With the real estate crash and Recession safely in our rear view mirror, consumers and experts once again see real estate as an essential investment. In fact, a recent survey conducted by Bankate.com found that 27% of Americans – more than 1 in 4 -said real estate was the best investment for money they would not need for at least a decade. Second on that list was cash at 23%, then investing in the stock market at 17%, and only 5% thought bonds were the best long-term investment.
Perhaps that’s one of the reasons why 94% of millionaires report that they made or kept a significant amount of their wealth by owning real estate. Statistics also show that the average homeowner’s net worth is 34 times that of a renter, and 77% of homeowners say owning real estate helped them achieve their long-term financial goals.
It looks like consumer confidence in the real estate market is roaring back – and for good reason.
- Real estate ownership offers unprecedented leverage
To simplify the power of leverage in real estate, let me propose two different scenarios. In one, an investor purchases stock with $30,000, gaining a $30,000 appreciable asset. Investor number two purchases a home with that same $30,000 with the aid of a mortgage. Of course they have to pay for that mortgage every month (unless they are in a rental property that is breaking even or cash flowing every month). But the key is that when the market goes up and their asset appreciates – say, 10% the next year, they will gain 10% of the FULL value of the home on paper, $30,000. Meanwhile, a 10% gain in the stock market will net $3,000 because of the lack of leverage.
Of course a wise investor owns a home and invests in the stock market, but there is no disputing that one of the inherent advantages to home ownership is the ease and ability to make the bank your partner, acquiring a full priced asset with only a fraction of the purchase price on hand.
- The tax advantages of owning real estate are unparalleled.
Not even a century ago, the U.S. government was facing a crisis that we can’t even fathom. It wasn’t the stock market crash or the Great Depression, but the idea of housing the nation’s exploding population. In fact, the U.S. government decided they didn’t want to be in the housing business, so to privatize putting roofs over heads, they added legislation that enacted a huge incentive: taxes.
Still to this day, real estate ownership and investing offer some of the most profound tax advantages you’ll ever hope to get. Just look at the long list of tax advantages and perks owning a home will afford you: you can write off mortgage interest, deduct the interest on up to $1.1 million in mortgage indebtedness on your primary home, sell your primary home for tax free profits up to $250,000 for singles and $500,000 for married couples if you live in the home for the last two of a five year period, and if you own rentals, all expenses associated with managing and improving your rental properties are also deductible towards your income.
Of course you should always consult your CPA or tax professional, but trust me when I tell you that no other investment offers tax free growth and write offs, short and long term, like real estate.
- Owning a rental property (or any home) is like a forced retirement plan.
Have you adequately planned for retirement? If you’re like most people, then probably not. As a nation, we save less than 4% of our personal income, which may seem like a grand victory compared to the all-time low savings rate of 1.9% we hit during the Recession, but it’s still a far cry from the minimum 10% savings financial advisors recommend. With pensions, social security, and medical costs all on shaky ground, it’s more important than ever to adequately plan and save for retirement.
Yet, the sad reality is that 50% of Americans have less than one month’s income saved for a rainy day, at least 50% of Americans have saved less than $50,000 for retirement, and 62% of adults have less than $1,000 in savings.
That’s where home ownership comes in – as a sort of forced savings plan. By buying a home today and holding it for 10, 20, or 30 years until retirement, you’ll have two different factors working in your favor: you’ll have paid down your mortgage significantly or even paid it off, reducing your housing expenses to almost nil in retirement, and you’ll also have added decades worth of appreciation. Add it all up and you’ll have a glut of equity if you ever needed to sell and downsize to fund your retirement, leverage other assets, or to use however you wish to your advantage.
- There is one person who doesn’t want you to own a house – your landlord.
Not everyone is a big fan of home ownership – your landlord probably is hoping and praying that you don’t buy a home!
In all seriousness, the rental market just keeps getting better for those who invest in rental property – and renters are getting squeezed. In fact, it’s now about half as expensive to be a homeowner than it is to rent in the United States. That’s the conclusion of a new study that found that renters paid an average of 29.9% of their monthly income toward rent, compared to an average of 15.3% for homeowners.
Alarmingly, half of all U.S. renters now pay more than 30% of their income to rent every month, which is the accepted barometer for housing affordability. That’s a marked increase from only 18% of renters paying more than 30% of their income a decade ago. California is one of those states where at least half of all renters pay more than 30% of their income toward rent.
Sure, homes are appreciating, but any good investor should be looking at cash flow and long-term gains, not short equity gains that aren’t liquid or can be erased with one bad economic cycle – a painful lesson we learned through the last crash. But rents are on the rise like never before in many major metropolitan areas and especially the Sacramento region, where a shortage of rental supply and lack of new home construction is exerting pronounced upwards pressure on rents – great news for landlords, investors, and homeowners.