Real Estate has always been a great investment vehicle.  Nothing provides the combination of stable and moderately predictable appreciation coupled with such low-risk.

Real Estate is a Limited-Risk Investment - During the past century there have been only a handful of years in which residential real estate values declined.  Between 1988 and 2003 the median price of a home increased more than 52% (an annual average increase of 3.4%) in the Dallas metropolitan statistical area (Dallas MSA).  During that 15 year period, there was only an annual decline in median property values on two occasions (1990 and 1991), something the major stock indices (e.g. the Dow Jones Industrial Average) cannot claim. And despite the barrage of bad publicity home prices in most Dallas area neighborhoods have increased year over year between 2007 and 2008, also something the stock market can’t claim.

Real Estate can be Leveraged –  Although many investments can be leveraged (e.g. stocks purchased on margin), only residential real estate is such a sound investment that it is possible for an investor to borrow 100% of the funds required to purchase the investment.  The ability to borrow the funds necessary to acquire an asset greatly increases the yield on that investment.  If an investor pays cash for a $100,000 asset and it appreciates in value by 5%, his yield on the funds invested is 5%.  If, however, he only invests 10% of his capital to acquire the same investment (borrowing the remainder using the asset as security), his yield is 50% (i.e. he received a return of $5,000 on the $10,000 invested).  It is the leverage potential of residential real estate that makes its potential for “yield” so impressive.

Ownership of Real Estate has favorable Tax Consequences – Tax laws favor real estate investment.  As with most types of capital investment, gain on the appreciation of real estate is taxed as a capital gain, at tax rates as low as 0% and typically no greater than 15%.   Real Estate has the additional advantage of being an asset for which substantial depreciation deductions can be taken, enabling an investor to pay no income tax on the investment, even during periods of positive cash-flow.  And although the depreciation will typically be recaptured when the property is sold, the recaptured income will usually be at a rate below the tax rate for ordinary income.  The ownership of real estate has the added benefit of being the perfect investment for an estate plan, since the valuable appreciated asset can usually be passed on to heirs and devisees of the investor at a “stepped-up” basis, virtually eliminating the tax on the appreciated value of the property.