Whether you already own a rental property or are thinking about buying one, the question is the same:
“Is real estate really still a good investment?”
Let’s look at some facts and compare the most commonly held investments to each other. Many research firms track the historical, long term rates of return on investments. If we remove inflation from the numbers, we can compare the various most common investment vehicles to each other, and here is what we have found:
1. BANK SAVINGS ACCOUNTS / MONEY MARKETS / CD’S – They’re terrible!
The net return on these banking products after inflation is about the same as burying your money in a tomato can … 0% !
Have you ever seen a crummy bank building? Well neither have I. They build their suburban branches and high-rise headquarters with your money … so don’t give them your money. Sure, your money will be safe in a bank BUT just don’t be expecting any kind of real return on it.
I have a friend who earns 0.5% on a $250,000 CD. Ridiculous! Bank savings accounts now pay as little as 0.01% (woo hoo! … 1/100th of 1 percent!).
2. PRECIOUS METALS – All that glitters ain’t gold.
The value of gold and silver metal fluctuates wildly and is very volatile! One year you are rich and the next you are poor. These precious metals actually haven’t appreciated all that much over long periods of time and remember … a gold coin pays no dividends. Your return is almost 0%. You are hoping for appreciation to make you rich. When you take inflation into account, the return from buying gold and silver is very very low.
Metals can be a way to simply PRESERVE your capital but do not work well to GROW it.
3. GOVERNMENT BONDS – Risk nothing and earn nothing.
Government bonds (T-BILLS) are touted as offering relative safety with a reasonable return. While the first part of that sentence is true, the second part is not. Generally speaking, government bond returns seldom exceed the rate of inflation by a significant amount. There have actually been recent cases (in Europe) where you would have to PAY a government to hold your money for you in a bond. Now THAT is crazy!
You may sleep better when your $’s are in government bonds but you sure as heck won’t get rich doing it. Your effective return may well be 0%.
4. CORPORATE & MUNICIPAL BONDS – A little more risk – A little more return.
Looking back in time, non-government bonds do tend to return 2-4% AFTER adjusting for inflation AND MORE for higher risk paper. Not too bad compared to what we have examined so far!
5. STOCKS – The manic-depressive investment!
As we all know, it is subject to price swings … the HIGHS can be very exciting but the LOWS can be so deep that people have jumped out of windows to escape them. Depending on what report you read and how much stock the writer of the report wants to sell you, in the long run the stock market can return 3-5% to you AFTER adjusting for inflation.
6. REAL ESTATE – Gimme shelter.
- you can live in it
- everyone wants it
- people clamor to loan you money to buy it
- you can’t live without it
- it is the most common pathway to getting rich
What investment is this? Why good old real estate of course!
Today the typical “CAP rate” (the expected rate of return) on rental real estate is about 8%. Adjusted for inflation you should expect a NET RETURN of about 5.5%.
But wait – there’s more! There are tax benefits (depreciation) that add a little more sweet frosting to the real estate cake … AND when you sell your “cake” (rental property) the government applies a special lower tax rate to your profit. SUCH A DEAL!
Sure, there’s a downside to owning rental property … dealing with tenants, evictions, basements flooding at 2AM, periodic downturns in market values… but overall the basic 5.5% average rate of return is hard to beat.
Want a 5.5% CD that you can sleep in? GO GET YOURSELF SOME REAL ESTATE!
