The idea of homeownership may be daunting to some, and for a lot of people, the question of “Why buy real estate?” can be very hard to answer. Here, I plan to help answer that question through the many benefits real estate has to offer. My simplest answer though, is something I tell people all the time. Real estate is the key to building wealth.
APPRECIATION:
Since 2000, the average rate in the US has been 4.7%. And since 2012, the average rate has been 7.7%. Home price appreciation varies significantly from state to state, city to city. At the start of 2022, San Diego house prices were on the incline. The National Association of Realtors reported that home prices had appreciated by 18.5 percent in the last year and a staggering 46 percent in the last three years.
RETURN ON INVESTMENT (ROI):
ROI is the profit earned from a real estate purchase after deducting the costs of the investment, which typically include the purchase price and any additional expenses associated with repairs or remodeling. ROI is not realized until the property is sold.
One of the most common ways to make money owning and investing in real estate is through appreciation, or when the property grows in value over time. For example, if you purchase a home for $500,000 and, over the course of five years, its fair market value increases to $600,000, that means it has appreciated by $100,000. Let’s say that in addition to the $500K you bought the home for, you also put $20K of improvements into it, and you’re now selling it for $600K. Following the formula above, that’s $600K (sale price) minus $520K (cost), which comes to $80K; $80K divided by $520K is 0.15, so your ROI is 15 percent.
TAX BENEFITS:
Tax benefits are another way in which real estate generates returns. When you own a home as your personal residence, you can write off the mortgage interest. This could result in significant savings each year as you prepare your tax returns. Real estate investing offers a number of tax breaks like the ability to write off property expenses, property management expenses and you can deduct property depreciation. There’s another great option of deferring capital gains through 1031 Tax Free Exchanges. You’ll want to work closely with your accountant to be sure you get each and every deduction you’re entitled to because of your property ownership.
RENTAL INCOME:
Rental Income is another source of return in real estate investing. This is one of my favorites! While you can incur expenses along the way, this is a great way to pay down a mortgage while someone pays you rent. The goal of course is to have income that surpasses expenses, which will give you positive income each year. The hope is that one day, the property will have been paid off by your tenants, giving you most of the rent as positive income. Of course, you’ll always have expenses such as property taxes and maintenance expenses, but in a perfect world the rent would still leave you with plenty of positive income.
LEVERAGE:
Leverage is one of the best features of real estate investing because it allows you to earn returns on borrowed money. Let’s say you buy a house for $500,000 with a mortgage that requires a 25% down payment. You get the benefit of returns generated by the full value of the house ($500,000) and not just the $125,000 you put in. The goal is to use other people’s money to increase your returns without having to put as much of your own money into buying a property.
LIMITED SUPPLY:
Land is a finite resource, and as recent years have shown, there’s limited space for new construction in many cities. We aren’t building homes as fast as we should to keep up with demand. As the population continues to grow, the demand for real estate is likely to increase. As my mom always said, ‘They’re not building any more land”.
And finally, with all of that said, it’s important to note that while real estate has a strong history of appreciation, no investment is entirely risk free. Market conditions can vary, and property values can be influenced beyond your control. So, my advice is to always do thorough research and work with a real estate agent who can help you find a property that’s in line with your goals, and your risk tolerance!