July 29, 2018 by Jon Kumin
Real estate is an excellent place to invest your money and can be very lucrative. One of the major reasons is with the ability to use high leverage. As a buyer, leverage provides you with a low-money-down option to invest in real estate and at the same time it increases your “cash on cash return” because financial leverage multiplies the power of every dollar you put to work.Real estate also has the major benefit of future appreciation. Historically property values have increased steadily over time and have always recuperated from down cycles and dips. Location is one of the most very important factors in realizing future appreciation, which can realized by neighborhood progressionand increasing demand. Lastly, what makes real estate investment exciting isyou can directly control value growth through home improvements and renovation. While interest rates are currently still near historic lows – it’s a great time to use leverage to build equity in this highly appreciable asset.
Leverage grants buyers the opportunity returns by affording them the financial flexibility to only put down a portion of the funds. The common real estate purchase requirement is a 20% down payment with an 80% LTV(loan to value), and you can even put less money down with mortgage insurance. Right now money is cheap, meaning borrowing costs are still very low. According to Freddie Mac, over the past 45 years interest rates on the 30-year fixed-rate mortgage have ranged from as high as 18.63% in 1981 to as low as 3.31% in 2012. While rates have started to rise, you currently can lock in a 4-5% US 30-year mortgage rate, which is still well below the average 1971-2017 mortgage rate of 8.12%. This makes today an ideal time to take on a mortgage, as mortgage rates will continue to rise.
Another compelling reason to invest in real estate is property appreciation. Historically, property values have increased over time despite any down cycles in the economy (unless the land was deemed unusable) and home prices have consistently recuperated from drops caused by periodic downturns in the real estate market. The following example highlights the power of appreciation:
Let’s say you buy an $800,000 home or condo, putting down 20% or $160,000 of your own capital. A survey of 110 economists, real estate experts and investment and market strategists asked panelists to predict the path of the U.S. Zillow Home Value Index through 2018 as well as solicited opinions on investor activity and federal monetary policy. Overall, the panel predicted an average annual pace of 3.7% appreciation for the next five years. For comparison, the price of existing homes increased by an average 5.4% annually from 1968 to 2009, according to The National Association of Realtors. Using a relatively conservative historical annual appreciation rate for existing homes of 4%, your home value after 5 years (growing at 4% annually), will be worth $973,322 (+$173k above your purchase price). Through appreciation, you can more than double the equity of your initial investment in 5 years ($160k + $173k).
That being said, not all properties are good investments. You still have to be very careful to ensure you invest in the right property, at the right price, and in the right location. You should buy smart: don’t overpay in the wrong location and know the comps. Most importantly, choose something you’re comfortable with.
This is where I come in as your advisor. Remember, brokerage fees are paid for by the seller, so for the buyer it is free advice. I can assist you in finding a property, which is a good investment and, most importantly, suits your needs. While the Boston real estate market has consistently appreciated in value since 2008 years (causing buyers to feel “priced out” of certain areas), there are still plenty of opportunities to find great investments.