When a person has extra money to invest, they have a lot of options these days. They could do something very conservative with it like retire some debt like credit cards or car notes. They could put it into a money market account or a C/D that pays a little interest but isn’t going to burn them.
They could take a lot of risk with it and buy stocks that could go up or down with out any say from the investor themselves. There are other options that an investor has like bonds, mutual funds, whole life insurance, and annuities. All of these types of investments look to balance the risk with the need for a return.
I look at real estate the same way. There are certainly risk factors associated with it. Its not yet out of anyone’s minds the recent housing bubble burst of 2006-2011. However, the market seems to have recovered nicely since then, and we are seeing a lot of markets already at or above their previous peaks. I know a lot of folks who sold their house at the bottom of the market and are probably kicking themselves now for not staying in it a few more years while the values came back around.
If we have learned anything about the real estate market, its that if you zoom out and look at the prices over the last 50, 100, 200 years that they are going up. They have moments where they retreat downwards, and moments where they grow for several years straight, but all things considered the price of real estate goes up over a long period of time.
I think that has a lot to do with the scarcity of land. The fact that most people in the US live in cities and urban centers. Most people work in big buildings in downtown type locations. The suburbs are immensely popular for families who value schools and community works. Any way you cut it, people buy homes for emotional reasons. To be close to family, to have good schools, to have a short commute, to have plenty of entertainment nearby, to enjoy nature and the list goes on.
This is one way in which real estate varies from other types of investments, the buyer may want to purchase your investment because of emotional reasons. How is that different? Well someone may want to buy stock from Google or Apple because they think the company is hip and they enjoy using their products, but that’s one of few examples that I can think of in which an investment in stock is emotional. When you consider buying a bond or putting money into a C/D there isn’t much emotion to that. There isn’t much risk or upside, its (in my opinion) a pretty boring place to put your money if you are in growth mode.
Another way that real estate is different is that you can leverage your money. If you want to buy a house for 200k you can put as little as $1000 down if you qualify. FHA only requires 3.5% ($7,000) and conventional could go as low as 5% ($10,000).
This is rarely if ever possible to do in other types of investments because banks don’t loan out money for you to buy stocks at 4%. They would feel that is too high risk for them, yet they do those types of loans on real estate all day. I think that its because the fact that real estate is tangible makes it a whole lot less risky.
There is yet another way that real estate differs from other investment types. That is the tax advantages. In the current tax code, real estate owners and investors are allowed to take the mortgage interest as a deduction on their taxes. Same with the property taxes. For investors there are a whole bunch of other items that you can deduct too like depreciation, insurance, repairs and more. So while its true that real estate is less liquid and more work than say a stock or bond investment, there are some nice little bonus benefits to them aside from the actual return on investment. You can also take your equity out of a real estate investment by doing a cash out refinance and use the funds with out paying taxes on it, because the gain isn’t realized until you sell it.
How great is that !
Investing in real estate isn’t for everyone, I am the first to admit. I love it because of all the reasons I mentioned above, and a bunch more that are too complex to put into a blog post. However it isn’t good for someone who doesn’t have tolerance for risk. Who isn’t comfortable being a long term buy and hold investor. It is not for the person who is willing to swing for the fences and while they are OK with striking out occasionally, they also need to hit some home runs. Real estate is a “slow and steady wins the race” type of investment.
My goal is and has always been to build a portfolio that can be used to pay for my retirement years and can be passed on to future generations of my family. If you are interested in the same thing in the Twin Cities market, then we can help you to achieve your goals.