With many individuals having a substantial portion of their net worth invested into their primary home, real estate is often an approachable and practical asset for many people to store or invest their money. Historically, property ownership has served as a cornerstone for amassing fortunes, providing the wealthy with not only tangible assets such as secondary homes but also a means to generate passive income. The rich have consistently leveraged the intricacies of the real estate market to further increase their wealth and often pass it down from generation to generation.
But with so many assets to choose from, why do the rich continue to flock to real estate? Well, there are several enticing factors that make real estate particularly alluring.
1. Steady Cash Flow
Real estate, for centuries, has been a favored asset because it can generate reliable passive income, a revenue stream that requires minimal day-to-day involvement. By owning residential or commercial spaces, investors can collect regular rental payments from tenants. These properties, if well-maintained and strategically located, can yield significant monthly income that reliably exceeds the costs associated with mortgages, taxes, and maintenance.
2. Appreciation Potential
In addition to generating income, real estate generally appreciates over time, which can transform an initial investment into a significant asset. Infrastructure developments, such as new roads, schools, or shopping centers, can also enhance the desirability and hence the value of a locale. Moreover, broader economic conditions, like job growth and increased population density, can fuel demand and push prices upwards.
Additionally, as properties appreciate in value over time, they not only become more valuable, but the promise of increased rental rates in the future can grow as well. In this manner, there is double appreciation potential- both on the value of the property and the passive income cash flows!
3. Can Be Passed Down in a Tax Efficient Manner
Real estate offers avenues for elder parents to transfer wealth to subsequent generations in tax-efficient manners. One commonly utilized strategy is the “stepped-up basis.” When a property is inherited, its tax basis adjusts to the market value at the time of the owner’s death rather than its original purchase price. This means that if the heirs decide to sell the property, they would only owe capital gains tax on the appreciation that occurs after the inheritance, effectively minimizing potential tax burdens.
4. More Control
Owning real estate is like owning a small business- you have the ability to control all the specific details that make your investment property differentiated. For example, you can renovate a property to make it more desirable or refinance it when mortgage rates change. If you are worried about vacancy, you can offer a slightly cheaper rent in exchange for a long-term, more stable tenant. Alternatively, you could choose a property in an up-and-coming neighborhood you feel might be undervalued and take more risk in exchange for more appreciation potential over time.
5. Lower Risk
Buying stocks on the market can be a risky venture- as the stock market has displayed historical volatility that’s more than double the swings of the real estate market. Although housing markets have their share of rises and falls, a strategic real estate investment can generate a more predictable set of cash flow and price stability during times of an economic recession.
Real estate allows investors to leverage their capital, meaning they can purchase properties using a fraction of the total cost. This is achieved through a loan, most commonly a fixed-rate mortgage. Leverage is a favorite tool of the rich because it allows them to put less money down than the full value of the property. If a savvy investor can achieve a high enough return on their rent vs. the mortgage rate, the bank will be financing their passive income stream. Of course, leverage always involves risk, and the greater the leverage, the more the risk of a default in a potential housing downturn.
7. Hedge Against Inflation
Real estate often acts as a hedge against inflation, a concept that’s been clear in practice over the past several years. In periods of high inflation, prices rise for all assets. Physical assets such as real estate and commodities generally hold values better than other assets, which can lose purchasing power. Tangible assets provide a sense of security, as the property’s value doesn’t vanish overnight and often can be more stable than an inflating currency, and it’s backed by a physical property that has actual demand.
Josh is the owner and lead writer at Daily Wisely. His career has taken him from finance to blogging, and now shares his insights with readers of Daily Wisely.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh has over 15 years of experience on Wall Street, and currently shares his financial expertise in investing, wealth management, markets, taxes, real estate, and personal finance on his other website, Top Dollar Investor.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business.