Why Real Estate?
Historically, residential real estate has been America's best investment opportunity for individual investors, for two reasons:
First, residential real estate offers the best combination of low risk and high returns.
- Municipal bonds and T-bills offer low risk, but also low returns. Stocks and mutual funds offer potentially higher returns, but as we've all learned recently, they can drop to zero overnight. Real estate is called real estate because you own actual property, not a paper investment whose value fluctuates by the hour. The value of your real estate (properly covered by insurance, of course) will never drop to zero.
- Averaged over the past 100 years, long-term real estate returns (rental income plus appreciation) have kept pace with long-term stock market returns (dividends plus appreciation). But remember, you don't make money in the stock market based on averages, you make money based on how YOUR specific stock performs. You could do much better, or much worse, than the historic averages. With real estate, the returns are more stable and therefore more predictable. You get that perfect balance between low-risk and solid long-term returns.
- Unlike the stock market, real estate investors do well in good times and bad. When times are bad, investment properties can be purchased at lower prices (often in foreclosure), and demand for rental space increases. During good times, the value of your properties increases and rent prices go up.
Second, and perhaps more importantly, residential real estate uses other people?s money.
- The banks won't lend you money to buy stocks and bonds, but they will lend you up to 80% of the price of an investment property. To purchase $100,000 worth of stocks, you'll need $100,000, but to buy a $100,000 rental property, you may need as little as $20,000 (plus fees in both cases).
- But here's the exciting part: The mortgage note you pay to the bank each month is paid by your tenants! Part of that note comes to you each month as income, while part of it goes to increase your equity in the property! What's not to like?
Why will banks lend money for one type of investment and not for another? Because banks don't take risks, and they know that residential real estate is a safe investment offering dependable returns. And with interest rates at their lowest in 50 years, now is the time to buy!
Of course, your retirement portfolio should include a variety of investment types, and the above information should not be construed as investment advice. Ask your estate planner or tax advisor whether residential real estate should be part of your long-term financial plan.