WHY YOU SHOULD OWN REAL ESTATE
Although the 2008-2009 financial crisis rocked the country’s real estate market and practically every other investable asset class, I believe there are incredible benefits to investing in real estate to ensure a healthier retirement. As soon as you find a place you can envision yourself living for at least five years, it’s probably a good time to start your property search.
1) Inflationary asset. I remember thinking to myself back in 1994 how ridiculous it was to pay $1,000 a month for a one bedroom in Boston when I was paying $350 a month to rent a room in a townhouse with my buddy in Virginia. Today, a similar one bedroom is over $3,000 a month. Inflation is a powerful economic force that’s difficult to stop. You want to own inflating assets rather than always be a price taker. Eventually your income will stop growing, decline, or eventually disappear, making survival that much harder if you must continue renting.
2) A hedge against conflict. Whenever there is geopolitical risk, a major natural disaster, or a terrorist attack, notice how US Treasury yields go down due to a flight to safer assets. Housing is a direct beneficiary of lower interest rates due to the common practice of borrowing to own. When interest rates go down, refinancing activity also picks up, increasing the cash flow of homeowners everywhere. I have personally refinanced five times with various properties and am paying $3,500 less in interest a month than 11 years ago.
3) A leveraged play in a bull market. When times are good, assets tend to inflate quicker due to higher employment, rising wages, and rising corporate profits. Real estate tends to be a major beneficiary during a bull market. Earning a 32% equity return in 2013 was fantastic. But earning a 75% cash on cash return on your 20% equity thanks to a 15% rise in home prices is even better.
4) Tax benefits. The US government has deemed real estate part of the American dream with mortgage interest deduction, the 1031 exchange program to defer taxes, and a generous $250,000 tax free gain for singles and $500,000 tax free gain for married couples. It takes a $714,000 return at a 30% effective tax rate to clear $500,000 in profits. Based on my research, I’ve found that the ideal mortgage amount and income combo is $1 million and $250,000 a year based on today’s rates.
5) Much easier for a regular person to understand and manage. Real estate is a relatively easy business to understand compared to investing in stocks. Good location, good tenants, manageable maintenance, and rental growth are all it basically takes to make for a solid real estate investment. Stocks have so many more variables to deal with, including: management credibility, industry growth, competition, politics, regulation, tax policies, inventory turns, margin analysis, operating profit growth, and more. It’s no wonder you’ll find plenty of first generation immigrants focus on accumulating property.
6) Less temptation to sell out too soon. Thanks to still stubbornly high selling commissions, the ability to sell is much more difficult than selling a stock when the markets are crashing. I know plenty of people who just had to get out of the stock market in 2008-2010 because they were scared out of their minds. It’s so easy to pay a $8 commission and press click. But when you’ve got to pay a 5% commission and go through the entire process of marketing a property, you tend to just sit tight and see what happens.
7) Paying back debt with inflated dollars. For people with fixed rate mortgages, their payments never change. 10 years from now you’ll get to pay off the same amount of debt with dollars that aren’t worth as much as when you first took out the mortgage. As your net worth grows, the mortgage liability becomes a smaller part of your overall net worth, thereby reducing any feelings of stress associated with the loan.
8) Never have to move again (so long as you pay your mortgage). Moving is a painful process. What’s more painful is having to move when you don’t want to. Many long-time renters are being displaced in cities such as San Francisco because the property owners want to capitalize on the demand. I was speaking to one renter who is being asked to move after 18 years. He has no job, a daughter who is entering high school, and a wife who no longer wants to be with him. He pays $1,990 a month for a place that could easily rent out for $3,800 a month.
9) Passive income machine. Although real estate takes ongoing maintenance, rental income is one of the best passive income sources around along with dividend investing. After the hard work of finding the perfect tenant is done, one should usually expect to collect income for at least 12 months before another tenant may need to be found. The rental income is also partially or completely shielded by non-cash depreciation expense as well thanks to the government.
10) An asset to pass on to your heirs. Everybody has heard a story of some grandparent buying a home for $20,000 that is now worth hundreds of thousands or even millions of dollars. If you can buy a property to live and enjoy, and then pass it down the family to give your children a heads start, what an amazing gift you’ll provide. It’s very difficult for Millennials to buy their own property nowadays. But besides working hard, a massive generational wealth transfer should help support future generations.
Why Real Estate Should Be A Part Of Your Retirement Strategy.