There are a number of reasons to invest in real estate. In this post, I will attempt to logically explain why investing in real estate is just as wise as investing in an IRA, 401-K, stocks, CDs, or any other platform we seek to collect compound interest. Let’s begin!
Real Estate is a dependable and growing flow of income. Weigh the amounts of income (rents, dividends, and interests). Investments that yield superior flows of income will show higher rates of long-term appreciation. Investors never buy assets. They buy flows of future income.
· Property versus Stock: Average yield of stock (S&P 500) is 1.5 to 2.0 percent. Average yield on Property (net annual income) is 6 percent to 12 percent on average.
· Nest Egg Dilemma: Low cash returns mean that relatively few Americans can ever hope to accumulate a stock market nest egg large enough to provide them a livable income in their later years. Stocks for retirements – you can run out of money before you run out of life. 1. Spend too quickly and live on food stamps. 2. Spend cautiously and not enjoy life.
· Volatility of Returns: Up until March 2000, most stock investors erroneously believed that the market just plugs along dependably. Bear markets can slumber for decades (1907-1924, 1929-1954, 1964-1982, 2000-?). Stock price volatility along with dividend yields can shatter the best-laid nest eggs.
· What about Bonds? Quality bonds pay more annual income than stocks, but they still lag leveraged returns from income properties. Purchasing power falls over the years. Inflation eats away at bonds while rental properties tend to increase over time.
· Don’t Fall for the Annuity Sales Pitches: Fixed annuities expose you to substantial inflation risk. Annuities eat into your capital. Annuities include heavy front-end expense loads and fees in addition to early redemption fees.
· Are Rent Collections Dependable? That depends – you need to review your market: Review your local rental housing market. If priced and promoted effectively, you should not find well-located, well-kept houses. And beware of superficial “market” vacancy rates: Market vacancy rates and rent concessions primarily refer to two types of properties: 1. apartment mega-complexes. 2. ill-maintained properties that attract the dregs of human populace.
· Why Rents Will Continue to Increase: For a number of reasons! Population growth:
· From Baby Bust to Echo Boom: Echo boom is coming.
· New Construction Can’t Keep Pace: Builders won’t be able to construct all of the homes that people will want. Can’t quickly and economically respond to bursts of demand. High Costs – Median price for a new home is $225,000. Most people can’t afford. Lack of Land – Most of land is located where people want to live. Priced at premium when land is where people want to live. Cumbersome Regulatory Approvals – Large-scale land developments require a lot of costly government permits. NIMBY power – You fight against neighbors, environmentalists, and public interest research groups who want to restrict development. Inadequate Infrastructure – New developments require additional rods, schools, parks, waste disposal, water systems, and recreational areas. Thousands of dollars per new unit in impact fees.
· More Good News for Property Appreciation: Market fundamentals (i.e., renters and homebuyers with money and limited housing choices) will push rents and property prices to successive new highs.
· But First, The Reckoning: Stock holders won’t shift to real estate for three reasons. The Perils of Land lording: Myth that owning a property means spending Saturdays with a pipe wrench under a tenant’s sink and taking calls at midnight to deal with a stopped-up toilet. E-mails and answering machines eliminate the bother of untimely phone calls. Stocks for long run: Belief that stocks will turn out in the long run if you hang tight. Property Prices have appreciated too much: Property appreciated two or four fold since 1980 but stocks have increased ten fold. Even without appreciation, property yields larger, inflation-protected cash returns than any other investment.
· The Relevance to Property Appreciation: Property investors typically value income properties according to a simple formula. Value = NOI (net operating income)/ R (capitalization rate) Net operating income (NOI) equals gross rent collections less all operating expenses (such as repairs, maintenance, property taxes, and insurance). R equals the unleveraged (i.e., no financing involved) prevailing rate of return for a given locale and property type (house, condo, quad). R ranges usually between 6 to 12%. (Ex: NOI of $24,000 and (r) of .10. 24,000/.10 means you could sell the house for $240,000.) Cap rates are falling so sellers can now force buyers to accept lower yields. Buy now before cap rates bottom out, good appreciation affects. Also echo boomers will soon be competing for a place of their own
· Reason, Not Faith: Stocks, social security, 401ks, IRAs, Keoghs, are not going to guarantee financial prosperity or survival. Facts eventually expose illusions. You Can Still Win with Properties (for Now): In terms of both expected income and appreciation, property stands as your best route to wealth. Use reasoning to Beat the Market: You will learn to enhance your profits through intelligent use of leverage, bargain hunting, sharp negotiating, creative improvements, commercial properties, strategic management, and moving your monies to undervalued properties and areas. Don’t fear a down market, take advantage of it. General problem restated – Opportunities will get tougher to find: Investing will become more difficult in the future. Solution – Start now: Times are tougher, prices are higher.
Check out these helpful links if you are needing some more information:
- Government Records
- Creative Real Estate Solutions
- The Ultimate Real Estate Solutions
- Smart Real Estate Investments
- Foreclosure Profits
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