There’s no question that we are in funny economic times. The stability of the housing market is potentially uncertain. With the downgrade, the stock market is extremely volatile. Even “safe” investments (like commodities and bonds) bring their own risks. Here’s why to invest in real estate versus other places:
- Leveraging: the idea of leveraging is very important within real estate. Let’s say you’ve got $100,000 to invest. You can take that money into the stock market and invest in companies. Today, the United Parcel Service (UPS) is trading at $66.26 per share. You can take your $100,000 and buy about 1,500 share of UPS stock. If UPS increases by 10% in one year you’ve made yourself $10,000. Congratulations. Within real estate, however, you can leverage that same money and increase your return on investment. With a mortgage, $100,000 can be a 20% down payment on a $500,000 house. If one year later the real estate market appreciates by 10% your $500,000 is now worth $550,000. Same time period. Same percentage increase. Different result: congratulations times 5.
- Tangibility: similar case as the one above, only flipped. Instead of a 10% increase, both the stock market and real estate markets take a hit of 50%. Everything is worth half of yesterday. Your $100,000 investment in UPS is worth $50,000 (on paper) and your $500,000 house is worth $250,000 (on paper). The difference is that your house is something tangible you use everyday. If UPS goes out of business and their stock goes to $0.00 you just had a really bad day and nothing to show for it. If your house became “worthless” in the same time period, you would still be living there, still raising your family there, still able to rent it out or run a business out of it. Neither is a great day and paying a mortgage on a house less than is owed is a crappy place to be, but nevertheless you’ve got a roof over your head and something physical to hold on to.
- Tax Shelter: I’ve talked about it much within many other blogs. In the stock market (like other places) you can write off your loss. Only in real estate is there the potential for tax write-offs when the property is going up in value. Property taxes and interest are just two of many places to save money within your taxes by owning. Consult your CPA for additional information.