If you’ve been following the housing market, you’ve undoubtedly seen some discouraging trends. While it’s true that mortgage interest rates and home prices are rising to levels we haven't seen in a long time, it’s important not to forget about all the benefits of owning property. Whether you’re a prospective homeowner or real estate investor, there are still advantages to investing in real estate – even in the most challenging market.
1. Long-Term Appreciation: The housing market has a proven track record of solid appreciation over the long term. According to the Federal Housing Finance Agency (FHFA), the U.S. housing market has experienced positive annual appreciation since 2012. The Q3 2023 FHFA House Price Index (FHFA HPI®) reports that U.S. house prices rose 5.5 percent between Q3 2022 and Q3 2023, which was 2.1 percent higher than Q2 2023. To find appreciation rates in your state for the last quarter, year or five years since 1991, click here.
2. Historical Agility: The housing market is known to be cyclical, with distinctive highs and lows. There is nothing new about the current downturn in rising interest rates, escalated property values and scarcity of inventory. Mortgage interest rates fluctuate over time, and although they have doubled within the past few years, they are still historically low. During the 1980s, rates for a 30-year fixed-rate mortgage were as high as 18 percent, which is significantly higher than the current average of roughly 7 percent.
House prices are subject to fluctuations, as well. Supply and demand drive home prices; when there is a shortage of supply, prices often rise, and vice versa. Market factors, such as location, have a significant impact on real estate prices and national data only provides partial information. For instance, a downturn in California can mask a boom in Florida.
3. Hard Asset: Real estate is a physical entity, or a “hard asset” with intrinsic value, unlike stocks or bonds. It will never become valueless and has the potential to generate a steady cash flow. Regardless of fluctuations in the economy, hard assets are considered highly valuable.
4. Diversification: Real estate offers a large variety of property types, making it easier to diversify investment portfolios. Some of the various property types range from residential properties, vacation rentals and fix-and-flip investments to office and retail buildings, agricultural land and Real Estate Investment Trusts (REITs). A diversified investment portfolio provides several benefits, including flexibility, risk mitigation, income stability, capital appreciation and market exposure.
5. Tax Benefits: As a homeowner, there are certain tax benefits that could return money to your pocketbook each year. If you obtained a mortgage loan to purchase your home, the interest you pay may be included as a deduction on your annual tax return. The state and local real estate taxes paid to the taxing authority may also be included as a deduction. If you receive rental income from real property, such as a vacation home for short-term stays, you may deduct certain expenses on your tax return for managing and maintaining the property, such as interest, taxes, advertising, maintenance, utilities and insurance.
Real estate investors also benefit from tax programs such as the 1031 Exchange and the Opportunity Zone incentive. A 1031 Exchange allows an investor to defer payment of capital gains by reinvesting the proceeds of an appreciated property to acquire a like-kind replacement property. The Opportunity Zone incentive offers tax breaks for investment in low-income census tracts. The longer an investor holds the investment in a qualified opportunity zone, the greater the tax benefits. That includes the possibility of permanently excluding the gain when the qualified investment is sold or exchanged after 10 years.
6. Creative Funding: There are multiple financing solutions for obtaining real estate. Traditional real estate financing is often accomplished through a conventional bank loan, but there are several other options available, including, but not limited, to:
• Private Money Lenders: Money from private investors is leveraged for a predetermined interest rate and a shorter-than-usual payback time, generally a few months to a year. Acquisitions involving real estate investments are the main reason for this kind of funding.
• Hard Money Lenders: This type of financing is often used by home flippers with less-than-perfect financial histories who need a short-term loan for home renovations. It generally includes costs on top of the loan interest.
• Seller Carryback Financing: The seller of a property provides financing to the buyer, instead of the buyer obtaining financing through a bank or mortgage company.
• Rent-to-Own: A written contract that allows prospective homebuyers to rent a property for a period of time (commonly, two to five years) before owning it. For more information about rent-to-own agreements, click here.
There are also several government agencies that provide housing loans and mortgage assistance programs.
7. Title Insurance as a Risk Mitigator: Title insurance is important because it helps to mitigate risks by ensuring that the property you are purchasing or refinancing has a clear and marketable title. Even after the most meticulous search of public records, there can be hidden title defects, such as tax liens, forged signatures and recording errors. These title defects can remain undiscovered for months, or even years, after you purchase the home. Without having title insurance in place, property owners risk incurring extensive legal fees or losing their entire investment.
If you’re a prospective homebuyer or real estate investor looking for answers to FAQs about title insurance, click here. You can also debunk eight common misconceptions about title insurance here, or explore common title problems and how title insurance protects your investment here.
When deciding whether to purchase real estate, don’t forget to weigh the pros with the cons. Doing so can help you answer the question, “Is real estate a good investment for me?” In many cases, the answer may be, “Yes!” According to the National Association of REALTORS® 2023 Profile of Home Buyers and Sellers, 82 percent of homebuyers continue to see purchasing a home as a good financial investment. Regardless of where you stand right now, if or when you choose to move forward, always do your homework and strongly consider consulting a real estate and tax expert to cover all your bases.
When you’re ready to make a move, Old Republic Title will be here to protect your property rights. We have a nationwide network of professionals who understand how important your investment is and offer products and services that fit your needs. To learn more about title insurance and working with Old Republic Title, contact a representative near you.
Copyright© 2023 “2023 Profile of Home Buyers and Sellers.” NATIONAL ASSOCIATION OF REALTORS®. All rights reserved. Reprinted with permission. May 28, 2023. https://www.nar.realtor/sites/default/files/documents/2023-home-buyers-and-sellers-generational-trends-report-03-28-2023.pdf