If you wanted to buy 1000 shares of $100 stock today, how much would you lay out of pocket? For most non-savvy investors, this would cost $100,000. Now, lets say you want to purchase a property for investment purposes. To make it easy, let’s say the property is $100,000. How much money would you need to lay out of pocket? Well, if you obtained a mortgage, you could put 20% down on the property making it $20,000 out of pocket. You just leveraged a $100,000 asset with only $20,000, score one for real estate.
Now, let’s say that both of these assets increase in value from normal market appreciation by 5%. What would be the return on your investment? For stocks, that is a 5% return. However, in real estate, that would be a return of 25%! In the meantime, if you wanted to help your stock appreciate, what control do you have over its value? Could you remodel the board of directors? Not likely, however, you can remodel the kitchen, update the bathrooms, and much more to help appreciate the value of your property!
Ok, now let’s see how we can realize all of this great appreciation. When you sell an asset, there is a capital gains tax thanks to our lovely government. If you hold an asset for more than one year, the average capital gains tax is 15%. Is there a way to defer this tax?…YES! There is a section 1031 of the tax code which allows you to sell the real estate asset, locate another property, and use all profits to leverage another property, and all taxes on those profits can be deferred! A wise man once told me, “it is not a matter of how much you make, it is a matter of how much you KEEP!” There are “loopholes” and rules that you can take advantage of to ultimately defer the taxation of your profits forever, however, the charitable remainder trust is getting a little too in depth for this scenario. The point is, try doing that with stocks!
Now, I am not telling you to throw all of your eggs in one basket and values of properties have taken a beating over the last few years, but so has your 401K. Speaking of 401k’s, let me ask you this question. Do you think taxes will be higher or lower in the next 10 years, 20 years, 30 years? Then why on earth are you deferring your taxation of your income until later in life when we all agree, taxes will be higher? You say that your income will be less? Great, you have a plan to be poor! That will show them! Try looking into a Roth IRA, or even whole life insurance. Any type of vehicle that you invest in, and pay taxes upfront. Let it grow tax free and come out tax free!