Buying residential property as an investment is a very popular topic. It’s popular because people instantly understand the nature of the investment, as opposed to things that are more complicated and conceptual, like stocks or Treasury bonds.
It’s also a very topical issue because the real estate market constantly fluctuates, leading to broader arguments about the true value of homes.
Why Invest in Homes?
Many people like to put their money into residential properties because they almost always appreciate in value on a long enough time frame, and sometimes that appreciation is much, much larger than any returns you would get in the stock market.
For example, if you bought a home in a middle class neighborhood in Santa Monica, Calif., in the early 1980s, its value would have gone through the roof by the time the early 2000s started. The profit margin on residential properties – if you pick the right home in the right neighborhood – is what attracts so many people to a residential property as an investment. Most people will then rent the property out, which allows them to pay the mortgage and make a profit. The profit margin will be larger if there are multiple units on the property as well.
Why You Shouldn’t Invest in Residential Property
The bad news is that when the real estate market becomes speculative, as it did in the past few years, home prices become inflated and people borrow against over-valued homes.
Then, when prices stabilize and fall back to where they would be in more normal times, everyone is stuck with mortgages and payments they can’t handle. That’s why so many people were foreclosed on recently.