When everyone is doing something, I personally am wired to think that the masses are wrong and do the opposite.  So when we are seeing record prices for single family houses, apartment buildings, and industrial buildings, I initially think that people might be making a mistake and buying real estate at the peak of a market. So I started doing research and found out that not only is this not a dumb decision to pay record prices, but that they are taking advantage of one of the best buying market that we have seen. Let me explain by discussing the truths of investing in real estate that are always true:

1. Strong, lengthy history of appreciation
   • According to the Millionaire Real Estate Investor by Gary Keller, housing prices have increased 4.4% annually since the beginning of the United States. While we have seen 30-40% appreciation over the last 18 months, we don’t expect that to be the going trend moving forward. We do expect that this continued trend of appreciation that has existed for the past 250 years will continue. This trend is not just a random item either.  Based on increasing population, constant inflation, and limited new housing being built nationwide, the desire for real estate will continue to advance more quickly than the supply of real estate available for purchase. And everyone remembers basic economics, that if demand surpasses supply, we will see prices increase.

2. Tax benefits
   • The US government has continued to promote home ownership since the beginning of the tax code.  While homeowners need to pay property taxes, which in states like New Hampshire can be a lot, these taxes are taken into account for Federal taxes. This means your tax burden on income is typically not as great.  The government also lets you depreciate your home annually as your home gets older and, in theory, because the materials of your home are becoming less valuable and need to be replaced.  So this is the unique situation, where you can claim the asset is becoming less valuable when in actuality, the asset is becoming more valuable. New IRS rules are now not allowing for second homes (even if being used as rental properties) the total write off of property taxes or the lower capital gains investors have been able to enjoy in years past. Even with the new rules, however, there are still more tax advantages in real estate investments than those that exist in most other investment types.

3. Leverage
   • Real estate is one of the only investment tools in which you can borrow money to invest. Over the past 20 years, the stock market as per the S&P 500 Index has generated a return of 8.2%. With reinvested dividends, your $10,000 investment would be $31,200. If you bought a house 15 years later in 2016 at the median price of $266,000 (which you could buy for $10,000 with a 3% down payment FHA or conventional loan at 4% interest) and sold in this past year at the median sale price of $402,000, that $10,000 investment would be worth $168,600. Now you would have had to pay a mortgage every single month during that time and there are costs to hold the asset as well, but it would easily be an over 5x return on your investment (assuming you did not receive one penny of cash flow and sold at the median price). 

4. Cash Flow
   • So if you were to leverage your money and see normal appreciation, you would already be beating most other investment opportunities.  That is not taking into account Cash Flow.  If this is not your primary residence and it is an investment opportunity, you can rent out the property and receive income.  As long as your monthly income is greater than your expense is, you would be able to receive a cash flow.  Most investment properties that are managed well and bought for a reasonable price will cashflow immediately. Like having a monthly dividend, you can reinvest this income or spend it to cover your lifestyle. 

So to recap, this is an investment that has historically always increased, receives tax benefits, you can invest in while leveraging the majority of the purchase price, and you can receive a cash flow from the property on a monthly basis.

Let’s take a look at the current market and see why the real estate investment truths that always exist are amplified today:

• Interest Rates: Both Residential and commercial loans are still very attractive to borrowers. With buyers, we see rates this week in the 4% range residentially and 5% range commercially. These are very good rates compared to what average interest has been this century and only a point or so higher than the lowest it was during this recovery. These rates are below the rates of inflation we have seen over the past 6 months.
• Inventory Crunch: Has anyone else had the conversation with their significant other of, “We could sell our house for almost $100,000 more than we bought it less than a decade ago. We should sell… and then we will buy…?”  The number of houses that have been built over the past decade is far less than the number of people looking to buy a home. This has caused more people to remain renters (which has created a huge increase in rental rates and apartment property prices). Environmental regulations will continue to make it difficult to find land to build houses, the material costs continue to increase (while down from the peak during the Covid-19 pandemic) and communities will continue to try and stop development because of their concern of the risks of increase costs maintaining municipal programs such as schools and emergency services. There are no signs from local to national programs addressing this inventory issue and as long as that is the case, basic supply and demand factors will keep prices increasing. And while we’re talking about residential, these truths exist in almost all type of real estate property – industrial, apartments, retail, etc. Even office buildings for sale are not easy to come by (at least not in this area). 
• Inflation: The government has turned into a game show in its shelling out of money. I turn on the news and it’s ‘you get a trillion dollars’ and ‘you get a trillion dollars’. I will say that the government intervention at the beginning of the crisis likely caused a strong and rapid recovery, which we should be grateful for, but the continued spending habits are driving up wages. This has an effect on every good or service we consume.  Although I am not as concerned about inflation as many people are, I do think that everything that has taken place takes time to have its effect on the market and we are just now seeing the effects of the first government stimulus package. The subsequent packages’ effects yet to be seen, and that is assuming they do not create any additional packages. Buying real assets is a way to hedge against inflation. While gold and hard metals feel like it would be the place to do that, you will not get a rental payment from your gold like you will from your industrial building.
• Economic Growth: Oct 10, 2021 (Reuters) – Goldman Sachs cut its U.S. economic growth target to 5.6% for 2021 and to 4% for 2022 citing an expected decline in fiscal support through the end of next year and a more delayed recovery in consumer spending than previously expected. The firm previously expected 5.7% GDP growth in 2021 and 4.4% growth in 2022, according to research released on Sunday from authors including its chief economist Jan Hatzius. So while not exceeding projections, we are seeing continued growth of the economy since the crash, with many industries at or above where things were in 2020 – before government shut downs. There are so many factors that effect economic growth, but GDP is the simplest one to review to see if the economy is doing well or not.  It is very hard to see that your own personal economic situation will get better if the GDP is in decline.

So in summary, why buy now? If you are waiting for the market to crash like it did in 2007-2008, I think you might be waiting some time. If you want to buy when the cost of borrowing money is low, before inflation shows its effect on the house prices, and while the economy is still showing good signs of getting stronger, then this is your time.  Real Estate is a long term investment and not very liquid, so if you are thinking about it like stocks you are looking at this investment the wrong way. 

If you are looking at this in a 5 to 10 year time horizon, borrowing money is unlikely to be significantly lower during that time (the Fed is planning on hiking interest rates through this year into next year to address inflation) Prices are also not going to be significantly lower during that time due to inflation and lack of inventory. By buying now, you can start seeing the appreciation of your property, along with cash flow on an investment property. If you’re trying to find property appreciation by buying a property for less than it is worth, it is very difficulty to find right now. I hope you start your path to financial freedom soon, if you haven’t started already, and I hope you recognize that real estate is a tool that can help serve you for that purpose.

– Written by Ethan Ash & Viktoria Alkova