With Rising Home Prices, Is Real Estate Investing Still a Smart Strategy?

Billionaire industrialist Andrew Carnegie once said that 90% of all millionaires made their fortune owning real estate. Real estate investments remain one of the best ways to make money and grow wealth.

Tax benefits, appreciation in value, diversification and protection against inflation are just a few reasons why people invest in real estate. Many prefer to own real assets rather than stocks or bonds.

There are many options for investors, including single-family homes, commercial properties, and real estate investment trusts.

There is real estate in a variety of budgets. For example a Mortgage on a house in Virginia Beach, VA, with an average home price of $ 310,000, will be significantly lower than a house in Ventura, California, where the average price is over $ 700,000, or San Francisco, which now has an average retail price of $ 1.3 million. Has dollars.

Let’s take a look at the different types of real estate investments, check the current status of the markets, and hear what some experts have to say about each one.

Invest in single family homes

Real estate values ​​in the US have skyrocketed over the past year. The median home sales price was just over $ 350,000 in May 2021, and the median sales price was up 23.6% year over year National Association of Brokers (POMEGRANATE).

With mortgage rates still at one of the lowest levels in 50 years and a need to catch up after a year of living with the threat of COVID, most experts predict at least another year and a half of rising prices.

Not everyone agrees. A recent survey found that 41% of respondents predicted this Bubble in the real estate market will burst sometime in 2021 and put prices on the downward trend. More than a quarter believed that falling prices would not come until 2022, and 13% did not forecast any further collapse in the property market.

The economic situation that led to the real estate crisis in 2008 was significantly different from that of the market today. In 2008, the real estate crash was caused by sub-prime mortgages that were written in record numbers, then bundled and resold at a terrifying pace. The industry has learned a lot since then and is more cautious about lending. Also, the government has more experience in protecting the housing market, such as the forbearance and market modifications it enacted during the pandemic.

Invest in commercial real estate

The commercial real estate market is recover more slowly and has not yet reached the pre-COVID values ​​according to NAR.

Large commercial property activity decreased 28% year over year in the first quarter of 2021. Transactions for portfolios over $ 2.5 million declined in all types of property except hotels. For smaller commercial real estate portfolios of less than $ 2.5 million, the transaction volume was only 1% year-over-year.

Prices have also fallen, with properties averaging 6% less than a year ago.

Experts expect the market to continue to recover, but fear that the employment trend could affect certain sectors of commercial real estate. As businesses shrink and increasingly give their employees the ability to work from home, there are some concerns that businesses need a smaller footprint. The Wall Street Journal, for example, reported that a record 42 million square meters of office space was launched in the 2nd and 3rd quarter of 2020.

Real Estate Investment Trusts (REITs)

Activity has also increased in real estate investment trusts (REITs). A REIT is backed by a company that uses investor money to buy and operate investment properties. They are bought and sold in the market like stocks. These have also become attractive for investors who want to include real estate in their portfolio, but do not want to make a classic real estate transaction.

REITS work in much the same way as dividend stocks. They have to pay out 90% of their taxable profits in dividends to receive their REIT status, which allows them to avoid corporate income tax.

Equity REITs buy and own buildings. Mortgage REITs provide real estate financing and may include mortgage-backed securities.

While REITs 202 fell by more than 5%, FTSE Nareit All Equity REIT Index, many fund managers have one Positive outlook for REITS in 2021.

Are Real Estate Investments Right For You?

Currently, high equity valuations and negative yields on many government bonds do not make attractive offers. Interest rates, which are expected to remain low until the end of the year, will continue to make real estate investments attractive to many commercial borrowers.

Investors must always weigh any investment against other potential opportunities. Every investment is subject to risk.

Whether real estate investments are right for you and your investment portfolio depends on the entirety of your finances, your risk tolerance and your investment goals.