Why Invest In Real Estate

Dated: 10/18/2016

Views: 474

By Scott Albright, REALTOR/Partner at The M Real Estate Group

Warren Buffett, the billionaire business magnate who’s made a fortune in real estate, said in 2012 that if he could, he’d buy “a couple hundred thousand” single-family homes. More recently, during the 2016 annual Berkshire Hathaway meeting, Buffett went on to say that although it’s not as good a time to buy as 2012, the chances of housing prices collapsing are low. “I don’t see a nationwide bubble in real estate right now at all,” he said.

As housing prices steadily increased since 2012, many economists have chimed in as to what to expect in the future of real estate. Bank of America Merrill Lynch analysts Chris Flanagan and Gregory Fitter predicted in a 2014 report that U.S. housing prices would increase 3% per year in 2015 and 2016, before flattening out in 2017, and then steadily decline nearly 35% over the next six years. According to the S&P/Case-Shiller National Home Price Index, those predictions have been wrong so far. The index increased 5.3% year-over-year for the month of February of 2016, and according to Zillow, “United States home values have gone up 5.4% over the past year and Zillow predicts they will rise 2.9% within the next year.”

The real bad news isn’t declining home values, but rather the rate of home ownership. Authors of the report ‘A Renter or Homeowner Nation?’ Arthur Acolin, Laurie S. Goodman, and Susan M. Wachter predict that by 2050 the U.S. home ownership rate will decrease to 57.9%, nearly 20 percentage points less than at it’s peak in 2004. Behind this decline, they report, is the inability of thousands of would-be-home-owners to get a mortgage. Low wages, credit card & student loan debt, and affordable housing shortages are behind the mass movement toward being a renter’s nation. Unfortunately, many of these would-be-home-owners will be forced to pay higher and higher rents, even though a mortgage would cost them less on a month-to-month basis.

Rent, housing prices, inflation, and interest rates are all predicted to steadily increase over the next decade, forcing millions of Americans into having to rent costly housing, which means that unless your wages are expected to increase at a faster pace than inflation or housing costs, the future looks bleak as far as home ownership goes. On the flip side, that means now is a good time to buy. Home owners who lost equity in the last housing bust have now recouped all or most of their losses, meaning they can once again borrow against their home in order to re-invest in the housing market. 

Income producing properties look quite enticing for those wanting to invest now, as rental rates are only going to keep going up, with a steady flow of renters ready to pay more than they would on a mortgage. For the smart investor, it’s also an opportunity to provide renters a chance at home ownership through rent-to-own agreements that could help to keep tenants staying around longer, while providing income producing home owners a steady flow of cash for years to come.

According to Investopedia, real estate provides an “attractive and stable income return,” and that, “By any measurement, the real estate sector has outperformed the overall market, even factoring in the drastic collapse in housing prices during the 2008 financial crisis.” According to the same article, average 20-year returns on residential and diversified real estate run around 10.6%, two points above the S&P 500 Index’s average annual return for the past 20 years. Holding for longer periods has the potential to continually increase those returns. As Warren Buffett is quoted as saying, “Our favorite holding period is forever.”

But don’t just ask Warren Buffett, who recently endorsed presidential hopeful Hillary Clinton. Billionaires on both sides of the aisle will tell you real estate is the way to go. American hedge fund manager and recently selected economic advisor to Donald Trump, John Paulson is quoted as saying, “If you don’t own a home, buy one. If you own one home, buy another one. And if you own two homes, buy a third and lend your relatives the money to buy one.” No matter how you look at it, investing in real estate is a smart move for anybody who cares about the future of their finances.

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