Investing 101

The stock market is up and down; there is no rhyme or reason for the movement. It’s frustrating for people trying to build predictable retirement wealth. But this is a perfect time for home buyers to build future retirement income and asset value through real estate. While many outside the business think that real estate investors are speculators, people who “buy and flip”, the majority of investors “buy, improve, and hold the property for rental”. More than 1 million purchases or consistently over 20% of all home purchases are purely for investment. If you encounter hesitation from home buyer property rental investors, there is some good news out there to calm their fears. We recently conducted a study with Harris Interactive of just who the true real estate investor was, and this is what we found:

This market is the perfect storm for investing in real estate in the most positive sense:

*  House prices are low
*  Interest rates are still low
*  Most homes purchased for rental meet conforming guidelines for mortgages from Fannie MAE and Freddie MAC (average price is around $150,000.

Rents are up in virtually every market according to the Joint Center for Housing Research at Harvard, because more people are returning to renting or are limited to renting because they don’t have down payments or can’t get a mortgage. While regularly 1 million people a year return to renting from homeownership due to things like death, divorce, job loss, health issues, etc., this year and for the next several years, that number will be closer to 3 million. Multi-family apartment development stopped when aggressive mortgage practices pulled apartment dwellers out of renting and put them in homes, so the availability of rentals is insufficient to meet demand in many places.

More importantly, what financial planners don’t want you to know (and why many real estate investors are drawn to this type of investment) is that the returns can definitely be better in real estate. That’s because you only put a portion of the cost of a property down. When you buy a stock, you typically pay for the entire cost. So, if you bought a $100 stock and it went up $18, you would have an 18% return on your investment. If you bought a house for $100, and put $10 down and it then went up $18, you would have an 80 percent return on the cash you had invested – a “cash on cash” return.

It’s also important to note that real estate investors can avoid paying taxes on the appreciation when selling the rental property by simply completing a Section 1031 Exchange and putting the appreciation into another rental property or properties.

Novice investors sometimes think that they should buy run down houses that they can rent cheap or fix and flip. However, you might want to rethink that option. The best property purchases are those in neighborhoods where good renters want to rent. Additionally, now that more companies want people who are being relocated for a short period of time (2-4 years) to rent versus buy, there is an even stronger demand for houses to rent in better neighborhoods.