A primary residence is not and should not be considered an investment it’s more of a variable savings account. Disregarding the occurrences in the real estate market over the past 2 years the land that a house is built on has increased each year for over 50 years, and yes it is partly due to inflation but nonetheless it has increased. Ask someone how much they paid for their house that was purchased 20 years ago and I am certain today it is worth almost two or three times as much.

Between 2001 and 2006 real estate appreciated 12.4% compared to stock prices at 4.3%. Since 1978 though your primary residence has increased 8.6% compared to 13.4% (S&P500). As we can see today the rate of return will revert back to 3% a year which is a little above inflation. For those keeping track, the stock market this decade has produced the worst total returns since the 30’s. The S&P 500 has returned a -10.8% since January 2000.

Many might argue leverage is more powerful within real estate than the stock market. While this is true, take a look back over the past three years at all the foreclosed homes due to this concept, not too appealing is it? The jackpot is found in rental property, the key is to purchase a distressed property for well below fair market value (20% or more) with approximately a 30-40% down payment. The returns on this investment will trump any stock market return. Of course the property must be located geographically in a highly dense area preferably close to a major city. With this in mind jumping into real estate thinking that leverage alone will return extraordinary returns is a losing scenario. There is plenty of risk and the expected return may elude an investor for years to come.

thevoice@voicedup.com

Tags: Real Estate, Stock Market

This entry was posted on Wednesday, December 9th, 2009 at 10:40 am and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed.