Why Real Estate?

Until recent times, real estate has always been the winner in investments. Yes, it is true, there are locations in the U.S. throughout history where real estate has straight-lined or even gone down in value. But over time, it has always been a home run when it comes to an investment.

Real estate has huge tax advantages and is considered to be the most predictable of all investments. True, it is not liquid and in a down market you may even experience a loss if you try and sell. How often does that happen on Wall Street; or should I say, how many times a day does that happen on Wall Street?

Investing in real estate as a general rule doesn’t take much consideration; actually it’s quite simple. Investing in real estate is actually an investment in inflation. If you feel we are about to embark upon a great depression, real estate may not be for you. But if you think inflation will be a factor of the near future, then it may be something you may want to consider.

One of the huge benefits to real estate is the ability to leverage. If you want to buy $100,000 in gold, you better have $100,000 lying around ready to invest. If you want to by real estate you merely come up with a nominal down payment.

A 10% down payment in a real estate investment that increases 10% in value yields the investor a nice 100% return.

If you find yourself in a 30% federal tax bracket, coupled with an 11% California tax, you are in a 41% combined tax bracket. For every dollar spent in interest on a mortgage you are actually out of pocket 59 cents. If you are spending $2,000 a month in interest, the REAL out of pocket cost is actually only $1,180.

Many people for years have invested in real estate purely for fact of obtaining the tax benefits. The pure fact you are gaining 41% return in a tax saving if the real estate itself never appreciated in value.

Just think of it. If you could borrow money at a 6% interest rate and you deducted 41% of that, the real cost of the loan is actually 3.54%. (6% x 59% = 3.54%) Or better yet, a 5% loan x 59% = 2.95%.

When selling real estate you get taxed at the capital gain rate, or you can continuously trade your investments and defer your tax liability until the day you die.

San Diego’s real estate has gone up 200% in value from 1995 thru 2005. Yes, it may have gone down 30% or even more in select areas, but that’s still a 170% appreciation in 19 years, or an average of nearly 9% appreciation each and every year. Putting 10% down with a 9% appreciation; that equates to a 90% return on your money. If you had sold before the down turn in real estate, say in 2005; that equates to 200% / 10 years = 20% per year. With a 10% down payment that’s equal to 200% on your invested dollar. 200% vs 90% - See the importance to “timing”? Location & timing are everything when it comes to investing in real estate.

Why NOW?

There are many factors that drive real estate values, either up or down. Knowing and understanding as many factors as possible minimizes your risk. Those so-called factors are known as demo-
graphics. Why does one investor favor one stock over another? Purely because of demographic studies or known facts that
causes potential increased values.

Over that last 50 years, the major contributing factor that made real estate increase or decrease in value was simply the movement in interest rates. Rates went up, values went down. Not at the same precise time, but never the less, that’s how it works.

Typically, when real estate values are high, interest rates are low, and vice versa. That’s how real estate went so high in value over a short period of time. Real estate was very affordable. In the past, there were loans available with no down payments, you didn’t have to prove your income, and interest rates often started at 1%.

Example:

A $200,000 mortgage with financing available at 5% = $1,074 monthly payment. I have seen 9+% many times over the past 40 years. Let’s pretend for a moment it was at 9% today. That $1,074 payment would become $1,609; a $535 or a 1/3 increase in mortgage payment. That kind of increased payment requirement removes many would be home owners from the buying market. If you could afford the $1,609 payment, but the rate dropped to 5%, you could now afford to pay on a $300,000.

A mere 4% change in interest rate can increase or decrease your buying power by more than a whopping $100,000!

Currently it is October 2009. At the time of this writing, homes listed on the MLS in San Diego with an asking price of $350,000 or less have multiple offers within 3 days of the listing. It is not uncommon to see 25-40 offers within 5 days.

What do you think this does to property values? The old supply and demand game. There are not enough of these lower end homes to meet the demand. It has been more than 30 years since I’ve seen it cheaper to own the same home you may be renting. Thus these lower end homes have increases in value 31% in the past 6 months.

Real estate will continue to increase values at an alarming pace until one or two things, or both take place. Housing prices get so high no one can no longer afford them, or interest rates increase, creating the same unaffordable housing market.

While rates are low couple with housing prices suppressed that combination makes for the most affordable housing ever, and has not been experienced since 1958.

Based on past history, NOW is one of the best times to BUY!