By Louise Bolger
Should you invest in real estate or the stock market?
sun staff writer
This may not be the right time to ask this question, but if your fairy godmother plopped down a chest full of money and told you to invest it, what form would that investment take? You could invest in pork bellies (whatever that is), you could invest in diamonds (probably too exotic for most of us) more likely you would invest in either the stock market or in real estate. The question is which one.
The country's economic climate at the moment doesn't seem to favor either stocks or real estate. Both markets are jittery with stocks up one day and down the next and real estate moving at a snail's pace. Nevertheless, many sophisticated investors are becoming increasingly comfortable with owning property for some very sound reasons.
The stock market is a fickle and unpredictable intangible asset with little tax benefits. Real estate on the other hand is far less volatile and, as mentioned in last week's column, has significant tax benefits and, in addition, provides cash flow on rental properties. Investing in an asset that you can see and touch provides a comfort level to investors that stocks may not.
As discussed last week, there are tons of tax benefits to owning not only the home you live in but also investment rental properties. Mortgage interest, expenses, depreciation, property taxes and even gains on appreciated property can be deferred almost indefinitely. When you make money on stocks and cash in your profits, there is virtually no way around paying taxes on the gain.
Investing in real estate provides a better vehicle in which to leverage your money.
If you purchase a home for $500,000 and put down 10 percent in cash, you've spent $50,000 of your savings and mortgaged the balance of the cost of the home. Let's assume you took the same $50,000 from your savings and purchased stocks with a 10 percent annual return, you've made $5,000. If the $500,000 home you purchased appreciates 10 percent over the course of a year you have earned 10 percent on the entire value of the home $50,000 with the same $50,000 cash investment. Compound this over the years you own the home and you're talking some serious money, even if there are a few down years.
In addition, investment property can be rented, providing a cash flow to help pay the monthly mortgage and free up additional funds to make further investments. The lesson learned here is what big time real estate investors and developers have always known, use other people's money to make money, build equity and wealth.
Even with the real estate market going through a period of some serious adjustments long term, the housing market has nowhere to go but up. After all, housing is a universal need, labor and building materials are more costly every year and the population keeps increasing. In addition, our society is creating more of a need for additional housing than in the past when several generations lived under one roof, divorce was not as prevalent and single women did not live independently.
Most financial managers will advise you to have a diversified portfolio of investments, certainly good advice. But, when your fairy godmother shows up with that chest of money, you'll have some real decisions to make. If your choice is real estate, now may be the best time to dive in. The interest rates are low and the banks are just dying to have you use their money - take it - leverage - don't worry, be happy!