In times of economic uncertainty, it’s nerveracking just thinking about investing your hard-earned cash. But without investing, the effects of inflation over your lifetime will take a big bite out of your savings. If you want to make sure you’ll have enough to cover the costs of major expenses like college tuition and retirement, you’ve got to put your money to work, and real estate is one way to do that.
According to the U.S. Census and national property sales statistics between 1940 and early 2010, the median home value has more than quadrupled over the past 70 years. This includes data from the housing downturn beginning in 2007. One study tags the annualized appreciation rate for part of this period–from 1978 to 2004–at 8.6 percent. This figure omits the recessionary value losses post-2006, but also leaves out the double-digit gains post-WW II and from 2004 to 2006. All the figures have one common factor: housing has always appreciated over the long term.
Leverage is a significant advantage of real estate investment. It allows you to earn appreciation off of the bank’s mortgage to you. If you buy a property for $500,000 with 20 percent down, or $100,000, and the property appreciates 3 percent a year for 10 years, the property will be worth $650,000. The 3 percent annual return rate on the property’s value represents an annualized return rate of 15 percent on your investment of $100,000. So even in times of modest appreciation, your actual return is strong. With a 20 percent down payment, it will be five times the home appreciation rate. If you’ve taken out an FHA loan with only 3 percent down, it will be like winning the lottery. A 3 percent annual appreciation rate will translate into a 100 percent rate of return on your down payment.
If you own property–either your personal residence or investment property–you will benefit from tax advantages. As a home owner, you are entitled to deduct your mortgage interest and are exempt from taxes on the first $250,000 if you are single, or $500,000 if you are married, of profit from the sale of your home so long as you have lived there at least two of the last five years prior to the sale. There is no limit on how many times you can take advantage of this exemption. If you own investment property, you can depreciate the building and its capital improvements. Depreciation allows you to subtract the cost of the asset evenly over its useful life from your income on the building and, to some extent, from your personal income. In some cases, depreciation makes it possible to actually profit from the building but not pay any taxes.
The great thing about rental income is that you earn it 24 hours a day, seven days a week, 365 days a year, whether you are awake or asleep, working or on vacation. If you have a full-time job, the rent supplements your income. When you have enough of it coming in, you can quit your day job.