Benefit of Real Estate versus Wall Street Investment

Let’s take a quick look and review investment in Wall Street stocks versus real estate properties.  As a real estate investor, the tax code provides us significant tax sheltering opportunities while producing monthly income and wealth growth in our pension plans. Unfortunately, Wall Street stocks don’t have that benefit.  I am not against stock investments. Excellent quality stocks are needed as a diversification of your total investment program. Smart investors balance their portfolios.

Wall Street stock investment:

1.  Growth in value is primarily with market appreciation that tends to be more volatile as the market fluctuates up and down with the emotions of the moment, and the state of the economy.

2.  Cash flow dividend income for many stocks is non-existent and, if paid, is usually a very low percentage of the stock’s value and subject to the whim of the Board of Directors and management to be paid. Often dividends are the last thing to be distributed, if at all, from profits.

3.  The tax code does not provide much benefit to stock ownership unless you sell the stock for a gain. Then you are taxed at the capital gain tax rate, which long term rate currently is 15 percent.

Real estate property investment:

1.  Growth in your investment value occurs with:

·      Market value appreciation,

·      Cash flow monthly income, and

·      Increase in equity from the pay down of loan principal.

The key factor in a quality real estate investment is that the tenants’ rent pays all the property’s operating expenses and pays down the loan principal.

2.  Cash flow income is a major benefit of real estate investment with rents being received monthly after all expenses and debt service has been paid. This is cash that the investor controls, which may be used to purchase additional real estate, or if not reinvested, used for living expenses, vacation travel or other things that the investor needs or wants. 

3.  The tax code provides opportunity to shelter most, if not all, real estate income as well as gains when the property is exchanged or sold:

·      Shelter income by deducting the property’s operation expense, amortization/depreciation and debt service interest from the gross rental income,

·      Shelter all gain when the property is exchanged for another using the tax code 1031 exchange provisions or

·      Shelter most of the gain on sale, when not exchanged, at the long term capital gains tax as a qualified investor.