If you take a look at the historical real estate trend, you'll notice there's never really been a downturn. From 1968 to 2003, it's been a steady climb up. However, in spite of the national average, there have actually been several downturns. One was in California from 1990-1997. During this time, many people decided to leave the state because they could find jobs elsewhere. This wasn't a time where real estate flourished in California. Markets in other states did great during this time, which eliminated any potential downturn overall.
Wall Street Conspiracy
Jason Hartman believes in something called the Wall Street conspiracy, and part of the
conspiracy is the Wall Street Journal. Much of the financial press features headlines promising wealth, but when it's time to open it up and look through it, the article says to buy mutual funds. Most people don't get rich off of mutual funds. On top of that, the magazines are usually filled with ads from
various companies, something not often encountered with income property.
The Big Lie
Prior to the real estate boom, in 1996, the Wall Street Journal came out with statistics comparing stocks vs. other investments. Here are the statistics they released:
- Small Cap Stocks: 12.5%
- Real Estate: 11.1%
- Dow Jones: 10%
- Bonds: 5.2%
- T-Bills: 3.7%
- Inflation: 3.1%
This is the lie: most real estate investors don't purchase income property with cash. In spite of
this, the statistics assume the investor pays in cash, while only comparing the base appreciation
of Small Cap Stocks.
If you put 20% down on a property with a 5:1 leverage ratio, you can take 11.1% and multiply it by five to get a 55.5% annual return. If this seems too simple, it is. These calculations leave out cash flow, tax benefits, closing costs, and more.
Real Estate Illiquidity
Real Estate isn't a liquid investment, but it's illiquidity is one of the best things about it. While it's not an investment which will allow you to go online and sell stock positions with the click of a button, it does have more value, because there's more to it.
What can be Promised
Income property really is the more valuable investment. Here's an example: if you have $10,000 which goes into S&P (A U.S. financial services company), after ten years you might have $17,000 or so. However, if you put $100,000 into an income property, and ten years later it's worth $150,000 or so, not counting earnings from tax benefits and cash flow, real estate outperforms S&P by roughly 800%.
Ultimately, Jason Hartman has a promise. He says “At the very least, income property sucks less than everything else.” This can be promised, and with the right strategies, it's possible to create quite a bit of wealth with income property investment. (Top Image: Flickr | 401(K) 2012)
The Young Wealth Team