Real estate is one of the best investments of all time. Land is in limited supply while population growth is growing at an exponential rate. Additionally, resources like timber are also being depleted forcing home material prices upward. A home is a tangible asset people will always need. This fact, has kept real estate prices relatively stable over the years. In addition, its illiquid nature keeps the prices from moving wildly. Market changes happen slowly over a series of months and years.
Why Real Estate?
Real estate has produced more millionaires than any other investment vehicle. For one reason, more people have invested in real estate than anything else because they need a place to live. Real estate is a wonderful investment vehicle. Here are some of the reasons it is such a good investment.
Leverage
You might ask yourself, "What is better, the stock market or real estate." The stock market will give you the best returns. However, where will you get the money to put in the stock market? Nobody will give you a 200k loan to invest in the stock market. With real estate, you only have to put up a small amount of the total investment. The only requirement is that you have relatively good credit. I think of it like this. The bank needs to lend money and a responsible person to look after the investment. And because real estate is a pretty safe investment they are willing to lend. Some pretty ordinary people own several homes that add up to millions of dollars. All they really needed to do was show the bank they are responsible through credit and have a reasonable income.
Tax Advantages
Real estate has many tax advantages. On your own home, you can deduct interest paid to lower your adjusted gross income. On rental properties, you can deduct expenses, repairs, management, points paid on loans and many other items. Consult your tax advisor. Is there any other investment that will let you deduct items for tax purposes? Is there any stock or bond that helps lower your adjusted gross income? The bottom line here is that Uncle Sam wants to encourage real estate investment. Real estate brings in a lot of tax dollars and helps poor people have a place to live. Imagine what would happen if nobody built apartments or had rental homes for those with poor credit or low income. People really need real estate and the government recognizes this.
How To Choose A Home That Will Appreciate
It's a difficult question; to say the least. However, there are several factors to look at. Typically, new developments in the slightly upper middle class range will have the largest home appreciation. You will know a development like this because it will look a little nicer than most of what you see around town. The kitchens might have an upgrade like granite countertops or the yards may be slightly larger than average, for the area. When you go there, you will feel like the area is somewhat unique and luxurious. Slightly above average new homes are sought after by a lot of people and still affordable; barely.
Price Appreciation Areas
There are always lists to look at. Forbes and Moodys always put out real estate lists that are fun to look at. The main factor is supply and demand. Demographically, where will there be a lot of job creation? And, where are houses selling quickly? The time it takes for houses, on average, to sell will tell you whether the market is hot or not. Ask your local realtor, "What are the average days on market for a house to sell?" Hot markets will take only a few days. Slow markets may take around six months. Areas with the highest reputation will have the largest appreciation. Talk to your local Realtor about the most attractive areas of the city. If you can't afford a lot, get something small, like a condo, in a good area. You will have much better luck than with a large home in a bad area. Once your home appreciates, you can sell it and move up to something better.
Interest Rates And Home Prices
If rates are low, more buyers can afford higher priced homes. In reverse, if rates are high, not many buyers can afford an expensive house. The interest relationship affects, in a big way, the pool of buyers. Recently, the last five years, or so, negative amortization loans have become quite popular. There has also been a huge increase in interest only mortgages. Countrywide Mortgage, the largest mortgage servicer in the country led the way. They came out with these new products; negative amortization and interest only. What this did is increase the amount of purchasing power for buyers. When purchasing power went up, houses went up to account for the higher purchasing power. The reason is that there are not enough nice homes to go around. Builders could pretty much ask and get whatever people can afford. The winners of this debacle were builders, real estate agents, mortgage brokers, and local governments (more property taxes through appreciation). Unfortunately, lenders like Fannie Mae and Freddie Mac are losers because so many people can't make their payments. It's what the subprime mess is all about. It's actually a good correction in the market. These companies, in effect, jacked up real estate prices and got people into homes they can't afford. The market correction will be a good wake up call that they should be more responsible to consumers. To summarize, high rates will lower home prices and lower rates will raise home prices.
For further information, please visit http://www.newcreditreport.org
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