“The Big Picture”

Considering what has transpired in our economy and with the real estate market the last several years,  it is no surprise that the real estate buying public has questioned whether real estate  is (still) a good investment.

We have all heard many horror stories of property owners who are underwater, “lost” a lot of money because of a need to sell or have even lost their home to foreclosure.   This has been the news of the day, month and year.  Though unemployment has had a terrible impact on some property owner’s income, many of these underwater cases are examples of all the equity (or profits) refinanced out of the property.   We can get much deeper into all the reasons this happened but that is for another day.

It is human nature to clearly remember the short term pain and forget the long term gains or rewards.

The fact of the matter is that real estate has been and will continue to be the best investment when compared with other alternatives.

If we compare the return over last 10 years from January 1, 2000 to December 31, 2009 for both the stock market and real estate, there is no comparison.

Below is a graph that really drives this home….no pun intended!

On January 1, 2000, the DOW was at 11,522.  As this post is being written, the DOW is slightly over 10,000 which indicates an even further decline in stock values from the graph since Dec 31, 2009.

Where I believe we all become confused is that what we all remember is the peak of our property values in 2006-2007 and believed that’s how much money we had in the “Bank of House”.  We saw double digit appreciation in many years and we felt like all of a sudden, we were rich.

The fact is that from the year 2000 thru 2006, our properties appreciated an astounding 89% or close to 15% per year average.  This was just incredible since the average appreciation over the previous 20 year time frame in 5 year increments was about 25%, or 5% per year.

I have often spoken with sellers that lament about what their property was “worth” and how much less it is worth today.  Of course, we will never know what their property would have sold for as it never really was put on the market and sold.

Here is the simple way I look at the stock market (and real estat market) to keep my personal sanity:

If I bought Microsoft Stock at $25 per share and it rose to $45 per share at it’s peak, but I was ready to sell it later when it was valued by the market at $35 per share, did I make $10 per share or lose $10 per share?  Any logical investor would state, I made $10 per share or a 40% return on my investment.  The IRS would look at it as a purchase (or basis) at $25 per share, and a sale at $35 per share with a taxable profit of $10 per share.

When compared with any other investment available, whether you consider the stock market, CD’s, saving accounts (at .2%), no other investment, even after adjusting for the current real estate down turn has over the last ten years, performed as well as real estate.

In addition, we need to reminded that there is a major difference between the word “investment” and the word “speculation”.  An investment is a low risk, good steady return over time.  Speculation is a high risk, great win or great loss over a short term….some call it gambling, day trading or flipping.

Real estate certainly performs over the long term but if you speculate on anything, including real estate, you can win or loss big.

Aside from the slow steady increase in values over time,  real estate ownership has a number of additional advantages over any other investments.

Real estate ownership advantages include:

• You can live in your real estate and your kids can play in the yard….tough to live in stock or a savings account.

• Home ownership is a income tax benefit as you can deduct the interest and the real estate taxes on your income tax return.  Try to deduct the interest on a loan to buy stock and Mr. IRS will be knocking at your door.

You pay taxes on the first dollar of interest you earn on a savings account.

And remember, if you are a renter, you can’t deduct a thing.  You are making the landlord’s payment and he gets all the income tax deductions.

• When you sell your home and have a profit, you are exempt from paying federal income taxes on the first $500,000 of profit or gain as a married couple ($250,000 as a single person).  If you make a profit on the sale of stock, you pay capital gains taxes starting at the first dollar of gain.

• If you own a rental property, you can not only deduct the interest and the real estate taxes but also take additional income tax benefits as depreciation of a property.  There is no depreciation benefit as you hold stocks.

There is a lot of feeling that we have hit or are very close to the bottom of prices.  We certainly are at the bottom of interest rates with historic lows probably not to be seen again in our lifetimes.

If you want to buy your first home or investment property, there is no better time.  A monthly payment is affected by two factors: purchase price and interest rates.

If you are a current homeowner and you want to move to a different location, school system or larger home, you may sell for less…but will buy for less as well.  That’s a wash.  But, you will probably never see these low interest rates again.

Look at real estate as an investment over time and it can’t be beat.  Look at real estate as a speculation and take your chances.

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