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Why Real Estate Is Important to a Portfolio

I have to admit I’m a little biased on this subject, there has always been something about “owning” a piece of property that has captivated me, even as a kid. I grew in the 90’s and 00’s as house prices climbed and climbed and the prospect of owning a place was always just out of my reach, until June of 2006 when I bought my first condo… well you can probably imagine how that story ended, and I’ll save it for another time. But even with that first bad experience it didn’t dissuade me from the property market. I believe owning Real Estate is a central part of a strong personal portfolio.

Ohh let me count the ways!

  1. A Personal Housing Cost Hedge – Once you buy a house with a fixed rate mortgage, you make one aspect of your budget unchanging. At first it may add stress to your budget because it might be more than your previous rent payment, but overtime inflation and economic growth slowly eat away at that stress. Before you know it, that payment that seemed like a stretch and hard becomes down right CHEAP, compared to what other people are currently paying. There is real power in fixing that cost and then letting it shrink in relation to everything else. The second aspect of this fixed cost mortgage is that near the time of your retirement if you just stuck with the program, you will be paying off your mortgage, opening up a huge relief in cost as you move into years where your income may become more fixed.
  2. A Fundamental Value Concentrator – Real estate has a very interesting and wonderful aspect, it is one of the primary places that value accrues. Take any major city in the world, much of the wealth that has been created there eventually gets represented in the property values there. People who make money in a place eventually pour that money into property, they buy and build bigger houses, they build bigger buildings, they hire people who have to move to the city and require housing and space. All of that builds property values. Owning Real Estate is a bet on future prosperity and growth.
  3. An Investment You Have Say In – When you own your own property out right, you have a say in how things work out. Of course you don’t have full control, but your decisions matter. That is not the same as when you buy a stock or a bond, nothing you do will improve or worsen the outcome other than when you buy and sell. When you buy a property, you get to pick where you buy, you pick how you take care of it, what you add to it, who you rent to, how you advertise. You are running a small business, and so doing a good job means extra rewards.
  4. Tax Bonanza – This is probably a subject for 50 different posts, but the big picture is that there are a host of tax advantages to owning real estate. I’ll just give a few of the big ones. You can write off your interest on your taxes. You can theoretically never pay capital gains taxes by using 1031 exchanges. You can have near tax free income from the depreciation of the property.
  5. 3 Sources of Return – Real Estate has three sources of return, all which can add up to a pretty great profit. First the property value can go up, second you can rent a property, and third if you finance the property, you get extra return for your money (leverage) and as you make those mortgage payments you are paying off the debt adding to your value.
  6. A Hedge Against Inflation – Real Estate values as mentioned above are based on what is going on in the economy where that property is located. So if prices are going up, and people are getting paid more, this almost always leads to higher real estate prices. How? Well as prices and wages go up, people are usually able and willing to pay more for rent and pay more in mortgage payments, this almost automatically (I’m ignoring interest rates) translates to higher prices as the competition for space drives up prices. Over long periods of time Real Estate reflects not only economic growth but also inflation, making it a double whammy of investment goodness.

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