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After the collapse of the housing bubble, you might think that real estate is still a risky investment. Learn why you might want to reconsider that assessment.
During those years, I often heard my physician clients (and others) say that although stock prices might fluctuate, housing prices would never go down. As a result, many chose to live in the biggest house they could afford and make real estate a significant part of their investment portfolio.
Of course, we all know what has happened since then. The bubble has burst. Housing prices and real estate values have plummeted-in some markets by as much as 50%. Now, however, things are changing again.
Why the turnaround? The biggest precipitating factor, in my opinion, is that the cost of ownership is relatively low. Aside from the drop in real estate prices themselves, borrowing costs have dropped sharply, with the average rate on a 30-year fixed mortgage at the time of this writing standing at 3.53%, according to http://www.bankrate.com/. That means doctors with strong earnings and good credit scores are perfect candidates for lower mortgage rates.
For those who say they will wait until the economy improves further, my response is that the present low rates are temporary. Interest costs could well be two or three percentage points higher by as early as next year.
Having said that, I don't foresee real estate values suddenly increasing sharply. After a possible above-average gain for a short period, I believe residential real estate will return to normal annual increases in prices, equivalent to the rate of inflation, or moderately above that level for commercial space. The fact that stocks are closing in on a new high while real estate is not indicates that further appreciation is likely if the economy continues to make progress.
As a physician, you can take advantage of the attractive investment environment for real estate by buying or refinancing a home or by purchasing your office space rather than leasing it. The continuing softness in both the residential and real estate markets means that you likely will find a large pool of both houses and offices available at reasonable prices.
The combination of reasonable ownership costs, tax benefits, the likelihood of price appreciation, and the hedge against inflation means that real estate should again be part of your investment portfolio.
The author is chief executive officer for Altfest Personal Wealth Management, New York City.