Is real estate a good investment? That is the big question on many people’s minds. It seems as the housing bubble fades into the background, mortgage rates remain low, and loans are easing up a bit. People love real estate investments again. In fact, almost one-third of Americans are saying real estate is the best investment for money they don’t need for 10+ years, with the stock market coming in at just 17%. But, does this love for investing really equate to a good investment?
Here are 10 reasons why real estate does, indeed, make a great investment option.
Properties Appreciate in Value
Over time, property values grow. Unlike cars that lose money the day you take them off the lot, the longer you hold onto property, the more money you will make. The Federal Housing Finance Agency (FHFA) House Price Index shows that homes have been appreciating steadily at 3 to 5 percent per year as a national average, with some areas being significantly higher. During the housing bubble, home appreciation did slip. However, for those who held on to their investments, prices have returned to normal in most of the country and appreciation is back on track. In fact, this past year, every state in the nation had a positive appreciation, and 15 states had higher than 5 percent appreciation.
Some financial experts even believe your net worth statement shouldn’t include anything that depreciates. The only way to really increase your net worth is to reduce your debt and increase your appreciating assets. This means real estate, with its track record of appreciation, is a perfect way to increase your net worth.
Diversify Your Portfolio
If you’ve ever spoken to a financial planner about investing, then you’ve likely heard the most common piece of advice there is: diversify, diversify, diversify. When you diversify your portfolio, you spread out the risk. In other words, if some of your investments are down, others will be up. Real estate is a great way to add diversification to your portfolio.
One reason to choose real estate is that it has a low correlation with the stock market. In other words, when stocks are going down, real estate tends to remain steady or go up. This will help you limit your losses.
Hedge Against Inflation
One of the biggest threats to any cash-based investment is inflation. This is because as inflation continues to rise, the value of the American dollar continues to drop. As a result, if you have cash investments such as a savings account, CDs, or IRA, the money in them won’t be worth as much in the future as it is now. Investing in real estate actually protects you from this problem because property values do not depend on the value of the dollar. In fact, the value found in homes, land, and multi-family dwellings actually goes up as inflation becomes a bigger problem.
High Tangible Asset Value
It is easy to know the value of a property, and far easier than understanding the true value of a stock or bond. Additionally, a stock value can go to zero, but that rarely happens with real estate. Why? Real estate always has the value of the land and the value of the structure. Even in times of a natural disaster, if you are insured, you will never end up with property that has no value.
Real Estate Has Competitive Returns
When it comes to rate of returns, real estate does as well as the stock market and does so without as much volatility. This was true even during the housing crisis years. For instance, U.S. commercial real estate gained an average of 8.4 percent per year from 2000 to 2010. Stocks, on the other hand, had an average of 3.6 percent in gains that fluctuated from years -37 percent loss to years with 28.7 percent gain. So, not only does real estate have competitive returns, it does so without all the volatility of the market.
Leverage Your Capital
You do not have to use all of your money to buy real estate. Instead, you put some money down and use other people’s money (bank, investor, hard money lender, friends, family, etc) to buy the home. You cannot do this for stocks. If you want to buy $100,000 worth of stocks, you have to shell out $100,000. For a real estate purchase, your out of pocket cash can be as little as nothing and typically no more than 20 percent. Let’s assume that you put 20 percent down and borrow the rest. If your property increases by just 5 percent, you’ve made a 25 percent return on investment.
Rental Homes are Hot Right Now
Millennials prefer to rent a house instead of renting an apartment. They are looking for larger spaces, bigger yards, and more storage – all of which are sorely lacking in most apartment communities. This is great news for those investing in real estate properties because this makes finding quality tenants for your property much easier. Whenever you have a commodity that is hot and scarce, you know the investment is a good one.
Provides Dependable Income
Real estate investing gives you stable, dependable returns. That is a rare statement in the investing world. Typically, investing is riddled with words like volatile, uncertain outlook, and risk. To realize real estate is stable and has long-term gains with minimal risk is something to smile about.
Tax Write Offs and Deductions
Real estate offers tax benefits other traditional assets, like stocks and bonds, do not offer. Many traditional investment vehicles cost you money in taxes. Done correctly, real estate investing can actually give you some tax cuts and benefits. Some tax benefits can include:
- Deductions for interest paid on mortgages
- Deductions for property taxes
- Deductions for repairs and maintenance on investment properties
- Deductions for insurance, travel and agent fees for investment properties
(Always consult with a real estate tax professional before making decisions based on tax savings.)
You Control Your Investments
Most investment vehicles require you to relinquish a good bit of control to someone else, such as a financial planner. Then, you watch helplessly at the stock ticker, wondering if you are losing or gaining money. With real estate investing, you will be able to make decisions for yourself. You will get to determine if you want to flip and sell or create long-term investments. You will get to determine what properties meet your criteria and what changes you make to the property before you flip or rent. Because of this, real estate investments actually put your finances in your hands.
As you can see, there are many substantial benefits to choosing real estate as an investment vehicle. So, if real estate investing has been on your mind, now would be a great time to get started.
About the Author
John Trautman is founder and CEO of the Real Estate Knowledge Institute (REKI). An author, entrepreneur and longtime real estate investor, he is committed to inspiring and helping other aspiring real estate investors who have an interest in everything from home flipping to buying and selling rental properties to earning passive income through various real estate investments. REKI is the fulfillment of Trautman’s ambition to act as a credible and responsive expert who is available to mentor and counsel individuals about the fundamental rules of real estate investing in an intelligent and straight-forward manner.