There are numberous ways to look at the profitability of investing in real estate. We can start with the structure and put off any intricate income tax aspects, or business advantages for a later discussion.
What is the singular most important investment advantage to the average single family home buyer. We could debate this, but speaking from my own experience, I think it’s important to identify leverage.
Why you say ?? If you buy a $500,000 house with only 10% down you have a 10/1 leverage ratio. If you put down 20% then you have a 5/1 ratio going for you. The less you put down the higher the leverage. We’ll do some cash to cash yield comparisons to illustrate this point later. Depending on whom you talk to, the problem of leverage is expressed in terms of risk / profitability.
What is risk ?? Well if you are the bank ?? There is the risk of having your mortgage paid to term. All of the usual suspects apply, on the retail side. The risk of death, disability, unemployment, and the more recently added component, the risk of devaluation. (Do you think it’s over ? Why ?)
Individual risk ! Pretty much the same things. You may not live to pay off your home. But you can insure against that. The same holds true with disability. Unemployment risk is unusually high at the moment. Devaluation or deflation if you want to consider the RE market as a balloon instead of a bubble, is a market problem. Not any easier to handle if your house is a little damp on the 1st floor, but if you have a good job and are young enough, remember, what goes down will undoubtedly go back up !!
Many people know that this has all happened before, to a lesser degree. In the 1980's when the banks didn't know any better. They asked their borrowers that were under water in their mortgages, to pony up with a margin call. Banks did back off, when too many homeowners were smart enough to tell their banks to go to hell and take their house back. They’d go buy a new bigger better house for less money than they owed on their mortgage. (yes I have a tendency to digress)
So, what other kind of classic investment can you buy where you get an automatic leveraging ratio built into the investment, where you can have your friends and neighbors put up 80 or 90% of your capital, and give you the chance to make all of the profit (or loss) on the whole investment.
No, that's not the stock market (maybe options if you have deep pockets and guts and expertise). No, it’s not the commodities market, or any other market that I know of, where you get to live in your investment, with the goal of building wealth.
Oh yes, taxes !! When you sell your single family home, your get a terrific exclusion from income tax on gains of up to $500,000 if you are married. And you can do this every few years, if you don't mind moving to improve your position or your savings account.
Actually, I'm on vacation, so I have limited time, but I'm interested in what you think of Real Estate as an investment. Lets limit our perspective presently, to individual single family homes.
Consider that after the biggest historical price correction of real estate, in recent history; that we are likely to see an upside that will present many opportunities in single family housing, for individuals and investors.