If low risk and a passive income stream sit high on your list to strengthen your financial future, look no further than residential real estate. It’s proving itself as a top performer in terms of leverage, risk-aversion, and a hedge against inflation.
Shelter ranks second as a fundamental need, just behind food, making rental properties a safe investment regardless of economic conditions. According to the Federal Reserve Economic Data (FRED), residential rental vacancy rates in 2016 were at their lowest since the 1980s. These rates have been falling since the housing crisis of the mid-2000s.
It may not seem like real estate is easy to leverage when you’re in the middle of a mortgage application, but compared to other investments, it’s one of the few that lets you take advantage of widespread lending and the low interest rates.
Mortgaging investment property requires 20 percent down, but that payment can come from a variety of sources as gifts, loans or funds from partnerships. Some loan programs even let you include energy efficiency improvements in the mortgage, which makes a property more attractive to tenants and future buyers.
Given the new financial regulations governing the mortgage industry, it’s nearly impossible to overpay for residential property. Your lender will require a complete inspection and repairs will need to be completed or adjustments to the selling price made before closing. You’ll also have to get at least one appraisal from a licensed professional that will help the lender establish the property’s market value.
Investing in companies that sell durable and nondurable goods offers no guarantees that the entity will be there when it’s time for you to cash out. Real property, however, won’t go anywhere, and even if the buildings that sit on it disappear, the land will still have value.
Unlike many other investments, you can insure real property for losses and damages.
Professional property management companies can assume the day-to-day management of rental property. These full-service agencies provide expertise in marketing, leasing, maintenance and financial reporting, turning them into a passive income generator for you.
You can deduct some of the expenses associated with rental property, and if it’s out of town, you can claim a portion of travel expenses.
With the exception of the mortgage meltdown of the mid 2000s, real estate appreciation has shown steady growth for decades. The Federal Housing Finance Agency (FHFA) noted that home appreciation grew by 4.5 percent in the U.S. from first quarter 2014 to fourth quarter 2014, their last reporting period. The annual inflation rate in 2014 stood at 1.6 percent.
The U.S. Census Bureau reported that the median value of owner-occupied homes was $178,600 in 2015, a significant increase from its median in 1990 at $79,100 and $119,600 in 2000.
An investor who picked up a home in 1990 for $79,100 and rented it for 26 years would not only have covered the monthly PITI (payment, interest, taxes and insurance) from rental income, but stood to gain nearly $100,000 in appreciation. Although this is a simplistic analysis, it does show how money is made in residential real estate investments.
It’s totally normal to have reservations about getting into anything new—and these common fears about investing in real estate are no exception. Although few investments are completely foolproof, rental real estate has a strong track record for passive income generation and wealth building. It’s also one of the few you can fully insure and leverage easily.