Should I Still Buy Real Estate?

I like real estate – always have. You know why?

I Have Control

I can drive past and check on my properties, or walk through them and make changes ranging from painting a room a different color to converting that outdated motel I bought into an executive office suite. These decisions are mine to make, and are not at the mercy of some CEO attempting to pump up his bottom line and max out his stock options. Remember Enron?

Many investment gurus and publications stress only stocks and bonds, and either ignore real estate or negate it. I have never figured out why. Stocks can be a good thing. I wish I’d purchased Google stock the first day it was on the market. But what then? Do I really know or understand what is happening inside Google? Is my investment at the mercy of foreign policy, terrorist acts, rumors, and acts of god, to say nothing of undue influence of large fund managers, captive brokerage houses and insider activity? My biggest fear of the stock market is having no control over what happens to my money.

Investing in real estate is not like investing in high tech stocks. Your real estate has utility value, while a stock certificate for Google is only worth what the next person will pay for it.

As a property appreciates in value and my equity increases, I’m able to refinance it and pull out cash for my own use. In that there is no tax on borrowed money, and my refinance costs are mostly tax deductible, this is a good way to come up with funds to send my kids to college, buy another property, or maybe even take a nice vacation. And should I choose to sell and acquire other property, the friendly IRS allows me to defer the payment of taxes on my profit by doing a 1031 tax deferred exchange.

Start Small

I’m a small investor. I started out buying a property, putting in a 10 or 20% down payment and using the bank’s money for the balance. This is called leverage, and it means that if my $300,000 house only just keeps up with inflation at say 5%, my $60,000 investment will have increased 25%. With the stock market, I don’t have this opportunity because no leverage is available to me.

As a worst case scenario, say I put down 20% of my purchase price, obtain a loan for 80% from the bank, and my rent does no more than cover my mortgage and expenses. Assuming that the rent never increases and the house never goes up in value, I own it free and clear 30 years from now, I have saved on income taxes because of “paper depreciation” and I have made no additional cash contributions because my tenants have made the payments for me.

This is my worst case? If I start at age 25, and buy a house every couple of years ‘til I’m 35, think how much I’ll be worth by the time I retire. I’ll be doing great! And with no more mortgage payments to make, I should have a pretty tidy monthly income to boot.

During those years, I’m painting walls, doing some minor fix-up, and renting my houses. I’m not worried about the daily Dow Jones or S&P ups and downs, I just keep renting my properties to folks like you and me. They want a place to live that is clean, comfortable, and a reasonable value for their rent. I’m talking about single family homes, maybe a duplex or fourplex, rented to working families with a couple of kids. Middle class America – not a bad thing to invest in.

And Stay For the Long Haul

Now, don’t get me wrong. I know real estate investment isn’t perfect. Nothing is. There can be vacancies; there is maintenance (tax deductible of course); a troublesome tenant once in a while. Check out my other article “Horror Stories in Real Estate”. But even here, you have control, unlike with stock where all you can do is buy or sell.

Don’t forget, you are in it for the long haul. The fact is that, over time, rents do go up and values do increase. In fact, over the past 5 years (2001-2006), the value of a $30,000 investment in homes has risen to $160,000.

It’s still a great time to purchase real estate. Interest rates are low, rents are rising. Our nation is prosperous and growing. Our population is increasing. People have to live somewhere. It might as well be in one of my (or your) houses.