There are a lot of disenfranchised Americans out there these days, frustrated, maybe even fed up with the current state of the U.S. real estate market. Some even no longer believe that buying a home is the sound investment we all thought it was just a few years back.
However, a lot of seasoned real estate investors are jumping at what today’s real estate market has to offer, and so should you.
Real estate investing takes many forms, from buying and renting out houses, to fixing and flipping, to buying and selling your own residence for tax-free income. Today, investors in many markets are snapping up bargains created by foreclosures, unemployment, and today's low mortgage rates. Savvy investors realize that today's unique opportunities--combined with the advantages that real estate has always enjoyed--could mean nice profits.
Here are several reasons why:
Reason 1: Mortgage rates are at historic lows
Generally speaking, hard assets like commodities and real estate tend to appreciate during inflationary times and depreciate in deflationary climates. If concern about inflation should rear its head down the road, interest rates will move higher. Locking in a bargain purchase at today's low mortgage rates could prove a very smart move when prices and interest rates rise.
Reason 2: It is better than renting
Rents are already climbing all across the country, and Moody's chief economist Mark Zandi expects buying to become more economical than renting this year in many major cities (it already is in 15 of 54 major markets surveyed). "By mid 2011 and certainly by end of 2011, buying will be superior to renting in most parts of the country," he said.
Reason 3: Home prices trending upward
While we cannot be absolutely sure that home prices are bottoming out, we do know that a market has reached its bottom once its prices begin to move higher.
Zillow.com identified six metropolitan areas that were hit very hard in the housing crash but seem to be coming out of it--Las Vegas, Nev., Fort Myers, Fla., Stockton and Vallejo, Calif., Hartford, Conn., and Columbus, Ohio.
The foreclosure rate in these cities has peaked, so the worst is likely over. Homes in these markets have become more affordable than ever for local incomes. According to USA Today, investors predict that housing deals will not get much better. "In these markets, you can kind of see a light at the end of the tunnel, and it's been a pretty long, dark tunnel," claims Stan Humphries, Zillow.com chief economist.
Reason 4: Housing is a relatively safe investment
Property is a relatively stable investment. “What?!” you say. “What about the housing crash? What about those areas that lost 30 percent of their values in a few short years?”
There is no doubt that a lot of homes lost value relatively quickly. But consider that stocks, bonds and other marketable securities can (and do) lose 30 percent in a single day! According to a Federal Reserve study of the “Great Recession,” families in the U.S. lost a median of 19 percent of their net worth due to housing price collapses, but over a third of their stock value was lost during that same period as well.
Stocks can even go to zero if the company behind the paper folds. Chances are if you visit where you lived as a child, your old house is still standing, even after 20 or more years. Yet how many companies that were household names 20 years ago are gone today?
With property, the value is not in some paper representation—that is why it is called "real" estate—it is a tangible asset.
Reason 5: Property gets preferential tax treatment
Dolf De Roos, PhD., author of Rich Dad's Advisors Guide to Real Estate Riches, extols the value of the tax treatment that property receives. If you buy a stock and sell it at a profit a few years later, you pay capital gains tax. You do this even if you turn right around and use the proceeds to buy another stock, or even if you buy the exact same stock.
With property, however, there are several ways that you can enjoy your gain without getting mugged by Uncle Sam. You can sell one investment property then buy another using a 1031 exchange, paying no tax on your profit in the process. You can sell a home and avoid most or all of the gain on the sale if you lived in the home for two of the five years prior to selling. You can borrow against the property and not sell at all. Finally, the mortgage interest deduction makes owning more appealing by allowing homeowners to deduct the interest they pay on their mortgage come tax time.
Reason 6: Real estate can be leveraged
Let us say you want to buy $100,000 worth of stock. If you do, you have to pony up at least $50,000. If the stock's value drops, you get a margin call and have to either sell at a bad time or put in more cash.
However, you can finance a home with anywhere from zero down (try USDA or VA mortgage lenders), to 3.5 percent down (with FHA home loans) to 30 percent down for rentals (try investment property mortgage lenders).
Furthermore, mortgage rates are cheaper than just about any other sort of financing. The beauty of being able to control large-value assets with a relatively small investment is that any appreciation is maximized. A simplified example is this: if you buy a home for $100,000 and it appreciates a typical 4 percent in one year, you would have a 4 percent rate of return. But if you have only invested 4 percent into your purchase and the price increases to $104,000, you have effectively doubled your money—a 100 percent return! Should home prices drop, you will not receive a margin call, and you can wait out the downturn.
Balance your basket
Of course, as with any investment strategy, you do not want to go overboard with real estate investing--your money should be diversified to max your return for the amount of risk you take. And property does have some drawbacks—it is not liquid, the costs of buying and selling are substantial, and leverage means that losses as well as gains are magnified.
However, the abundance of bargains, the affordability of today's mortgage rates, the hedge against inflation, and the tax savings have prompted many investors to get back into real estate, and should cause you to seriously consider home ownership in one form or another.
Besides, as one investor said, shrugging, "You have to live somewhere."
