Recently, a Gallup poll indicated that Americans are losing some of their enthusiasm for investing in stocks after U.S. equity markets dropped in the wake of COVID-19. In July, only 21 percent of people considered stocks the best investment, down six percentage points from last year and the lowest Gallup has recorded in almost a decade. When it comes to investment preferences, Americans put residential real estate at the top, followed by stocks and mutual funds, then gold and savings accounts.
You won’t be surprised to find out that, as a real estate broker, I am a fan of real estate investing. But I am not alone. A huge study titled “The Rate of Return on Everything, 1870-2015” indicates residential real estate has been the best investment year over year worldwide for the last 145 years.
Saving the money for a down payment can be a barrier to real estate investing, but if you can swing it, I believe real estate will outperform other investments over time. Let me use my own history as an example.
In 1973, I bought my first house right here in Ukiah. I was in college and I saved up enough to pay for half of the down payment and the owner of the property agreed to a seller carry back for the other half. So, with $1800 of my own money, I bought a house valued at $18,000. Today, that house is worth about $325,000. The appreciation alone would have made it a profitable investment—that house is currently 18 times as valuable as it was when I bought it.
To be fair, there are other investments that have appreciated in value like this: gold, for example. In 1973, gold was worth about $100 per ounce. Today, it is worth just over $1800 per ounce. However, with the real estate investment, not only did I benefit from the increased value, I also collected rent each month. Those rent payments covered the mortgage, insurance, and maintenance, plus they earned me a small return. Over the course of 47 years, the rent payments would add up to about $445,000. When I subtract expenses, I still come out ahead with about $220,000 in my pocket. This alone would make the real estate investment far more valuable. But this misses the most important point.
Had I bought $1,800 worth of gold, it would now be worth $34,000. With my $1,800 investment, I was able to take ownership of an $18,000 property that is now worth $325,000. Also, gold does not produce any cash flow (no rent payments).
For numbers guys like me, it’s hard to understand why someone would invest $5,000 in a gold engagement ring, $20,000 in a wedding, and another $5,000 in a honeymoon when you can elope for the cost of a marriage license and invest in a home. Sparkle is nice, but it won’t keep the raindrops off. Of course, a down payment is only one of the expenses associated with home ownership. You have to pay ongoing mortgage, insurance, and maintenance expenses. But once the wedding is over, you have the ring and your memories, and that’s it. Is this the most romantic approach? No, but imagine living with your spouse in your home together for years to come—that’s romantic in my book.
Real estate isn’t for everyone, and it’s expensive to get into, but once you’re in, it can be a very lucrative investment.
If you have questions about real estate investing, please contact me at email@example.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. Dick Selzer is a real estate broker who has been in the business for more than 45 years.