Greenbook: A Local Guide to Chesapeake Living - Issue 3 | Page 29

an investor who buys real estate does
not have to pay all cash to purchase
the asset. Investors in gold have to
pay all cash when buying gold.
Banks will lend at least 75 percent of
the money required to purchase a real
estate investment. In using the bank’s
money, an investor leverages his
investment by putting down a small
down payment and borrowing the rest
of the money to acquire the property.
With positive leverage, an investor
can actually supercharge his or her
return because the entire property
appreciates in value not just the cash
invested.
Equity and Cash Flow from
Real Estate
From 1994 through 2013, gold had
an annual appreciation rate of 6.51
percent. During the same time period,
a real estate investor who bought an
average-price new home for $154,500
put down 25 percent equity of $38,625
and paid interest of 5 percent on a 30year amortized loan would have had
an annual return on the appreciation
of his capital investment in the home
of 7.64 percent.
Another benefit of income-producing
real estate is that while the tenant is
paying rent, which goes to pay the
monthly mortgage payments, the
debt on the property is reducing. An
average new home that cost $154,500
in 1994, based on a 75 percent loan-tovalue ratio, would have a mortgage
of $115,875. Over the next 20 years,
the principal loan balance would be
paid down to $58,647. The tenant, by
paying rent, would have paid down
the mortgage balance by $57,228. The
increase in equity from the reduction
in the principal balance of the loan was
paid by the tenant’s rental payments.
When combining a 5 percent cash flow
with equity buildup and appreciation
over 20 years, the overall return on
this modest real estate investment
would be 10.79 percent; a whopping
4.28 percent higher return than an
investment in gold!
Tax Benefits of Real Estate
Besides cash flow, leverage, equity
buildup and appreciation, a real estate

investor also experiences favorable
tax benefits while owning real estate.
Although real estate actually appreciates in value, for tax purposes, the
government permits an investor to
depreciate the asset over either 27
½ years or 39 years, depending on
whether the property is residential or
commercial. This tax break enables
the investor to shelter most of his cash
flow without having to recognize it
as income. Additionally, when a real
estate investment is sold, the gain on
the sale is taxed at a 15 percent rate,
depending on the investor’s adjusted
gross income.
Gold is taxed at 28 percent. Gain
from the sale of gold is considered
collectibles gain and is taxed at a
higher rate than conventional
long-term capital gains. The
maximum tax rate on collectibles
gain is 28 percent.
Real Estate is More Stable
Although gold is more stable than
stocks, it is still more volatile than real
estate. Over the past 40 years, gold
experienced a decline in value in 15
of the past 40 years. Those declines
ranged from a low of -0.05 percent
to a high of 25.2 percent in one year.
During several years, gold declined
more than 10 percent in value. Real
estate, on the other hand, experienced
declines in value in only five of the last
40 years. Those declines ranged from
a low of 1.74 percent to a high of 7.42
percent. Real estate is unquestionably
less volatile than gold.

This type of control is not available
to an investor of gold. When gold is
purchased, whether it’s in the form
of gold bullion bars or coins, one of
the most important considerations is
where to store the gold. If it is stored
in a custodial vault, the investor has
to worry about whether or not the
custodian will go out of business. If
that occurs, the investor is left with
an unsecured claim against a bankrupt
custodian. If the investor purchases a
safe and stores the gold at home,
then there is the concern of a robber
stealing the gold and possibly
harming the investor or their family
in the process.
A few years ago, I had a client who
owned $100,000 in gold. He stored the
gold in a safe at his home. He wanted
to invest in a commercial incomeproducing real estate investment with
me and was required to be a co-signer
on the mortgage loan. He submitted
his financial statement to the bank
showing that he had $100,000 in gold.
The banker wanted to see the gold.
The investor did not want to take the
gold to the bank nor did he want the
banker coming into his home to see
the location of the safe. They finally
compromised by having the investor
take his gold to a coin dealer for
verification of its value and providing
certification that he was indeed the
true owner of the gold. The whole
process was a hassle.

In summary, gold has performed well
over the past 40 years, but it does not
have the same performance capabilYou Have the Control
ity as an income-producing real estate
Finally, an investor in gold or real
investment. Gold may provide positive
estate has control over the asset, as
appreciation in value similar to real
long as the gold acquired is not part
estate, but it can’t provide cash flow,
of an Exchange-Traded Fund (ETF)
leverage and equity buildup. Nor can
and the real estate is not part of a
it compete with real estate when it
Real Estate Investment Trust (REIT). comes to tax benefits, stability or conHowever, the type of control is much
trol. In short, when all the additional
different. An investor in real estate
advantages of a real estate investcan control the performance of the
ment are considered, gold just doesn’t
asset by raising or lowering the rents stack up.
when