April 27th, 2011 4:07 PM by Eileen Denhard
How does buying a second home compare to investing in common stocks?
Conventional wisdom still holds that, over time, common stocks offer the best returns. This may be true if measuring cash-on-cash return, but when looking at total return, the picture changes.
The ownership of real estate offers four distinct advantages over stocks, according to John Tuccillo, former chief economist for the National Association of Realtors.
* Real estate prices are less volatile in most areas. Stocks can move a great deal in both directions. This can make ownership of stock a high-risk proposition, with profit often dependent on timing.
Stocks can bounce up and down. Someone who cashed out one year might have seen a huge return; someone else who waited another year could lose a great deal. House prices fluctuate as well, but to a lesser range. If real estate prices don’t shoot up the way stock prices do in a bull market, real estate markets don’t crash the way stocks do when the bull runs out of steam. In short, it’s a less risky investment most of the time.
* Real estate is a leveraged investment. One can own a home with a down payment of 20 percent. Most investors can’t do this with stock. They need to pay the entire price of the stock. Because of this difference, when the price of a stock rises 5 percent, the investor makes 5 percent on his or her money. If real estate purchased with a 20 percent down payment rises by 5 percent in value, the return is upward of 25 percent.
* Real estate is tax-advantaged. Any interest incurred for the financing of a second home is deductible from ordinary income for tax purposes. If a second home becomes an investment property, tax can be deferred and sometimes eliminated. The stock investor, on the other hand, pays capital gains tax and can’t deduct the interest on any debt incurred for the purchase of financial assets.
* An investor can live in real estate. The investor can’t go to sleep in a stock certificate, or use it to fish with their children. Investors can only look at certificates and hope they make money. Real estate provides many kinds of satisfaction that money can’t provide.
A second home has long-term wealth-building powers. In a nutshell, if the owner thinks a house is good enough to live in and enjoy, someone else will too, and they’ll pay for the privilege to rent it.
The ownership of an investment home, particularly a property the homeowner can personally enjoy, pays dividends on a variety of levels and can be a very profitable road.