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Why investing in real estate is a good deal

For regular people, the most popular choices of investing include stock investing and real estate investing. Both are good long-term investment vehicles. The longer you invest, the higher returns it would be.

For stock investment, it's very easy to invest, without high threshold and basically worry-free investing. If you invest in a S&P 500 ETF over 30 years, the return would be around 450% profit.

You can check our another article for more detailed analysis:

As for the real estate investing, it's not easy, with higher threshold (down payment), and you need to spend some time for rent management. However, the return is also higher than stock investing. Basically, you can do more value-added activities for real estate investing.

Why investing in real estate can be such a good deal?

Because there is a leverage from the bank. Assume your down payment is 20%, the mortgage from the bank will be 80% of the funding. That's the magic and the real power of real estate investing.

A good property in a good location is always keeping up with inflation. We can assume that inflation rate is 2% per year, so the value of your real estate is increasing at least 3% per year.

If your down payment is $100,000 and the mortgage from bank is $400,000. After 30 years, your property will go from $500,000 to $1,200,000. However, your initial investment is only $100,000. Assume you still have $200,000 unpaid principal, your return in the real estate will become at least 800% profit over 30 years, which is significantly higher than stock investing.

You may ask there are also lots of costs related to real estate investing, such as mortgage interest, property tax, and other renting costs. That's the key for real estate investing. The most experienced investors can always find good deals with positive cash flows, and they can always find good tenants for consistent income. All the costs can be transferred to the tenants.

In conclusion, the magic behind real estate investing is the higher leverage from mortgage. Your property only needs to keep up with inflation for at least 3% appreciation in value each year to achieve a 800% profit over 30 years.

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