Everyone is down on real estate as an investment right now. But, this dismal real estate market is exactly what investors have been waiting for. And, it’s exactly what home buyers should be hoping for. Here is an affordable chance to purchase what could be the best investment you will ever make.
Some people will disagree with me. They may have woeful tales of broken dreams and lost properties. Others may declare that houses are a money-pit and recount every painful expense. They may suggest you don’t have to pay these expenses as a renter, but that simply isn’t true. All costs are factored into rent and passed on. If your landlord pays a large maintenance expense, count on the rent going up.
This Top 10 list is based on the purchase of a house to live in versus renting. I won’t get into rental properties or commercial real estate, which have their own risks and benefits. It also compares an investment in a house with other common investments.
I believe in getting one good mortgage and paying it off. I don’t believe in refinancing, unless interest rates drop two percent or you shorten the loan by five years. I recommend against lease-options, flipping, wrap-arounds, property auctions or any other risky ventures, unless you are an experienced investor. You can get hurt in creative transactions of any kind and real estate is no exception.
So, without further delay, here is the list:
1. Leverage: Leverage is a double-edged sword. You can control a large financial asset for a small down payment. When the real estate market goes up by a few percentage points you can quickly double your equity. When the market goes down a few points, you can be completely upside-down. Since the long-term trend of real estate is positive, leverage is your friend.
2. Stability: Historically, real estate is a very stable long-term investment. There are low-demand areas that won’t appreciate much and high-demand areas that rise and fall dramatically. But over all, the real estate market is a steady long-term gainer. If you don’t think so, compare it to the stock market for the past 100 years. There are decades when stocks gained very little. I’m not just talking about the Great Depression. If you had bought stocks during the ’70s, you would have wished you kept your money in the bank.
3. Practical Use: You get to live in your investment. You can’t do that with precious metals, collectibles or financial assets. You may assume this just offsets the cost of rent. But when you own a home, you can do things renters only dream about. You can get a satellite dish, add a bedroom, remodel the kitchen or landscape the yard. Basically, you are the king of your castle, as long as you obey the laws and regulations. Here is another thought, no one can terminate your lease, keep your deposit or charge you for having a pet.
4. Fixed Costs: If you get a fixed loan and you don’t refinance, you can count on paying the same mortgage until your house is paid off. Your taxes and insurance may go up, but that won’t even dent your budget. Twenty years from now, your mortgage will be really cheap compared to everyone else’s.
5. Inflation Hedge: Inflation causes the cost of most items to go up every year. It also causes housing costs and property values to rise. So, you can rent and watch your housing costs go up. Or, you can buy and watch your property values go up, while your housing costs stay the same. Although, this was a bad year for property values, they will go back up in the next few years.
6. Real Assets: This is often overlooked, but very important. Real estate has real value, based on the land and the usefulness of the dwelling. Take it from someone who owns 2,000 shares of worthless stock. The prices of houses will rise and fall, but they will always have value as long as people need places to live. Paper assets, including our currency, have dubious future value.
7. Tax Advantages: Writing off your mortgage interest is huge. For most homeowners, you can pay more on your mortgage than you would for rent and still come out ahead, after taxes. And, you can usually write off your property taxes. Finally, you can do equity swaps or sell a property and keep some proceeds tax-free. No other investment offers you all of these tax advantages. You may have to pay an accountant to figure it out, but the tax benefits are worth the effort.
8. Collateral Value: Say you need a lot of money quickly for any reason. Let’s say you have the business opportunity of a lifetime. Maybe you are less fortunate and get sick or injured. The reason doesn’t really matter. If you have equity in real estate, you can borrow against it. And you can do it without cashing in your investment, moving out of your house or taking a hit on taxes. You can even borrow from one property to invest in another. You still have to pay the loan back. But, it’s nice to have options.
9. Forced Savings: Modern Americans are terrible savers and our personal savings rate is -1%. I’m not saying that a house is the best way to save money, but it definitely forces you to save. You have to pay the mortgage, if you want to stay in the house. And, when you make the payment, some portion goes right into your equity.
10. Live Frugally: This is my favorite point and that’s why I saved it for last. Once your mortgage is paid off, you only have to pay taxes, maintenance and insurance. I’m still about 10 years away from paying off my house, but I am literally counting down the months. Once my house is paid off, I could live comfortably on a fraction of my current income. Then, I can think about travel, mini-retirements and everything else I want but can’t afford.
The Bottom Line
If you are still renting, you may finally have an opportunity to buy a house for a cost that is close to rent. That just wasn’t possible in California or any other hot market a couple of years ago. Don’t let anyone discourage you from living “The American Dream” because you deserve it. Clean up your credit, save that down payment and take advantage of the market collapse. This opportunity is going to disappear in a couple of years. Then, you will have to pay a lot more to buy your dream home.