Is Real Estate Investing a Good Idea in the Market?

Posted by Brent Jones on Thursday, April 23rd, 2009 at 10:00am.

Lets say you had a relative that left you some money. Wow...an unexpected windfall.  There are plenty of things you could do with the money: a new car; a pool would be nice; remodeling the home; dream vacation.

If you took a more practical approach and invested the money for the future, where would you invest it today?

According to BankRate.com on 12/29/08, you could earn 2.23% of a 6 month certificate of deposit, 2.68% on a 1 year CD, and 3.16% if you're willing to commit it for 5 years.  Those rates do keep up with the current inflation of 1.8% but aren't really going to grow your investment nor will it provide much income.  Using the rule of 72, it would take almost 23 years to double your investment assuming you didn't spend any of the interest and didn't have to pay taxes.

With a 40% decline in value in the past 12 months, the stock market may not be the place you'd want to risk your inheritance.  The market is so volatile and doesn't behave with any predictable rationale.

Since neither of those choices are very exciting, we need to broaden your scope of possibilities and maybe the most obvious prospect should be a rental property.  Let's consider a below average price range so it will appeal to the greatest population of renters and eventually, buyers.

In today's market, you look for an opportunity to buy a home below market value that you could pay $100,000.  If you paid cash, rented it for $1200 a month, and paid the expenses, you'd have a cash flow before taxes of over $7,000 per year which would be a 7% before tax rate of return.

An alternative would be to use leverage by getting a 80% loan at 6% and factor in 3% appreciation and the other tax benefits; the before tax rate of return will go to 15%.  If you consider that you're buying the home below value but it increases based on market value, the rate of return goes to 23%.

The choice is yours: 3% in a CD or about 8 times that amount by investing in something that is yours.  You now understand real estate better than any of the alternative investments.  YES....It makes sense to be investing in real estate in the current market!

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