- The Washington Times - Friday, July 19, 2002

When the stock market gets clobbered, as it has recently, investors seek out safer havens. Real estate is at the top of the list. Unlike stocks, though, real estate is not as easy to buy as clicking on a Web site and transferring your holdings from one fund to another.

If you are considering a change in your investment portfolio, keep in mind that you're going to have some expenses in a real estate purchase that you don't have in a stock fund, but you also will enjoy some financial benefits a stock fund will never provide.

The good thing about stocks is that the price is the price. If a fund requires a deposit of $5,000, you're in the fund for $5,000, less a few dollars for commissions or fees, depending on the fund. You hope and pray that your investment will grow to at least stay ahead of inflation. In the past, 15 percent to 20 percent growth was not unusual. Thus, a $5,000 investment that grew at 5 percent was worth $5,250 in a year.

In real estate, it's not so simple. A $150,000 property isn't really going to cost you $150,000. It might cost you $15,000 by the time you fund the down payment, points and closing fees. But the money you put into a real estate investment doesn't grow based on the amount of money you put into the transaction. A real estate investment grows based on the leveraged value.

If a house appreciates in value by 5 percent 2001's average appreciation nationwide the initial investmentgrows exponentially.

Let's look at our $150,000 house again. If the value grows by 5 percent, the house will be worth $157,500 in a year. However, the $7,500 appreciation actually results in a 50 percent growth rate on your $15,000 investment.

To figure your return over a five-year period, just do the math.

The nature of real estate enables you to earn much more per year than you could earn in a regular stock fund. The question usually follows immediately, "But what if the real estate market drops?"

Fair question. I'll show you what happens by using as an example a condo I sold two years ago, walking away with $11,000.

The initial purchase price was $66,000 in 1989; my down payment was $1,980 using an FHA program that required 3 percent down. With closing costs, etc., the investment to get into the condo ended up being about $3,000. So my total investment was less than 5 percent of the value of the property.

Unfortunately, I bought at the height of the market, and then the bottom fell out. In five years, condos like mine were selling as low as $49,000, but I already had converted the unit into a rental by then.

The monthly payment for my loan was more than the rent coming in. With the condo fee, I was still paying out $75 per month more than what I was bringing in on the rent.

This was the equivalent of what we are experiencing now on Wall Street.

With rentals, however, there are more benefits than mere cash flow. Unlike securities-based investments, real estate comes with options.

The tax benefits for rental property saved me thousands of dollars over the years. The Internal Revenue Service allows me to depreciate the condo by 4 percent each year (based on the $66,000 purchase price) and also deduct expenses for upkeep and real estate taxes on the property. By the end of each tax year, I may have flowed $900 into the property, but I also received a deduction of more than $4,000 for depreciation and various expenses.

The years when I rented it out were pretty much a wash. By the time I sold it, however, the market had turned, rents were up to where the positive cash flow would have been $200 per month instead of a loss of $75 per month if I had chosen to keep the property and the condo had appreciated to a value of $75,000. My eventual return was more than 300 percent on the original down payment, but that doesn't even include all the tax savings throughout the rental years.

One of the biggest benefits about real estate is that even in a bust market, you have options to make money on the investment. In addition, real estate markets can stand separate from their counterparts in other jurisdictions. When the stock market falls, it takes just about everybody with it. When home values drop in Houston, they're not going to take down other jurisdictions, as well.

M. Anthony Carr, director of communications for the Northern Virginia Association of Realtors, has written about real estate for more than 12 years. Reach him by e-mail ([email protected]).

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