Why Is Real Estate A Safe And Financially Rewarding Investment

Why Is Real Estate a Safe and Financially Rewarding Investment

by

Michael Roche

Whereas real estate is not normally a short term investment, there are windows of opportunity for rapid financial gain created primarily by changing market and economic conditions. As a long term investment, real estate is probably the safest investment one can make. Inflation and supply vs. demand factors virtually insure appreciation over time. We can’t make any more land on which to build but we continue to make more people and they have housing needs. Managing the return on investment is complicated by the real estate downturns that occur periodically over the decades. Of course the latest downturn was the worst since the 1929 depression so the investment is optimized by those who buy at the end of the downturn and sell at the peak. Timing is everything!

Changing economic conditions radically influence real estate market conditions and vice versa. Each change in the real estate environment creates new buying and selling opportunities. An example is the rental property investment opportunity fostered by our most recent deterioration of property values. Low interest rates and escalating rental values work in concert with foreclosures and short sales properties to provide an unusual opportunity to purchase rental properties that provide a positive cash flow.

Perhaps the most appealing characteristic of the real estate investment is the return on investment attribute. Stock market investments can generate a return based on the amount invested but the entire investment is at risk. Appreciation in real estate values create equity based on the increase in value not the amount invested. A property purchased for $200,000 with 20% down payment that appreciates 10% of the purchase price produces a return of 50% on the invested dollar. If over time, the average yearly appreciation rate is 5% the appreciation is actually compounding generating appreciation on the previous year s appreciation. Naturally the homeowner is making monthly principal, interest, insurance and real estate tax payments but the property is providing a home as well. In the case of rental property the mortgage payment is offset by rental income.

Another enhancement of real estate as an investment is the significant tax deduction on a primary residence. All real estate taxes and mortgage interest are deductible on federal and state tax returns providing a substantial reduction of the tax obligation.

Financing a home with an FHA mortgage and asking the seller to cover closing cost is an ordinary practice and greatly reduces the buyer s financial investment. FHA insured financing requires a 3.5% down payment and closing cost typically are 2 to 3% of the purchase price. The penalty is that all mortgages with less than 20% down payment require mortgage insurance.

The primary factor that prevents the real estate investment from qualifying as a short term investment is the cost to sell. Unless the property was purchased at a below market price, commissions and closing cost can preclude a seller from recovering the initial investment and realize a profit from a recently purchased property. A home is a nest egg that hatches with time. The combination of appreciation based on property value rather than investment, the tax deduction of interest and property taxes along with all of the other personal and family rewards are the reason home ownership is commonly referred to as The American Dream .

At the forefront of our new mortgage market generation is the Automatic Rate Cut (ARC) mortgage. What separates ARC from the normal fixed rate loan is that at any time interest rates drop more than 1/4%, the loan is recast at the lower rate automatically and never goes back up. Refinancing a traditional mortgage creates a new loan and the amortization starts over at year one. The ARC loan does not and there is no closing cost when it adjusts. Visit http://www.arc-mortgage.com for more informatio

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