The Biggest Pros And Cons In Real Estate

Real estate is a great investment option. It can generate an ongoing income source. It can also rise in value overtime and prove a good investment in the cash value of the home or land that you buy. You may use it as a part of your overall strategy to begin building wealth.

With market volatility and real estate prices where they are today, many are wondering, “Should I invest in real estate?”

Real estate is one of those enduring investments that people believe they can (almost) always rely on. Owning your own home, for instance, has long been considered a fundamental component of achieving the American Dream, while stocks and mutual funds can be stigmatized as being too unreliable. Real estate investing took a hit during the housing crisis years between 2007 and 2009, but new research shows that Americans are beginning to warm up to the idea of long-term investing through real estate.

Real estate can add dimension and diversification to a portfolio. It can provide an asset that should grow with inflation as the costs of materials increase; it can also provide an income stream that also overtime increases with inflation as a wages and the population grow. And, of course, when it comes to land we all know they aren’t making any more of it!

Before jumping in with two feet, keep in mind the following:

Properties Appreciate in Value

Over time, property values grow. Unlike cars that lose money the day you take them off the lot, the longer you hold onto property, the more money you will make. The Federal Housing Finance Agency (FHFA) House Price Index shows that homes have been appreciating steadily at 3 to 5 percent per year as a national average, with some areas being significantly higher. During the housing bubble, home appreciation did slip. However, for those who held on to their investments, prices have returned to normal in most of the country and appreciation is back on track. In fact, this past year, every state in the nation had a positive appreciation, and 15 states had higher than 5 percent appreciation.

Some financial experts even believe your net worth statement shouldn’t include anything that depreciates. The only way to really increase your net worth is to reduce your debt and increase your appreciating assets. This means real estate, with its track record of appreciation, is a perfect way to increase your net worth.

Prices can and may still drop

We’re at a point in many places in the county where prices are in line with historical averages. Keep in mind that “in line” doesn’t mean cheap. Prices may be turning the corner in some markets, but still haven’t in all. The key to a successful real estateinvestment is not necessarily the right property, but getting it at the right price.

Rents can and may drop

Lower prices mean investors can make a profit by purchasing properties and offering lower rent to high quality renters. It may be deceptive to look at what a renter is paying today, as they may be able to shop around for something better tomorrow.

Real Estate Has Competitive Returns

When it comes to rate of returns, real estate does as well as the stock market and does so without as much volatility. This was true even during the housing crisis years. For instance, U.S. commercial real estate gained an average of 8.4 percent per year from 2000 to 2010. Stocks, on the other hand, had an average of 3.6 percent in gains that fluctuated from years -37 percent loss to years with 28.7 percent gain. So, not only does real estate have competitive returns, it does so without all the volatility of the market.

What is the point of investing in real estate, then, if houses don’t actually appreciate that much, if at all? Well, as Entrepreneur magazine points out, real estate can be a blessing for those who struggle with savings. For those people, buying a rental property (or properties) can act as a kind of sideline retirement plan that you are required to commit to, month after month.

The moral of the story is that as alluring as it may be to own property, the reality is that not much can replace the stock market when it comes to making real, tangible returns on your investment, though real estate does have its benefits. From utilizing rental properties as a kind of extra retirement income, to taking advantage of the added opportunities for tax deductions that come with owning property, real estate certainly isn’t a worthless investment, but it is worth researching to be sure you don’t have unrealistic expectations for the kind of return you’ll be getting.