Out of all the investment opportunities available to you in 2010, acquiring real estate is an option that deserves serious consideration. Property ownership has long been a method employed by savvy investors to preserve and increase the value of their money. Current conditions in the housing and lending markets make investing in properties more attractive than ever, with mortgage rates the lowest they’ve been in 50 years, and home prices dropping to about half of the peak seen several years ago. The return on a real estate investment purchased in the near future is likely to be far more substantial than the profits available from competing types of investments.
~ Investment Options
There are many different strategies investors can choose from in their attempts to make their money grow. Buying stocks or bonds, earning interest on savings accounts or certificates of deposit (CDs), and obtaining valuable commodities such as gold are all possible methods of investing one’s money. As one of the many choices, real estate investment – whether it is as basic as owning one’s residence rather than renting, or as advanced as acquiring millions of dollars’ worth of rental properties – has a long history of being one of the safest and most lucrative investment techniques.
While the incredibly low interest rates banks are offering right now are great news if you’re a borrower, they also mean dismally low returns for investing your money in savings accounts or CDs, to the point that you might not even keep pace with inflation. Although investing in the stock market has historically created the highest average investment profits, the recent performance of stocks has been unpredictable, reflecting the turmoil in the American economy as even big corporations once presumed stable have gone bankrupt. Buying US Saving Bonds has been considered a “safe” way of investing your money in the past, offering a return that is typically a little higher than general interest rates but lower than buying stocks, but with the huge increases in government debt and plans for more spending, buyers may be leery. As for investing in gold, the time was right some years back, but the current high prices leave much less room for profit.
~ Buy Low, Sell High
One of the easiest ways of making a significant profit on your real estate investment is to seek out the real bargains selling for much less than their actual value. Although many experts recommend holding onto your investment properties for a longer period of time to reap the advantages of property ownership described below, many individuals have gotten a quick, generous return on their investment by buying “fixer-upper” houses, completing the needed repairs, and selling them mere weeks or months later at much higher prices. Although it’s still possible to “flip” properties this way for a profit, keep in mind that the real estate market currently favors buyers much more than sellers.
The slow sales of the past few years caused by high unemployment rates and potential buyers’ uneasiness about job security and reluctance to commit to loans have driven real estate prices down. In addition, the economic downturn prompting unexpected lay-offs of formerly solvent homeowners, combined with government policies that coerced banks into granting home loans to people unable to afford repayment, has caused a flood of foreclosure properties to come back on the market, often at greatly reduced prices. Although there are some risks to buying foreclosures, the careful investor who does his or her homework can realize unbeatable profits in the current market. (See “The Downside of Buying Foreclosures.”)
~ Property Appreciation
Within the controlled economy of the United States, government tinkering with monetary policy causes inflation and an escalation of the cost of living as time goes by. What this means in practical terms for real estate investment is that, after a few years of inflation – caused by the government printing more dollars, so each one in circulation becomes worth less – the market value of your property will in all probability have increased or “appreciated.”
For example, if you buy a house worth $150,000 with a down payment of $30,000, an inflation rate of 4% would bump your house’s market value up to $156,000. The increase of $6,000 on your $30,000 investment is a 20% return which, after subtracting inflation, is an appreciation of 16% on your down payment investment. Of course, your actual profit will be somewhat lower on a personal residence after subtracting expenses like property taxes, repairs and insurance. On the other hand, your total profit could be even higher for an investment property bringing in monthly rent payments.
~ Rental Income and Equity
We’ve all heard amazing success stories about investors who give little or no down payment but obtain ownership of one or more rental properties, and access to an impressive stream of income from rent payments. The rents collected cover the buyer’s mortgage payment and other property expenses, so that he or she ends up owning the real estate with minimal out-of-pocket costs. Besides the equity being built with “other people’s money,” the investor has a nice chunk of excess income left over each month after paying expenses, for personal use or other investment. With real estate sales being so slow now, it is definitely possible to get in on a fantastic deal like this, but you need to be aware of a few potential issues.
To find the relatively few sellers who are sufficiently motivated to transfer their property to you on such favorable terms, you must be willing to spend time and effort researching multiple properties, contacting numerous sellers and making lots of offers before one is accepted. Additionally, you need to plan ahead for the inevitable vacancy and maintenance problems landlords face by having adequate money set aside to cover the repairs, mortgage and other expenses if your tenant trashes the house and skips town.
Despite the possible hassles, the time is ripe to invest in rental properties. The same effects of inflation that cause property appreciation also benefit the rental-property investor who locks in a low mortgage rate and monthly payment, such as the ones offered by lenders right now. As inflation increases and the cost of living rises, rents will go up too, while the investor’s monthly mortgage payment stays the same, meaning greater profits as the years pass. For example, if initial rent is $650 per month, and the mortgage payment is $400, the investor begins with a gross profit of $250 monthly (from which other property expenses will have to be paid, of course). If monthly rent has increased to $700 a few years later, the mortgage payment still remains $400, and the happy investor now has $300 gross profit from rental income every month.
~ Tax Benefits
When you own rental properties, the tax code generally provides for a yearly deduction for “depreciation” of the building you own, lasting for several decades of ownership, since the structure is subject to wear and tear and eventually will have to be replaced. In practical terms, this means that a certain portion of your rental income will not be subject to federal income tax. The investor is also typically entitled to deductions for all expenses associated with owning and renting the property, including property taxes, insurance, repairs, management fees, and mileage. Of course there can be exceptions, so it’s advisable to consult an attorney, accountant or other professional, or otherwise educate yourself, on the specific rules of rental property taxation that apply to your situation.
For the purchase of a house for your own use, rather than renting, there are fewer tax benefits. However, you are usually able to deduct the interest paid on your mortgage if you itemize deductions for your federal income tax return. Again, do some research or consult an expert on the tax rules that will apply to you, as these can vary depending on how title to the property is held and other factors.
The year 2010 has seen the lowest mortgage rates in more than a half-century and a buyer’s market in real estate, making it a great time for investing in property. Despite economic uncertainty for the country at large, individuals with reasonably secure employment and minimal debt are unlikely to find a better way of investing their money than buying a home or rental property in the near future. Remember the golden rule of investing: Buy low and sell high. Now is the time to “buy low,” then hold your real estate and enjoy the many benefits of ownership described above. You can “sell high” if and when you choose to in the future, when the market inevitably changes again.
Mortgage Rates Lowest Since Mid-50s, Retrieved 09 17 10
Real Estate vs. Stocks – Which Is the Better Investment?, Retrieved 09 18 10
Why Housing Slump Isn’t Getting Better, Retrieved 09 18 10