Why real estate is a good investment?

Bowes & Cocks
Creative Commons License photo credit: C.P.Storm

Of all possible investments that are within the reach of the average investor, none ofter the combination of outstanding benefits that are available to real estate investors. And, do you want to know something, banks and life insurance companies recognise this fact!

So they invest your money in real estate. While they pay you 1 to 3 percent for the use of your money, they are making 10 to 20 percent on it.

Why is real estate such a good investment? It offers the investor at least five different returns or ways of making money, on his investment.

Gross spendable income – cash flow
Investors also refer to this as “cash flow” or how much money that you can spend at the end of the month or year after all the operating expenses and mortgage payments have been made. We also call this as “gross” spendable because we have not taken income tax consequences into consideration at this point.

We always purchase properties that cash-flow. It takes time to find them, but it is well worth the effort. The simplest definition of positive cash flow is that you collect more revenue, usually in the form of rent, than it takes to pay for and operate the property.

A big advantage of real estate over other investments is that it can produce cash flow on a monthly basis. The cash generated by a real estate investment will always be a much larger percentage cash-on-cash return than any other investment.

The beauty of a cash-flowing real estate property is that it can help you become financially free. We discussed two real life examples of such real estate property in How to know if a property investment is worth investing?

Creative Commons License photo credit: Tracy O

Equity income
This is also referred to as equity buildup or principal reduction. Anyone who has had a mortgage on a home or car recognises that each time a payment is made, a certain portion of that payment is for the interest charged by the lender and the balance goes toward reducing the balance on the loan.

In a real estate investment, this equity income can be a sizeable amount. Although you cannot spend it each month, when the time comes to sell your property, you owe less on the mortgage, so you will receive more money at closing. It’s like putting money in the bank each month.

Making inflation work for you instead of against you – appreciation
Like inflation, you do not see it but it’s there. Only now, it’s working for you instead of against you. How does it work? Each year, because of inflation, your real estate is appreciating in value. Those of you who own a home, for example, would you sell it today at the same price you paid for it five or ten years ago?

We keep on having babies but God quit making land a long time ago. The supply is limited.

What does this mean in terms of existing land values? It means that existing land is becoming more and more valuable each year. It explains why investment real estate, whether in single family homes, apartment buildings, office buildings, shopping centres, ware houses and even vacant land, has become the most secure and profitable way to beat inflation. Existing land in most parts of the country, is appreciating at a rate greater than that of inflation.

How real estate stacks up against other investments – leverage
Leverage is an interesting thing about investing in real estate. It’s more than likely you have heard the term Other People’s Money, or OPM. The concept is simple and powerful.

The OPM concept is using money generated from someone or something other you in order to start a business or acquire an asset. While it is true that you can do this to an extent with stocks through buying on margin, the fact is that there is no investment where the application of this tool is more powerful than in real estate.

In real estate the leverage is based on the asset itself and you can get a bank to loan you the money up to 90 percent, and sometimes even 95 to 100 percent, of the total asset value. Why do banks do this?

Because they can repossess the physical asset itself should you default. Buying stocks on margin, however, allows you to borrow no more than 50 percent of the stock portfolio value. Just try to get bank to loan you the money for buying stocks – let alone your margin! Instead, you have to buy through a brokerage – at a high interest rate. In other words, when you buy stocks on margin, you are taking the risk. But when you take out a loan to buy real estate, the bank is assuming the risk. – Ken McElroy in “The Advance Guide to Real Estate Investing”

You can see the power of leveraging demonstrated by real life cases in our previous article Why you want to take up a loan for your real estate investment? No other form of investing allows an investor the opportunity to control so much with a small amount of his own cash.

We further discussed in How to finance your real estate investment for maximum return? the ways to structure a mortgage loan in order to get the maximum return from your cash investment in real estate.

3D Realty Handshake
Creative Commons License photo credit: lumaxart

An investment that allows you to control
A unique advantage to real estate is that you can control it. In other types of investments, you give your money to a financial advisor and they place it for you in a company’s stock, a bond, or a mutual fund. What happens after that is completely out of your control. You have no ability to make operating decision for the company you have invested in; you are at the mercy of its managers.

