May 29, 2024


Mad about real estate

Why Real Estate Investing Scores Over Stock Investment Alternatives For Safer Deals

Real estate is preferred over stocks at least as a short cut to medium term investment. It is wise to pick real estate, keeping in view sale price appreciation in real estate right from the beginning of 1999. As per tracking done by the Office of Federal Housing Enterprise Oversight of the US Department of Housing and Urban Development, the sales price for real estate escalated more than 56{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} from 1999 till end 2004. During this period there was a corresponding drop in the S&P index in the range of 6{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4}.

Skeptics are predicting a bust in the real estate market, but that is not keeping homebuyers from investing in real estate. April 2006 figures of the National Association of Realtors suggest that in the previous year 7.2 million homes changed hands at a median price of $206,000. This was up 15.1{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4}.

Real estate investing is relatively simple when compared to stock markets. To be a successful investor in stocks you need to understand the technicalities of the stock markets, which are more than the average person bargains for. Most people work through brokers and are unaware of the reasons for their gains, if any, and whether they have received the full amount to which they were entitled against their investment. They have to rely on what they are told by the party handling their stocks, as they are not conversant with the ‘hows’ and ‘whats’ of stock market functioning. The same goes for losses suffered.

Real estate investing on the other hand has a more ‘hands on’ approach, which most people find simple and easy to understand. With a little calculation and foresight, a proper investment strategy can be formulated to make a decent profit with very little personal investment. The bulk is taken care of through suitable and timely financing. An owner occupied investment property can be financed with a 10{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} down payment. Therefore a $100,000 home can be secured by making a personal investment of just $10,000. A ten percent increase in the sales price in the first year, which is quite reasonable to expect, would get the entire initial investment back. Of course there would be closing costs involved, but they will be deductible as expenses.

There is also another advantage of depreciation as a tax benefit. Under US tax laws, it is understood that the value of a residential house will depreciate to zero in twenty-seven and a half years. However, the value of the land on which the house is built would not depreciate. The value of the construction and the land is understood in the ratio of 80:20. As per these figures, a $100,000 house will generate depreciation (on the $80,000 attributable to the construction) of $2,909.09 each year, which can reduce taxable income from other sources like salary payments etc. to place a person in the lower tax brackets.

A good way of investing would be to find bargain real estate below its real value for say $100,000 and invest $20,000 as down deposit to secure it and add another $2,500 in closing costs. Then, you need to identify someone to clean and paint the property and work for a bank reappraisal for its real worth of $120,000 or above, if it merits more value. The next step is to obtain a ‘home equity line of credit’ to get back the initial investment.