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Why Should I Invest In Real Estate?

July 11, 2017

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Why Should I Invest In Real Estate?

July 11, 2017

 

This is a question I've been asked a million times since I graduated college. I've even asked myself this question and as embarrassing as that sounds, I'm glad I did. After graduating college, I began working in the banking industry for three years. Not only did this experience open my eyes to an entire different view of financial markets, it also led me to change my mindset on how I make choices in my life. Something as simple as going to the movies on my day off or something as complicated as how to diversify my stock market portfolio both, now, had something in common...they are investments!! The former is a decision on how I choose to invest my time, the latter is a decision on how I choose to mitigate risk on one of my financial investments. I realized that everything we do is an investment. I didn't go to college for four years just because I love college (although some people might), I did it as an investment in my future and as I got older, I began making choices based on the return of those potential investments. Years later, as a 27 year old home owner who has lived in both apartments and houses, I'm going to use three reasons to detail why investing in real estate is a good decision.

 

Value Appreciation

 

As a man who was born and raised in NYC (Brooklyn), I am very familiar with expensive properties. Any New Yorker who simply took a stroll down any number of streets in Downtown Brooklyn probably already knows the massive cost to own a property there. What they may not know is the fact that those costs weren't always massive. Over time, the value of those properties increased. I witnessed this first hand as my parents purchased a home in Brooklyn, NY in the 1970's for around $50,000 and now that home is valued at around $1,000,000!!! Through all the economic recessions and natural disasters and boom and busts cycles, the value continued to increase. Had my parents never purchased a home, they would not have experience that increase in wealth. A fundamental concept at the heart of this example is the fact that there is a finite amount of space and land on this planet and we can't make any more of it. As population grows, there are more and more people competing for the same amount of space and land. Not to go into an economics 101 lesson, but this is where supply and demand comes into play. The supply of space and land stays the same but demand is constantly increasing and as demand increases, so does price. The Dallas/Fort Worth area is a great example of this as well. Homes are appreciating at a record pace and with thousands of people relocating to this area, homes are not being built fast enough for all the new demand. 

 

Building Equity

 

As homes appreciate, we increase the equity or value of our ownership in those properties. One thing I learned as I got older is that a person will always need some place to live. I realized this first hand once I moved out of my parents house (sad face). When a person decides to rent, they aren't building any long term wealth, they aren't experiencing any property value appreciation, they aren't building any equity or ownership and they have no control over what can or can't be done with that property. In fact, they're probably helping their landlord build equity and long term wealth in that property. I currently have a 15 year fixed interest rate (3.5%) mortgage. After those 15 years (if I choose not to pay it off sooner), I'll completely own my property at the age of 42. Along with completely owning my property, I'll also have experienced value appreciation, built a massive amount of equity as well as benefited from all the tax deductions. Then if I choose to rent the house out, I'll still have all the benefits I previously mentioned in addition to establishing another income source, all while building long term wealth that can be passed to my children. If I chose to rent instead, I wouldn't have any of those benefits. Also, that rental price I paid every month for years and years was simply put towards only having a place to stay (wasted). In my opinion, it's equivalent to paying to stay at a hotel everyday. That's expensive...and damaging to my health. The equity one establishes in their property can be used as the owner chooses. If I need $50,000 in an emergency and I don't have it in my bank account, I can pull that amount out of the value of my home. Every situation is different, but I've heard some really life and death examples where the equity actually saved someone's life...and what's more important than that?

 

Long Term Financial Security

 

My experience in the banking industry was both good and bad. I learned a lot and was able to help massive amounts of people, but one thing that broke my heart was when I learned just how bad the majority of people are when it comes to their finances. I spoke with people of many different ages and professions, however the retirement community always had me riding that train home holding back tears. Time and time again I witnessed many people who were in their 50's and 60's and have never purchased a home. They rented their entire life because they thought maintaining a home was too much work or it tied them down to one job or one location and now they faced a situation where they couldn't afford to rent anymore. A major benefit of purchasing a home is the fact that after it's paid off, it's paid off! You have your maintenance and taxes, but taxes are deductible and both are extremely less expensive than paying rent or a mortgage. Once retired, most only have their retirement account and social security to live off of, which significantly decreases their expendable income. Rental prices have gone through the roof and because of this, many older men and women are forced to either live in distressed areas or move in with their children/family members, which places their financial security in jeopardy.

 

I can keep going with examples, but I'll stop here for now. One thing that's clear is people invest in everything they choose to do, whether they know it or not. I invested my time and energy just by writing this article, but if it's going to allow just one person to make better decisions, then it was all worth it. I don't anticipate everyone reading this article to go and immediately purchase a house. I also don't anticipate everyone to only invest in real estate. There are many things that are good investments. I simply hope I was able to provide good information about the benefits that investing in real estate can bring. And who knows? Maybe one individual who only invests in the stock market will add a few homes to their portfolio. :-)

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