I have written before that there are definitely times in the economic cycle when investing in real estate is one of the best things you can do with available capital. And, conversely, there are times when a more cautious and hesitant approach is most appropriate.
There are absolute psychic benefits to owning your own home. It’s one of the main reasons there are Realtors, after all. Among other reasons, we are here to help people’s dreams of home ownership come to reality.
Of course there can be benefits other than the psychic. For many, the equity they have in their homes is their largest single asset. (Now, also for many, the negative equity they had in their homes after the bust was their largest burden. It can cut both ways.)
One of the things I am able to do with my Real Estate Yearbook data is determine financial returns on single family homes owned in the 54 neighborhoods that I have analyzed throughout Broward and Palm Beach Counties.
Let’s consider it from the perspective of the investor. Across the 54 neighborhoods, since the end of 2011 the median increase in the value of a single family home has been 64 percent. That’s just over nine percent per year, every year, compounded. Of course there was a range of results. The worst performing neighborhood increased by just six percent in six years. On the other hand, the neighborhood with the best return (the Northwood/Northboro historic district in West Palm Beach) went up by 389 percent – more than 31 percent per year!
As many of you know, real estate can be purchased with borrowed money, often referred to as “leverage”. The use of leverage can amplify one’s investment returns (on the upside and the downside, it should be noted). Typically, a real estate investor makes a down payment in the area of 30 percent (which we will use for illustration). I assumed an investor bought the median home at year-end 2011 and sold on September 30 this year. At a 30 percent down payment, and after commissions but before taxes and expenses, the total return in that Northwood/Northboro neighborhood was 1,222 percent (yes you read that right).
The table shows the top three overall neighborhoods, and the top three in East Broward.
The magnitude of these returns illustrates why investors – including Wall Street hedge funds – bought huge blocks of real estate here after the bust. (It also explains why some of your neighbors seem happy.) But, of course, past performance does not predict future results, far from it. Buyers, investors (and sellers) need to determine where we are in the current cycle, and make their financial plans accordingly.by