Last week we introduced the topic of Main Street investing. This week, we want to dive a bit deeper into that topic and discuss the very real and tangible benefits of investing in Main Street.
In other words, we are going to tell you why to keep your money OFF Wall Street!
Main Street Investing Is Inefficient
Doesn’t sound like much of an advantage, right?
In fact, inefficiency allows more room for deals to be created. Wall Street likes things that are efficient, clean and straight to the point. In real estate, opportunities are created through inefficiency. We create deals, build relationships and networks that allow us to make opportunities possible.
Insider deals on Wall Street will send you to jail. On Main Street, insider information is where deals are made! That “inefficiency” of the market is not possible on Wall Street.
You Can 10X or 20X Your Efforts
Let’s say you buy a house for $100k. Would it be 10X more effort to buy a piece of real estate worth $1M? Sure, it may be some effort more, but not ten times. You can increase your leverage of time by going bigger.
The idea of counterparty risk is 100% credited to Russ Gray. For example, if you’re holding a piece of stock, you assume it is worth a certain amount.
But is it really worth that amount?
It’s really just a promise of a value, should you choose to redeem it. With real estate or business, there is a tangible asset backing your investment. You actually have something you can touch and influence.
When you’re investing in a stock, you don’t necessarily know what is going to come next for that particular market.
For example, when you think about consumer entertainment, we had VHS’s for movies which were then replaced by DVDs, and now we use streaming services or RedBox to get entertainment.
Disruptive technologies means the market is moving quickly, and always innovating. Your investment is dependent on the technology of your market, and you have no control over it. Consider Apple. If you buy an iPhone, are you really moving the needle on the stock value? Do you have any clue of what’s really going on within that company?
Real estate is a more stable market — people will always need a roof over their head and a place to store their things. You have more control and can move the needle by changing operations, increasing rent, improving your facilities, etc.
In a previous article we spoke about I.D.E.A.L., an acronym to help you understand and evaluate different asset classes.
Let’s apply I.D.E.A.L. to investing in Main Street:
The amount of money your investment produces is considered income. The true value of a real estate property is the net operating income it produces. With Main Street investors, income comes from your renters or tenants.
Real estate offers real tax advantages to investors. You don’t get to depreciate a stock, but with real estate you can depreciate more than you put in. For example, if you purchase a $100k house, where you only personally invested $20k, you can still leverage the tax advantage at 80%.
The equity growth is paid by your tenants. Essentially, your tenant is paying down your mortgage, and the amount of equity you have in it is going up.
Real estate typically keeps its value relative to inflation, especially in the markets we deal with. That means you have a hedge against inflation, as compared to Wall Street investments. Appreciation can come from two sources: a natural increase in property value over time, or value-added activities such as remodeling, expanding or improving the property in some way.
Leverage is available via funds from institutions and raised capital from investors. Positive leverage is when the after tax un-leveraged yield of the property exceeds the aftertax cost of funds. As far as getting a mortgage, there is leverage in putting $20k down to be able to get a $100k house. Typically, there is really only one asset class where you can do this with debt leverage — real estate.
Real Estate Investing Is Hard to Manipulate
Even by large players… And, even if it were possible, would it really be all that bad?
They’re probably going to want the same things that you want: to raise prices and protect tax advantages. The National Association of Real Estate Brokers is probably the largest group of lobbyists for increased real estate values, and they want to see that needle move too, because owning a house is typically the biggest investment most people make.
Private Placement Advantages
With all this being said, how do you actually get started investing in real estate?
When it comes to real estate there is a spectrum of involvement for investors. For instance, I am highly involved in finding and creating opportunities, but there are others who take a more backseat position.
Private placements allow you to “tag along” with people who are experts in their area, and leverage their time and lending. Think about it: if you invest in real estate with your own house, you get that leverage on the mortgage, but you can also use your retirement income to do that.
With a private placement you get the expertise, network and time of the syndicators who put opportunities together. This allows you to invest a larger sum of money, especially if you’ve done your due diligence and are confident about the opportunity.
This is a lot of information, so we know it can be difficult to get started. When you’re ready, we’re here.