Is real estate a good investment today?
Following a record price run-up, then a housing market crash with a long recovery, followed up by pandemic-market distortions, would-be investors may be wary. But real estate has a long history of solid, reliable gains.
Real estate investing takes several common forms:
- Buying and renting out houses
- Fixing and flipping homes
- Buying and selling your own residence for tax-free income
Savvy investors realize that today's opportunities could mean nice profits. Here's why.
Mortgage rates aren't all that high
While it's true that today's mortgage rates are higher than recent record-setting lows, they are still below recent peaks, and people certainly invested in real estate when they were higher than today. It's also true that the climate for investors is friendlier as the economy continues to expand, compared to the difficult economic times that produce lower rates. This means that while your interest rate might be a little higher today, risks may be lower, and investment earnings are also likely to have increased.
In addition, housing is on a roll. Home prices are rising in much of the country, helping to increase the value of the asset, while rents are also high, improving the chances for solid cash-flow from a property. Even though mortgage rates may be high at the moment, they probably won't be forever, and refinancing an investment-property mortgage at a lower rate later may improve the property's cash-flow even further.
Real estate investing beats renting
According to Harvard University's Joint Center for Housing Studies, the net worth of homeowners beats that of renters by miles. And, especially for those without stock portfolios, the "forced savings" created by paying off a mortgage generates wealth they might not otherwise have.
"Forced savings" refers to the fact that you have to make regular payments when you have a home loan, and paying it adds to your home equity (your wealth) each month. Renters who have to discipline themselves to invest, and who can choose to tap their savings any time they want often fall far behind homeowners.
Harvard says in its 2019 State of the Nation's Housing report that "the median net wealth of homeowner households was about 40 times that of renter households." In fact, says Harvard, "Strong growth in home equity lifted the median wealth of homeowners from to $231,400 in 2018 to $254,900 in 2019, while the real median wealth of renter households only increased from $5,000 to $6,270."
With strong home price appreciation over the last few years, the gap has only widened since then. The Urban Institute reported in 2024 that the wealth gap between homeowners and renters had reached a record high (2022 data), and the Aspen Institute reported in late 2024 that the differential had expanded further; renters had a median net worth of $10,400 while homeowner net worth was nearly $400,000.
Home prices continue to trend upward
While we cannot be absolutely sure that home prices will increase by a specific percent, residential real estate has a reliable average of about 4 percent annual growth. The latest housing report for the National Association of Realtors (NAR) indicates that home prices rose on a year-over-year basis for 91 consecutive months between July 2015 and January 2023, took a five-month breather but since then posted another string of 20 months of gains by this year-over-year comparison.
Looking forward, forecasts for what will happen to home prices are all over the board, ranging from Zillow's rise of 0.8% in 2025 to the 3% expected by J.P. Morgan to as much as 4.1% according to Cotality (formerly Corelogic). However, it's not the potential for immediate gain that should excite most people. Unless you're a property flipper, the steady and safe historical return over time is the key to sound real estate investing.
Related: Use HSH's Home Value Tracker to follow home values in 400+ housing markets.
Investing in real estate is relatively safe
Property is a relatively stable investment. "What?!" you say. "What about the housing crash?"
There is no doubt that a lot of homes lost value relatively quickly and that home prices in some markets took many years to recover. However, most of those markets eventually bounced back strongly, with property prices appreciating at a much higher rate than average. And consider this: stocks, bonds and other marketable securities can (and do) lose 10% or more in a single day.
An investment in stocks can even go to zero if the company behind the paper folds. But chances are if you visit where you lived as a child, your old house is still standing, even after 20 or more years. How many companies that were household names 20 years ago are gone today?
With property, the value is not in some paper representation. We call it "real" estate because it is a tangible asset.
Property investments get preferential tax treatment
Dolf De Roos, PhD., author of Rich Dad's Advisors Guide to Real Estate Riches, extols the value of the tax treatment that property receives. If you buy a stock and sell it at a profit a few years later, you pay capital gains tax. You do this even if you turn right around and use the proceeds to buy another stock, or even if you buy the exact same stock.
With property, however, there are several ways that you can enjoy your gain without getting pinched by Uncle Sam.
- You can sell one investment property then buy another using a 1031 exchange, paying no tax on your profit in the process.
- You can sell a home and exclude up to $500,000 of the gain on the sale if you lived in the home for two of the five years prior to selling ($250,000 for single homeowners).
- You can borrow against your increased equity and not sell at all.
Finally, the mortgage interest deduction, for those who itemize, can make owning more appealing by allowing homeowners to deduct the allowable interest they pay on their mortgage from their taxable income.
Real estate investing can be leveraged
Leverage is a powerful concept. Suppose that you want to buy $100,000 of stock. If you do, you have to pony up at least $50,000. If the stock's value drops, you get a margin call and have to either sell at a loss or put in more cash.
However, you can finance a home with anywhere from zero down (try USDA or VA mortgage lenders), to 3.5 percent down (with FHA home loans) to 25 percent down for rentals (try investment property mortgage lenders).
Furthermore, mortgage rates are cheaper than just about any other sort of financing. The beauty of being able to control large-value assets with a relatively small investment is that any appreciation is maximized.
Here's a simplified example: if you buy a home for $100,000 cash, and it appreciates by the typical 4 percent in one year, you would have a 4 percent rate of return. But if you have only invested 4 percent in your purchase, financing 96 percent, and the price increases to $104,000, you have effectively doubled your initial investment -- a 100 percent return! Better still, you did not tie up all of your investment funds. You could, theoretically, control 25 properties for the same $100,000 investment. And should home prices drop, you won't receive a margin call, but will have wait out the downturn before selling if you don't want to realize a loss.
Other real estate investment considerations
Investing in real estate has risks. You should invest across many vehicles, not just property, to maximize your return for the amount of risk you take. And investing in property does have some drawbacks, too; for example, it's not liquid. As well, the costs of buying and selling are substantial, and leverage magnifies losses as well as gains.
However, the relative affordability of today's mortgage rates, the hedge against inflation, and potential tax savings have prompted many investors to get into real estate, and should cause you to seriously consider home ownership (or investing in property) in one form or another.
If you're not ready to own a home or become a landlord, one way to invest in real estate without having to either occupy a property or manage it is by investing in a Real Estate Investment Trust (REIT). There are REITs that invest in physical residential properties or commercial buildings and those that invest in the mortgage that back them. It's important to do your research carefully to know what form of REIT might be an option for you, but it is a way to take advantage of the gains that holding real estate may offer without having to manage properties yourself.
Is investing in real estate worth it? As one investor said, shrugging, "You have to live somewhere." Of course, there are many ways to invest in real estate -- even if you never actually own a home.
This article was revised and updated by Keith Gumbinger.