Similarly, you have no control over financial markets when you purchase bonds or futures. You make a calculated guess, and then you sit back and watch. With these types of investments, the only control you have is choosing whether to buy or to sell.

Real estate is different. You purchase a tangible asset and you manage it. While there are still external market conditions that affect your investment, the difference is that you have the ability to manipulate the operations of your investment to respond to those conditions. Instead of being reactive (buying or selling), you are being proactive.

For example, if you are a landlord, you have the ability to manipulate rents based on changing market conditions in order to maximise income. This doesn’t always mean raising rents. The goal is to maximise income. Since it is a dynamic process, that might mean lowering rent or offering an incentive. A property’s occupancy comes into place here.

If you have the highest rents in a market, chances are potential tenants will rent from a direct competitor. Then all your high rents become lost potential income. The dynamic of real estate require you to keep occupancy, as well as rents, high.

You have the power in real estate to control the operational performance of your asset more than any other investment.


About The Author


Coming from a humble little town named Tangkak in north Johor state of Malaysia, I am so lucky to have chances to learn and work both in Johor Bahru and Singapore - a conurbation with 6.49 million still fast growing population - since year 1996. Hope now I can have a chance to contribute back to the community by sharing what I see, what I know and what I learn in this wonderful place.


  • Jacques

    Reply Reply March 12, 2009

    Interesting article.
    One question pop up when reading it: Can Real Estate owners chose to default on their property, and what is the trade-off? Do they simply walk away and lose their investment, or do they need to cover the loss with their estate / declare bankruptcy should their estate be insufficient?

    • ongkl

      Reply Reply March 19, 2009

      Hi Jacques,

      If an owner chooses to default on his property, his property will be foreclosed by the bank after a grace period given. The proceeds from selling the property (through auction) will be used to pay off all the outstanding loan including interest and all other charges incurred to sell the property. If the proceeds are insufficient to pay off the oustanding amount, bank will distress his other estates. If the amount is too big, bank may request the court to declare him bankrupt.


  • Dave

    Reply Reply April 4, 2009

    Great article… its amazing but i chanced upon this blog while surfing thru google…
    have been looking at the local (JB) real estate scene but honeslty don’t have a clue how to start… this is the first article i’m reading and so far it rocks. 🙂 Good stuff..

    @jacques unless i’m wrong or unless the circumstances seem really extreme, one should not choose to default on their property. apart from monetary loss, it wouldn’t look good on you if you decide to borrow $$$ from any bank in the future. having said that, i believe as with any investment, if due diligent homework is done (the hardest part ==” ) , no investor should have to abandon their investment. ie: all the locality, cashflow, price potential factors etc etc….


    • ongkl

      Reply Reply April 5, 2009

      Thank you, Dave. Glad that you like our posts.

      Yes, one should accumulate as many as possible good real estates in order to secure cashflow towards financial freedom, and also as a preparation for a more financially secured retirement…

      Hope can hear more from you Dave.


  • Michelle

    Reply Reply July 26, 2010

    Would like to know ur view on Condo project like Sky The Excecutive Suite and KSL city. Is Johorean ready for these kinds of “high end” condominium? Those expats influx talks works? As a working class, i think the price is not reachable at all.

  • David Chan

    Reply Reply May 19, 2012


    Sound simple,must have holding power.Using OPM skill.
    Surely will hedge over inflation provided economy does well in the region.


  • Jack

    Reply Reply June 3, 2012

    Hi kl….is there any property in jb town (both condo n landed property)
    that can generate “pisitive cash flow” at this moment ???

    Correct me if I am wrong .. I checked through iproperty.com n comparing the price n the rental ….ALL shows negative cash flow for investors … So does that mean property prices will surely have to drop as no one can expect rental to go up in jb due to oversupply now n in near future …????

    I am am investor but cannot find anything that can generate positive cash flow …. Please do correct me if I am wrong here ..


  • Jack

    Reply Reply June 3, 2012

    Hi kl….is there any property in jb town (both condo n landed property)
    that can generate “pisitive cash flow” at this moment ???

    Correct me if I am wrong .. I checked through iproperty.com n comparing the price n the rental ….ALL shows negative cash flow for investors … So does that mean property prices will surely have to drop as no one can expect rental to go up in jb due to oversupply now n in near future …????

    Finally where would you recommend for n investor interested in jb area?


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