Now that residential and commercial investments in the Grand Valley have experienced an upturn, is it time to pull some money out of the stock market and invest in additional real estate? It depends.
Any investment decision should be
based on answering five important questions:
How long will I be able to invest these funds before I could need them for other purposes?
How have the returns from real estate and equities compared over the past five, 10 and 20 years?
Will I be a hands-on property manager for my investments or am I looking for a passive income stream?
What does the future look like for each investment?
What am I considering investing in and why?
If you’re looking for a short-term hold for your funds, real estate is probably not the way to go. A short-term hold could eliminate capital gains consideration for the investment, and the tax man always gets his way when reselling the property. Many investors maintain what could be considered liquid funds in savings accounts or money market mutual funds for planned expenditures. Real estate investments are usually held for longer terms — five to 10 years at a minimum — to enable investors to realize the greatest returns with the most help from tax laws that allow cost recovery (depreciation) to be deducted from normal investment passive incomes.
In comparing real estate and stocks or mutual funds, some differences are apparent. Unless you’re investing in small cap stocks, most stocks and mutual funds are liquid. Markets exist in which you may sell those investments in a day or two as opposed to real estate, which could take months or even years to sell. Unless you invest in real estate investment trusts, real estate could offer the best tax hedge. Mortgage interest is deductible, as is cost recovery on the investment. In addition, it’s still possible to complete tax-deferred exchanges with new or more suitable investments when one investment is sold and replaced with another. It’s possible to perform 1031 tax-deferred exchanges and avoid capital gains taxes and recovery of depreciation for the remainder of your life. That could be a benefit if you don’t need the funds from that investment at any time prior to your death.
Management issues keep many prospective investors out of real estate. Investors worry about fixing toilets on weekends or evicting non-compliant tenants. By hiring the right kind of property management with that new real estate investment, you could find it’s really a joy to deposit monthly checks and focus on other aspects of your life.
In discussing the potential of any investment, it’s important to first review the past. Have things changed in the last 120 years? Other than four wars, a depression, market corrections, the U.S. going off the gold standard and a trend toward renewable energy, have we seen any changes to market conditions? Obviously, it’s reasonable to expect continued changes.
Regardless of the investment, we’re best served to choose quality assets and savvy managers when making decisions.