Friday, February 5, 2010

Stocks Versus Real Estate - Which One Is Best?

The leading financial institutions in America are banks and insurance companies. Part of being a good leader is being a good follower.

What I mean by this is that a bank won't lend you money to speculate on the stock market, nor could you obtain an insurance policy to guarantee your stocks will be secure. In fact, most banks disclose that mutual funds and other stock certificates are not backed by the FDIC.

In contrast, a bank will lend you money to buy real estate all day long, and I'm sure everyone has heard of home insurance.

The reason why banks and insurance companies are so eager to lend and insure real estate is because real estate is tangible, where business (stocks are shares of a business) is more of an intangible idea.

Also, with real estate you have more control.

If you cannot sell your property, you can always rent it out for a passive income. Also, there are three ways to make money in real estate:

1. Cash flow - residual income off of renters. Whatever you get above and beyond your principle, interest, taxes, and insurance is yours to keep.

2. Equity - If you buy a house for $50,000 that actually appraises for $100,000, you can either sell the house for $100,000 and collect a $50,000 pay check, or you can go to the bank to refinance the equity out of the property.

3. Appreciation - There is only so much land available on the Earth. There are booms and busts in real estate, but everyone agrees that there is only so much space on this planet to buy. So, the same property you bought for $50,000 that is worth $100,000 today - may be worth $125,000 in 3 to 5 years.

I have not even mentioned the tax breaks you get by investing in real estate. Here is just an example of what I mean:

There are three types of income:

1. Earned
2. Portfolio
3. Passive (Residual)

Earned income (doctors, lawyers, attorneys) are taxed in the highest brackets, and have to give 50% of their income to Uncle Sam.

Portfolio income is equity, or what your assets are worth but haven't sold for. Once you sell, you can be taxed up to 20% of your proceeds.

Passive is generated from royalties, copyrights or real estate rentals, and is only taxed up to 10% in most cases.

With real estate, you can sell that $50,000 for $100,000 then take that $50,000 proceed and RE-INVEST that money into more real estate, tax free. In other words, you can use Uncle Sam's money legally to invest and buy more real estate. The technical terminology for this is called a 1031 exchange.

There are NUMEROUS ways to invest in real estate, regardless if you want to buy rental properties, rehab and flip houses, or become a partner with a real estate investor like me and provide the funding while I find the deals, manage the contractors, secure a buyer, and do all of the leg work to make the business a success.

You can partner with an investor who buys steeply discounted properties, set up a self directed IRA where the money continuously rolls back into your account tax free, and your money is secured by a 1st position promisory note. In other words, if the venture fails and the house doesn't sell for full appraised value- you own a house that is at least 50% of the appraised value that you can either rent out or sell to get your money out of.

All you have to make sure of is that the title on the real estate is clear, which an attorney will provide for you for very little cost. And your money will be secured by the real estate.

You can form a partnership with me, own the real estate with me, and I will do all the leg work as far as finding the deals, finding a buyer or renting them out for a profit. We can show recent sales in the neighborhood, and provide contracting bids to show how much work each property needs.

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