Why do wealthy people choose real estate over passive funds?
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[{"id": "g5r7vwv", "text": "Rent rises with inflation while debt decreases with inflation.\n\nPeople with 50M don't need or want all their assets to be liquid\n\nTax benefits of having real estate\n\nBeing in direct control of your assets.\n\nBeing able to refinance and pull cash out tax free.\n\nEstate planning.\n\nTax planning.\n\nThey understand it can still be passive and have 10%+ annual return.", "replies": [{"id": "g5r8gvz", "text": "Yes to all these.", "replies": [], "depth": 2}], "depth": 1}, {"id": "g5r7yqd", "text": "Many wealthy people I work invest passively in real estate deals as limited partners. This allows them to benefit from the monthly or quarterly distributions without the hassles of property management.\n\nRE has a ton of benefits - hedge against inflation, tax advantages, diversifies your portfolio, and is more predictable. It\u2019s also backed by a hard asset.\n\nIt also offers the opportunity to offset and defer capital gains if you invest in an OZ.\n\nFrankly I\u2019m surprised more people don\u2019t invest this way.", "replies": [], "depth": 1}, {"id": "g5r8z8k", "text": "People buying a stabilized asset at a low cap rate is an income play. With a 65% loan to value mortgage you're making much more than a 4% yield, paying down principal and getting significant tax advantages like depreciation. \n\nThe other aspect is that real estate investing is a game where you can be more experienced in and better connected than the competition, not really the case with index fund investing. This can be anything from a contractor who has a cost advantage renovating houses to rent out, to a commercial developer who is a preferred builder for a chain store or warehouse tenant. Those kinds of deals where you buy land or a vacant building and built to spec for a new tenant who already signed a contingent \u013aease before you even close on the property create huge amounts of value.", "replies": [], "depth": 1}, {"id": "g5r9z3d", "text": "I don't know if my situation applies to your question all that well since I'm not a passive investor. I invest in real estate primarily because I know how to add value to properties. I figured I'd at least give my perspective.  \n\n\nFor example, if I invest in a $1 million apartment building that's performing at a 5% cap rate with 30% down and borrow the rest at 3.5% interest, that means I am getting a 5% return on my initial $300k and 1.5% on the remaining $700k for a grand total of 8.5% ROI.  \n\n\nAppreciation over the last 30 years has been somewhere around 5% per year for real estate (obviously varies depending on the market), so you're also seeing an annual increase in value of $50,000 on a $300,000 investment (16.66% increase in value of initial investment). Total so far is 25.16%  \n\n\nNow, if the value of this particular property is based on the cap rate, then if I can increase the rent by $100 a month I will see an increase in value of $24,000 ($100x12/0.05). If it's a fourplex and I renovate the units by putting in $20k into each unit and see a rent increase of $250 per unit, then I'm getting a net gain in value of $160k.  \n\n\nNow if I sell the property in a year for $1 mil + $50k appreciation - $80k renovation + $240k added value I have $1,210,000 (plus the income for the year of $8,500). I take out my 700k loan and I'm left with $510,000 to invest in another property (minus selling costs) without paying taxes because I do a 1031 exchange. This is super simplified, but I hope this helps.", "replies": [], "depth": 1}]