Why Real Estate is your Best Investment

By: Mark Sumpter

Think about it: Are real estate prices higher now than they were ten years ago? Absolutely! Think about what your parents paid for their house. (For example, a friend's father paid $12,600 for his home back in 1963. Today the home is worth $415,000.) Rent prices also continue to rise. Years from now, the price you'll pay for the average home will be much higher than it is today.

In 2003, the U.S. government published statistics regarding median home prices. Take a look at how rapidly the average home has appreciated over the past 35 years:

1970 $23,000

1975 $35,300

1980 $62,200

1985 $75,500

1990 $95,500

1995 $113,100

2000 $138,400

2005 $182,000 (estimated)

What's interesting to note is that while prices have boomed in the past five years, prices have risen at double-digit levels in every five year period. Very few investments can match that level of appreciation over the long-term.

Real estate prices are extremely likely to continue rising. There are a number of reasons why; let's look at just a few. Over the next twenty years, the following is expected to happen:

* The U.S. population is expected to grow by more than 40 million people.
* The U.S. median income is expected to increase by 50 percent.
* Ten million people will choose to buy vacation homes in the U.S.
* More than sixty million children and grandchildren of baby boomers will enter the housing market.
* Environmental restrictions and land shortages will tighten property development in popular areas, causing a decrease in supply and an increase in housing prices.
* More than 60 million baby boomers will seek retirement income, and many will sensibly turn to real estate investments.
* Minorities and immigrants will continue to buy homes in record numbers. Currently 75 percent of whites live in their own homes, while only 40 percent of Hispanics and Asians own their homes. As their rate of home ownership increases, demand for housing will increase.

So what's the end result? Real estate prices will continue to rise - making smart a great way to grow wealth.

There are two basic ways to get income (cash) from real estate investing: buying and selling properties for a profit, or by collecting rent from tenants who occupy your properties. Most successful real estate investors do both.

If you 'flip' properties, the profits can be either used as income for living expenses, or to invest in more properties. The average real estate investor doesn't seek to earn an income from their properties (at least not at first); most try to increase their net worth. But over time, you can do both.

For example, let's say you buy a house for use as a rental property for $150,000. If your mortgage payments, taxes, insurance, etc add up to $1,200 per month, and you collect $1,300 per month in rent, you're generating very little monthly income. But you are building wealth.

How? Each year, more of your principal is paid off and as the property appreciates in value, your equity grows. (In effect, your tenants are paying your mortgage for you.) If interest rates fall and you refinance your loan, you may be able to widen the gap between your expenses and your rental income. Or you may choose take a 'cash out' refinancing in order to free up capital for other investments. Whether you leave the equity in the property or take cash out, you're building wealth.

As years pass, you'll have significant equity in the property. If you hold the property long enough, you'll eventually pay off your mortgage... and the money you were putting towards mortgage payments can now be used as income or to fund other investments.

If you're a 'buy and hold' investor, then your short-term income potential is low, but your long-term wealth potential is high, and eventually your income potential is high once your properties are paid off. If you 'flip' properties, you can still build wealth by continually reinvesting profits, or you can use some of the profits as income.

In either case real estate investing is profitable and financially rewarding - and over the long-term, it's one of the best investments you can make.

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