In this episode, Paul Shannon of Redhawk Real Estate breaks down 3 reasons why real estate investing may be a better option than the stock market – leverage, higher income potential, and tax advantages like bonus depreciation. Learn how syndications can offer preferred returns of 6-8% compared to stock dividends of 2%, and how techniques like cost segregation can accelerate depreciation deductions. 

Here are some power takeaways from today’s conversation:

• The power of leverage in real estate investing
• The advantage of income generation 
• The tax advantages of real estate investing
• Other benefits of real estate investing

Episode Highlights:

[02:38] The Power of Leverage in Real Estate Investing

Leverage, a common practice in real estate, involves using debt to finance assets. However, it's important to note that higher debt levels come with increased risk. Lower leverage minimizes risk, as owning a property outright provides security even if it doesn't generate income. By leveraging investments, such as investing $20,000 in a $100,000 house that appreciates by 10%, you can amplify returns. Leverage can be applied on a larger scale in commercial real estate, but it's crucial to manage debt and understand the risks involved. Real estate offers stability compared to stock investments, making leverage a powerful tool for optimizing returns.

[04:54] The Advantage of Income Generation

When it comes to income generation, the S&P 500 relies on dividends paid out by companies. The better the company performs and the more consistent its dividends, the more reliable it becomes as a source of income. While some dividends can be higher than 2%, reaching up to 12% for certain master limited partnerships, it's important to note that higher dividends come with increased risk. The reason behind such high dividends is often to attract investors due to underlying business instability. In general, returns and risk are inversely related, meaning higher returns indicate higher risk. 

On the other hand, real estate investments offer the advantage of higher income through cash-on-cash returns. Syndications, for instance, often include a preferred return of around 6-8% before the sponsor receives any profits. Compared to the lower returns of the stock market, real estate provides the opportunity to achieve alternative income goals with less principal investment.

[08:38] The Tax Advantages of Real Estate Investing

One of the main tax advantages of real estate investing is depreciation. Commercial properties can be depreciated over 39 years, while residential properties follow a 27.5-year schedule. This allows investors to deduct a portion of the property value each year, reducing their taxable income. Syndications can utilize techniques like cost segregation and bonus depreciation to accelerate depreciation, generating "paper losses" that offset income in the early years. However, it's important to remember that tax benefits should not be the sole reason for investing in real estate. Evaluating deals based on fundamentals and consulting with accountants is crucial to understand the specific tax implications.

[13:18] Other Benefits of Real Estate Investing

• Equity Building: By utilizing leverage and having tenants contribute to the mortgage payment, real estate investors can steadily build equity over time. 
• Appreciation Potential: Real estate has historically shown the potential for appreciation, especially during booming market periods. 
• Inflation Hedge: Real estate investments have proven to be a reliable hedge against inflation. 
• Diversification: Investing in real estate offers diversification away from traditional markets like stocks and bonds. This helps reduce overall portfolio volatility and provides a stable alternative investment option.
• Tangible Asset: Unlike stocks or other financial instruments, real estate is a tangible asset. 

Resources Mentioned:

Tribevest

Redhawk Real Estate

https://www.leftfieldinvestors.com/3-reasons-to-invest-in-real-estate-and-ditch-the-market/