Real Estate Creates Safe Haven For Your Money

by M. Anthony Carr
Realty Times

When the stock market gets clobbered, like it has as of late, investors seek out safer havens for their dollars. Real estate, obviously, is at the top of the list. Unlike stocks, however, purchasing real estate is not as easy as clicking on a web site and transferring your stocks from one fund to another.

Many differences abound between trading in stocks and real estate. If you are considering a change in your investment portfolio, keep in mind you're going to have some expenses in a real estate purchase that you don't have in a stock fund, but you will also enjoy some financial benefits a stock fund will never provide.

The good thing about stocks is that the price is the price. If a fund requires a deposit of $5,000, then you're in the fund for $5,000, less a few dollars for commissions or fees, depending on the fund. You hope and pray that it will grow to at least stay ahead of inflation, these days, but in the past, 15 - 20% growth was not unusual. Thus a $5,000 investment that grew at 5 percent, was worth $5,250 in a year.

In real estate, it's not as simple. A $150,000 property isn't really going to cost you $150,000. It may cost you $15,000 by the time you fund the down payment, points, closing fees, etc. However, the money you put into a real estate investment doesn't grow based on the amount of money you put into the transaction. A real estate investment grows based on the leveraged value.

If a house appreciates in value by 5 percent (2001's average appreciation nationwide), the initial investment grows exponentially.

Let's look at our $150,000 house again. If the value grows by 5 percent, the house will be worth $157,500. However, the $7,500 appreciation actually results in a 50 percent growth rate on your $15,000 investment.

To figure your return over a five year period, just do the math.

The very nature of real estate enables you to earn much more per year than you could earn in a regular stock fund. The question usually follows immediately, "But what if the real estate market drops?"

Fair question and I'll show you what happens through a condo I owned and sold two years ago, walking away with $11,000.

The initial purchase price was $66,000 in 1989, to which my down payment was $1,980, using an FHA 3 percent down program. With closing costs, etc., the investment ended up at about $3,000 to get into. So my total investment was less than 5 percent of the value of the property.

Unfortunately, I bought at the height of the market and then the bottom fell out. In five years, condos like mine were selling for as low as $49,000, but I had already converted the unit into a rental by then.

The monthly payment for my loan was more than the rent coming in. With the condo fee, I was still paying out $75 per month more than what I was bringing in on the rent. As you can see, this was the equivalent of what we are experiencing now on Wall Street. However, with rentals, there are more benefits than just cash flow. Real estate comes with options, unlike its securities-based counterparts.

The tax benefits for rental property saved me thousands of dollars over the years. The IRS allows me to depreciate the condo by 4 percent each year (based on the $66,000 purchase price), as well as deduct expenses for upkeep and real estate taxes on the property. By the end of each tax year, I may have flowed $900 into the property, but I was also receiving a deduction of more than $4,000 for depreciation and various expenses.

Pretty much the years I rented it out were a wash. However, by the time I sold, the market had turned, rents were up to where the positive cash flow would have been $200 per month instead of a loss of $75 per month if I had chosen to keep the property, plus the condo had appreciated to a value of $75,000. My eventual return was more than 300 percent on the original down payment, but that's not even including all the tax savings throughout the rental years.

One of the biggest benefits about real estate is that even in a bust market, you have options to make money on the investment. In addition, real estate markets can stand separate from their counterparts in other jurisdictions. When the stock market falls, it takes just about everybody with it. When home values drop in Houston, it's not going to take down other jurisdictions, as well.

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