Editor’s Note: This post is from Mr. PoP from plantingourpennies.com. He and Mrs. PoP are amateur Real Estate investors living in Florida. Feel free to let them know what you think of their advice in the comments below!
Lately we’ve noticed a real increase in friends and family asking us about buying some real estate, either as a home, or an investment property.
At the same time, we can’t turn on the radio or read the local news without hearing something positive about the health of the real estate market across the nation.
It’s tough to argue with the news. Mrs. PoP and I have done very well over the past few years by buying our home, a rental property, and a piece of land on a canal here in Florida.
But what do we tell our friends when they ask us “Is now a good time to buy a house?”
Well, its complicated…
Will Equity Increase (Enough)?
For most people, home ownership acts like a forced savings account with the hope of appreciation. You are putting some amount of money into an asset month after month, year after year instead of giving it to your landlord and helping him slowly buy an asset.
This amount of equity you buy per month is probably much smaller than you would think. The amount you send to the bank every month might be $850, but half of that amount could go to taxes and insurance, while 90% of the remaining payment goes to interest during the first part of the loan. Yuck!
While you are slowly buying an asset that you also get to live in, raise a family in, and paint the walls any darn color you want. You’re also hoping that the house appreciates.
When people ask me “Is now a good time to buy a house?” what I think they really mean is “Will I see significant appreciation in the future?” By appreciation, we mean that the value of the house will increase faster than the rate of inflation (Currently about 2%, but it averaged 3.35% over the past 100 years).
It’s not enough that your home increase in value. If it’s not increasing in value by more than about 3% per year, you’re buying an asset that is eating your wealth slowly.
OK, enough with the numbers, should I buy some property or not?
Almost done, we promise! See, despite the real estate bubble of 2003-2006, and despite the current rising market, if you adjust for inflation as a nation our housing stock has outpaced inflation by a measly 0.1%! Now, this is a national average going back 100 years. Since it’s at least keeping up with inflation you’re not losing money really.
So if you’re going to stay in one area for a while, have a 20% downpayment, we say go for it, get that 3 bedroom / 2 bathroom house with the nice garage and the picket fence.
But keep in mind, your home probably won’t appreciate much more than the rate of inflation in the future…but you won’t fall behind either.
With that in mind, instead of buying more and more pieces of property you might want to consider putting your money in the market, which has gained about 1.6% above inflation over the past 100 years or so.
“Hey, but you said you own a home, an income property, and some land on a canal?!”
Yep…we do. Here’s why we’re still bullish on real estate…
How We Plan to Beat Inflation
We think it boils down to two reasons. First, we bought at a big discount during the crash a few years back. Those days of banks dumping foreclosures are behind us, unfortunately.
This isn’t to say that deals are not still out there. You’ll just have to move quickly, have good financing (or cash), and be ready to sift through the rocks to find your gem. We firmly believe that you make your money when you buy real estate, not when you sell it.
The second reason we are doing well, and why we might tell others to make a real estate investment is demographics. One of my favorite philosophers, Auguste Comte, once said
“Demographics is destiny.”
Applied to real estate, that means that if you happen to live in an area where more people will move to in the next 10 or 20 years, your land could appreciate quite well.
Thanks to the census we have a pretty good idea of where people are going, and how many are going there. If you are living in a geographic area with positive demographic trends (we feel this is the case for our home in Florida), then your returns on a real estate investment should be better than average.
Demographics is driven by a lot of different factors. For example, Florida’s birthrate is ranked #40 of all the states. But our population has increased an average of 39% every 10 years since 1950!
Like many of the states in the Southeastern U.S., people are born elsewhere and move to here for the nice weather and sandy beaches.
Technology can be a driver as well. Air conditioning made living in Florida year round much easier, and advances in healthcare allow people to live better, longer, which in turn allows more people to retire to Florida in their golden years.
For us, the retirement aspect is particularly important when you consider the number of Baby Boomers who will be retiring in the coming years. If the Boomers continue the demographic trend set over the last 50 years, Florida could easily double in population in the next 50. While “they” are making more and more old people everyday, we aren’t making any more beach-front real estate. If the demand generated by a demographic wave like the retiring baby boomers gets focused on a scarce resource like water-front lots, its a good bet that the price will rise more quickly than the average.
So that’s it-the Planting Our Pennies real estate advice that we tell anybody who will sit still long enough to listen. We’re definitely still amateurs in this area, and we’d love to hear your take on this in the comments!