Real Estate: Return On Investment

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I’ve been reading some of the headlines about the topic of whether or not real estate is a “good investment”. I’m going to make this really simple.

Yes, real estate is a good investment.

Now let’s prove it.

Return On Investment

From MSNmoney.com, the graph above is best described in the following way:

If you took $100,000 in January of 2000 and invested in the stock market, if you averaged out the total gain/loss in the stock market, as of January 2011, you would be down just over 17%. So in eleven years, your $100,000 investment would be worth $83,000. Of course this graph is general, but performance-wise, that’s what the stock market has yielded over the last 11 years. The Nasdaq has a terrible return of 34% – overall.

Now in stark contrast to this, despite the very turbulent real estate market that has declined significantly during the past several years, the rate of return is 45%. So the $100,000 invested in 2000, would be worth $145,000. This far exceeds any investment in the stock market.

Bottom Line

Many people I know saw their 401k investments turn into “201k’s” (slang for losing half of your retirement). Despite the bad wrap real estate has gotten in the past few years, it still is far exceeding stock investments. And unlike a stock investment, you can live in a home and you can change a home and you have control over the home. Furthermore, unlike a stock investment, you can borrow money to buy a home (mortgage) so you don’t have to have $100,000 to buy it (like you would have to have in order to buy $100,000 worth of stock).

The return on investment in real estate, when you take into account the use of leverage (borrowing money to buy), is astronomical. Stock investments can not compare because you have to have a dollar for every dollar you invest. If you have $20,000 in your saving account, in order to buy 20,000 shares of Company X for a $1.00 a share, you would empty your savings and all your money would be at risk of going down or up with the ebb and flow of the market.

In contrast, if you saw a home worth $300,000, with an FHA loan, all you might need is $10,500 of your money from savings to buy it. Additionally, you get write-offs and live in it.

Yes, real estate is a ~~good~~ great investment.

Should you have any questions or would like to schedule an appointment, please call me at (631)881-5959.

I am currently working on a future article about leverage in real estate so stay tuned.

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