Should You Invest in Residential Real Estate?

by admin on February 18, 2014

Written By: Geoffrey Pike

Real estate is an interesting topic these days.

We saw what was probably the biggest real estate bubble in American history just recently, when housing prices topped out somewhere in 2006 or 2007.

We then saw a major bust, the beginning of which actually preceded a bust of the entire economy.

Of course, we have to remember that real estate is a local issue. A few parts of the country didn’t see a housing boom, and some parts, such as New York City, didn’t really see a bust. In general, however, we saw a big boom followed by a big bust.

After housing prices bottomed somewhere around 2011, we have seen them climb quite significantly, though still not to the levels we saw in 2006 in most places.

Different Points of View

There are differing points of view on where real estate is headed, even by advocates of the free market.

Some people think we are in another bubble that will pop again. They point to the fact that the housing market is being propped up by low interest rates, a loose monetary policy by the Fed, and bank bailouts.

While these things are certainly true and they do prop up real estate prices, what’s to say it can’t go on for a while longer?

Other people think that real estate prices will continue to go up and maybe even enter a new bubble at some point, while maintaining that it is not a bubble yet. They correctly point to Federal Reserve inflation.

When there is high inflation, investors look for hard assets. You can’t get more of a hard asset than real estate. So if you expect inflation to continue to get worse, real estate is something to seriously consider.

A Consumer Good

A lot of people refer to their own house as an investment.

I don’t think this is a good idea in most cases, because a house is a consumer good, just like a television. The difference between the two (besides the obvious) is that shelter is a basic necessity, whereas (and some people will argue with me on this point) having a television is not.

So if you are buying a house (as opposed to renting) because you need a place to live, this might be a valid reason to buy.

However, it’s important to remember that buying a house to live in is not really an investment, other than the fact that you need a place to live. The only sense it could be considered an investment is that it’s somewhat of a forced savings plan, as you pay down the principal balance on your mortgage each month.

If you’re buying a house with luxury amenities (a pool, extra bedrooms and acreage, etc.), it’s important to realize that you are buying it because you want the amenities, and not simple because it is some kind of an investment.

Now, there is nothing wrong with buying luxuries and extra space — if you can afford it. You just shouldn’t fool yourself into thinking it makes good financial sense.

Investing in Residential Real Estate

Investment real estate has a potential to be quite profitable in the long run.

Even if inflation is not as bad as we might expect, we can still likely count on some inflation. With a federal government in $17 trillion of debt and no signs of anything close to a balanced budget, I think some inflation in the future is a pretty good bet.

While I don’t consider buying a house to live in an investment, there is such a thing as investing in real estate.

Personally, I favor residential real estate. Residential real estate is easier to get in to and there’s less risk. If there’s another downturn in the economy, you can get wiped out quickly with commercial real estate… but there will always be a demand for places for people to live.

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