Real Estate as an Investment
Up to this point in many people’s lives, housing expenses have been viewed as just that—an expense. That needs to change. From this point on, you should view your house as an investment. Not only is it truly an investment, it will probably outperform what you traditionally view as your investments, such as your stocks, bonds, and mutual funds.
Buy it Properly
When discussing real estate with folks, I hear these common statements: “When I sell my house, I’d like to make $X,” or, “I need to fix this and update that so I can make a profit when I sell my house.” In some instances, those could be valid approaches. However, after living all across this country, in big cities, small towns, good economies and bad, it has become obvious to me that you make money on a home purchase when you buy it properly.
When I say properly, I mean you buy the right house in the right neighborhood for the right price. That’s why we do what we do here with our network of agents. If our clients get matched with a good, honest, reputable agent, their likelihood of buying a home properly increases dramatically. Their risk is reduced dramatically. And three or four years later, when it’s time to sell their home, their stress is significantly less because, more likely than not, they have a little room to play with financially.
Now, other than death and taxes, there are no guarantees in life, and that is absolutely true with real estate. Yet it also remains true that there is no investment vehicle out there that can give you the leverage for your money like real estate can.
Buying as an investment: an example
Let’s look at an example to truly see the benefits of real estate as an investment. Imagine that you have $20,000 to invest. Obviously you have a lot of options as to where to invest it. For the purpose of this example, let’s say you decide to buy $20,000 worth of AT&T stock (“T” on NYSE, excellent stock, global company, well-diversified, and approximately a 7 percent dividend). Tomorrow you will actually own $20,000 worth of stock. Now let’s say it has a strong year, earning 10 percent in value. At the end of the year, what do you have? You have $22,000 worth of stock, not considering any dividend reinvestment. Your investment of $20,000 has made you $2,000 in profit if you were to sell.
What if you were to invest your $20,000 in real estate? How much real estate could you buy? With a typical conventional loan for a primary residence, you are usually required to put 5 percent down (or 3 percent for first-time homebuyers1). That means for a $20,000 down payment, you could purchase a $400,000 home. Now let’s say it does average to below average in appreciation and only appreciates 2 percent for the year. Your home’s value would be $408,000—an $8,000 increase in value.
Comparing the two options, your average to below-average real estate investment made four times what the very strong stock investment made. The reason for this is simple—leverage. Your ability to leverage your money when investing in real estate is the reason that real estate has created more millionaires in this country than any other investment vehicle. You are buying a $400,000 asset with only $20,000 of your capital.
We haven’t even begun to talk about the tax benefits, depreciation, investment property opportunities, or any of the other benefits of owning real estate. So yes, we are obviously very pro real estate. Every day people are fretting over the horrible real estate markets around the country, and in some cases, those folks are justified. It is likely they paid too much for their home when they bought it, or it was in a very volatile area and they are upside down; that is, they owe more on the property than it is worth.
When we look at the real estate markets, we see tremendous opportunities. In almost all areas prices have dropped dramatically, and interest rates are as low as you will probably ever see again in your life. That doesn’t mean you should rush out and buy a $400K condo in South Beach or Las Vegas. It means you should talk with one of our network agents, who are experts in the local real estate market. Explain to them what you’re looking for, what you would like to achieve with your home purchase, and let them do the legwork in helping you find a quality home that your family can live in comfortably with less risk and stress.
- A first-time homebuyer is someone who has never owned a home before or has not owned a home in the last three years. Most lenders can offer this, but some may not. Please check with your lender, and be aware there may be pricing and interest rate implications when doing less than 5 percent.