Scott Galloway calls real estate 'most tax-advantaged' investment you can make — his tips to build a portfolio
Investing in real estate may seem like an attractive prospect, but not everyone agrees on whether it’s a good investment for the average American.
Some see it as the pinnacle of wealth generation, as it can provide a steady income and has the potential for appreciation over the long term, along with certain tax benefits. Others believe real estate requires too much upfront capital to invest and too much ongoing capital for property management and maintenance, which may put it out of reach for some.
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“The brightest people in real estate will say if you really account for maintenance and upkeep, then real estate has not outperformed other asset classes,” New York University professor and finance expert Scott Galloway said on Steven Bartlett’s “The Diary of a CEO” podcast July 11.
But that hasn’t stopped the renowned entrepreneur from making “good money” from real estate investing and enjoying the process.
Here’s why Galloway likes real estate as an asset class — and how you can get your piece of the pie.
Tax advantages
Galloway described real estate as “the most tax-advantaged” investment you can make in the U.S.
“There are very few asset classes you can lever up four-to-one,” he said. “A 20% downpayment? I can’t buy $100 of Apple stock for $20! It’s huge leverage [and] the interest on that is tax deductible.”
Mortgage interest, property taxes and certain maintenance expenses are often tax deductible, helping homeowners or investors to reduce their overall tax liability. Additionally, if you hold onto your primary home for at least two years, you may qualify for capital gains tax exemptions.
Per the IRS, if you make a capital gain from the sale of your primary home, you may qualify to exclude up to $250,000 of that capital gain from your income, or up to $500,000 if you file a joint tax return with your spouse.
Some real estate investors can also benefit from property depreciation tax breaks. Depreciation is the recovery of the cost of the income-producing property over a number of years. Investors can deduct a part of the cost every year — for a total of 39 years for commercial properties and 27.5 years for residential properties.
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For example, if you buy an office building worth $1 million and the land is worth $200,000 (land can never be depreciated), you can depreciate the $800,000 value of the building. Divide by 39 and you’ll be left with a depreciation expense of around $20,513, which you can use to lower your taxable income. The depreciation amount may be lower in your first year of ownership, depending on when the property was acquired.
That is a significant advantage over other types of investments. As Galloway pointed out: “You can’t depreciate a stock [by] 2-3% a year.”
Build your own real estate portfolio
Anyone with the time and means can build a real estate portfolio. To get started, Galloway suggests getting to know the homes in your area and researching the local property valuations.
“Find a nice home or a rental unit that you can rent out or upgrade (maybe you’re handy),” he said. “Do that every few years and take advantage of the tax deduction and then roll into something bigger.”
You do have to be somewhat strategic about where you invest in property. Bartlett shared some advice he received from his brother, back when he was 25: “Steven, if everybody is playing the game, the returns probably aren’t great from it.”
Galloway agreed.
“It goes back to sex appeal — too much capital going in,” he said. “When everyone’s trying to buy homes in a certain area, that usually means it’s probably getting overvalued and, like any other asset class, it can lose money.”
But even up against tricky market dynamics, Galloway is still a fan of investing in real estate.
“The reason I like it is because it is a form of forced savings,” he told Bartlett. Galloway noted much of the savings for baby boomers is tied to the equity in their homes.
“Also, there is some psychic value, which I think is important to a home,” he said, “You start investing in it, fixing it up, it feels like there’s something rewarding about it.”
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.