Across the US, there is $12 Billion in savings accounts, money market accounts and other ‘safe’ investments that earn less than 1%, even less than .5%. Why? Because people are afraid of the volatility of the stock market.
Others are investing elsewhere – in real estate. You’ve heard the news of investors from Atlanta, Chicago and NY paying top dollar for commercial real estate in Nashville, from raw land to apartment buildings to sky scrapers. There are also numerous large investors buying multiple homes and managing them as rentals. One reason the Antioch market is so hot.
And every day people are investing as well. At a recent open house I hosted, about half of the potential buyers were local investors. I and other realtors at Village have quite a few clients that are investing in real estate. They’re buying both long and short-term rentals; one house or a portfolio of properties. I am currently looking for another rental to purchase and wish I had started earlier in life.
Why Real Estate
Why invest in real estate? Cash flow, tax deferral, and appreciation. A trifecta! A perfect place to put that idle cash you have. I’ve even purchased two rentals with my IRA, diversifying my portfolio.
But isn’t the housing market just as volatile as the stock market? Not really. It’s not traded as often, so when there is a scare in the market people can’t sell their real estate like stocks and bonds. So the market has a chance to right itself again which it usually does.
If purchased correctly, a rental property should begin producing cash flow right away. In an expanding market, your cash flow increases as rent increases. And in some down turns there is even a positive boost to returns as more people need a rental as they cannot afford to stay in a home. Rents did not decrease during the recent recession in Nashville, the rental market tightened and demand increased. And once you pay-off the mortgage, your cash-flow increases greatly.
Let’s say you buy a rental property at 55 with a 15 year mortgage. For the first 15 years, you make a modest income on the property. And then at age 70, when the mortgage is paid off, the full rent payment excluding some maintenance costs and property taxes is yours to supplement your retirement. With 3 properties, or 5, or 10 you have a nice steady income.
There are two ways to defer taxes on investment properties. One, is depreciation. By depreciating the property every year, you’re income is reduced and you pay lower taxes. You do pay the tax when you sell the property because your gain is based on the depreciated amount. However, there is a chance you will be at a lower tax bracket then. The second is a 1031 exchange. In a 1031 exchange, you sell one investment and transfer the gain to the purchase of another like investment, then the tax on the sale is deferred until you sell the new property. There are a few other loop holes to avoid paying capital gains tax but you’ll have to call me to find those out. I don’t want the IRS after me.
The one thing that makes real estate different than most capital assets is that it does appreciate. My neighborhood has appreciated 45% over the last 3 years. And in Nashville overall home prices have been appreciating 8 to 10%. And with the projected growth in the greater Nashville area over the next 15 to 20 years, appreciation should continue. Even if the next peak is in 2024 (see last month’s article), home values aren’t expected to drop drastically, just not increase at the same pace.
So should you be investing in real estate? I say yes. And a recent Harvard Business Review suggests, as we plan for our retirement we should be thinking about creating a monthly income not about our net worth. A real estate investment portfolio does that for you. Contact me if you or someone you know is ready to invest in real estate and start producing that monthly income.