There are many good reasons for buying property, and just as many different types of property available to buy. Whether you are looking to buy property for security, income, recreation, or retirement, there is always a piece of property than can provide it. Here’s a look at three popular types of property to buy, and some smart reasons why buying property is such a good idea:
Buy A Home
Almost everyone has heard that buying a home is the best investment one can make, and there are many reasons why this is true:
Pride of Ownership
This is the biggest reason that so many people desire to own their own home. It means you can stop wasting money on rent, you can decorate according to your own taste, paint the walls purple, make home improvements, and generally do things any way you want. Home ownership provides a sense of security and stability in the knowledge that you are investing in your own future.
Equity Appreciation
Real estate moves in cycles, but over the years, it has consistently increased in value. Many people buy property, especially their home, as a hedge against inflation. Each month, part of your monthly payment is applied to the principal balance of your loan, which reduces your debt as you watch your equity increase. A growing equity mortgage is an example of this principle in action.
Tax Deductions
Home ownership is a superb tax shelter and tax rates favor homeowners. Mortgage interest, which is the largest portion of your monthly payment, is fully deductible on your tax return (if the price of your home exceeds your mortgage balance.) This deduction is generally available for second mortgages as well. IRS Publication 530 contains tax information for first-time home buyers. Real estate property taxes for a primary home and a vacation home are also fully deductible on your income taxes.
Capital Gains Exclusion
If you have lived in your home for two of the past five years before you sell, you can exclude the profit from capital gains up to $250,000 for an individual or $500,000 for a married couple. There is no age restriction, and you do not have to buy a replacement home or move up. You can claim this tax exclusion by buying property as a home every 24 months, meaning you could sell every two years and keep your profit, free from taxation.
Equity Loans
If you are carrying credit card balances, you are unable to deduct the interest paid, but with home equity loans, the interest is deductible and the interest rates are usually much lower. For many home owners, it can make sense to pay off credit card debt with a home equity loan. You are allowed to borrow against a home’s equity for many other reasons such as home improvement, college, medical expenses, launching a new business, or even to buy property! In the US, home equity loans are subject to state law.
Buy Investment Property
The reasons for buying investment property revolve around three key factors:
- Appreciation
- Cash flow
- Preservation of equity
Of course, investors who buy property say that they want all three, but in reality, they prefer one over the others. If someone buys a run-down house to fix up and sell at a profit, he or she is focused on appreciation and not cash flow or preservation of equity (the property produces no income, and the neighborhood property values may decline). On the other hand, an investor who pays top price for a property in the best location will probably not see much appreciation or cash flow, but the chances of losing his or her equity is very small.
Tax Shelter
Buying investment property provides opportunities for many tax shelter benefits, which are also related to the three key factors. Thanks to depreciation reducing the tax bill, it increases net annual income, which increases cash flow. Also, growth in value (appreciation) happens without incurring annual taxes, which preserves equity. By employing 1031 exchanges, assets can be sold without capital gains taxes, which both improves cash flow and preserves equity.
Different types of property provide different mixtures of the three key factors. For example, low-income rental housing tends to provide healthy cash flow more than anything else. A high-quality single tenant real estate asset like a US Post Office will provide preservation of capital, but not much in the way of appreciation or cash flow.
Investment Goal
The secret to buying investment property is understanding how important each of the three benefits is to your investment goals. Armed with this understanding, you will know where to put your energy and equity in the search for your ideal property to buy.
Buy Land
Everyone has heard the old saying “buy land, they’re not making any more of it.” And for good reason – land and acreage are great vehicles for investment that can have huge payoffs in the end, especially for those who buy and hold. Here’s five smart reasons to buy property in the form of bare land:
- Investment – Land is almost always an appreciating asset. Unless you buy property in a real estate “hot spot,” land rarely depreciates. Over the long term, people who buy investment property will eventually watch their land value climb past its purchase price.
- Recreation – Land can also provide lots of enjoyment for you and your family. Fishing, hunting, hiking, horseback riding, and gardening are all great reasons to buy property for your own enjoyment.
- Development - Bare land has unlimited potential to make your dreams come true, whether it involves apartment buildings, vacation homes, or a cabin to retire in. Building a custom home creates a strong bond between your family and the land, especially if everyone helps in the construction.
- Conservation – Buying property as large tracts of land, particularly wetlands or areas bordering property you already own, is a good way to preserve environmental health. Also, large enough areas of undeveloped land can be used to sell carbon offsets. Every little bit counts when searching for ways to encourage land conservation.
- Low Risk – Land ownership together with liability insurance is a fairly low-risk scenario. The value of the property will tend to naturally rise with inflation, and there are not many things you can do to the land to render it totally worthless.