Why I still like real estate

I have said this many times. You will not get rich in the stock market, you will get reasonable rates of return over time but people who are wealth generally do not do it that way. Wealthy people are wealth because of 1 of 4 things.

  • They inherited it (Rockefeller)
  • The owned a business (Gates)
  • They did it in real estate (Trump)
  • On they invested systematically for a long period of time in the stock market.

I have invested in real estate probably for over 20 years. Understand investing in real estate and buying a property to live in are not the same things. When you buy a property for yourself, generally when you leave that property assuming you were there for a fairly long time, you will recover your costs. This includes interest, principal taxes and upkeep. What I am referring to is having an investment property that is rented out which is entirely different.

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Here is why I think it is still a great time to invest in real estate:

1. Low interest rates. My first job out of college back in the 80's was selling vinyl siding door to door and we would try to convince people to use a home equity line of credit — at 18 percent — to pay for the siding. Today, you can probably get a 30-year mortgage on a rental property for under 5 percent (generally there is an additional increase in interest since it is a rental property). So, if you borrow $100,000 with an interest rate of 5 percent, your monthly payment is $536 per month, locked in for the next 30 years, which is an incredible rate.

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2. Properties are still reasonably priced. Yes they have crept up since 2008 but they are still reasonably priced. More likely than not, the number will work — meaning that, after expenses, you get a few dollars that you put in your pocket as profit. If that happens, and the value of the property goes down for whatever reason, do you really care? You are paying the expenses, putting a few dollars in your pocket, your tenants will pay off your property and over time the property value will go up.

3.Tax benefits. Never do anything just because you get a tax deduction. Do it because it makes financial sense … AND you get a tax deduction. The depreciation allowance that real estate offers you allows you to get "profit" out of the property, mostly tax free, which is an incredible benefit.

4. You can move your gain into another property. If you own a stock and want to move into another stock, that gain becomes taxable when you sell the stock to move those funds into the new stock. With the use of a 1031 exchange, I can move my gain from one property into another ….TAX FREE!

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5. Predictable Income. Income from an investment acct is incredibly unpredictable. For example, assuming that you had $1 million in CD's 5 years ago, you got $50,000 in income…not bad! Now those CD's are renewing at 0.5 percent, so it generated $5,000 — a 95-percent drop in income. Generally, rental income is indexed for inflation and can provide for a great stream of income in retirement

6. Potential tax-free gain. If I die with money in a retirement account, my heirs still owe money on my IRA. If I die with real estate, there is a "step-up in basis" which means that the entire gain goes to my heirs — income-tax free. That is a pretty nice benefit.

So we are not talking about flipping properties, get rich quick schemes, or anything overly aggressive. It is a buy-and- hold strategy that, over time, works very well. As a financial planner, I must throw out a few points that need to be said. Real estate is generally not liquid. If you are looking to invest, make sure you have cash on the side as, at some point in time, you will need it. Have life insurance. If you die and you have a huge amount of debt, then this was a waste of time and you left your family in a big financial mess. Finally, this is a lot more sophisticated then a mutual fund or bank account, so have a good list of people to help you. Insurance, legal, contractors, finance etc. professionals need to be lined up in advance so when the deal comes, you are ready to move.

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Generally you are not going to get rich fast. Historically real estate keeps up with inflation but you have a few things in your favor. First, you only put down 20 percent, so if the property value grows by 3.5 percent annually, that is equal to a 17.5-percent return. Second, if you purchase the property at the right price, you will get positive cash flow giving you an additional return. Over a period of time if you buy the right properties, you will do very well.

The Tortoise always wins!

Commentary by Jerry Lynch, a certified financial planner, chartered underwriter and chartered financial consultant (CFP, CLU, ChFC). He is president of JFL Total Wealth Management, a registered investment-advisory firm. Follow him on Twitter @JFLJerry.