When One is Not Enough

Roger Schlesinger

5/28/2009 1:29:24 PM - Roger Schlesinger
How many people do you know who have gone into the stock market and bought one security, other than the company they work for, and never considered buying another share of another company? How many stamp collectors do you know who have one stamp? Art aficionados who own one painting? I believe you get my point.

What about housing? Why should you limit yourself to one house (finances aside for this point of the discussion)? Who says you can't have a second home, a rental property, a vacation place? More importantly, have you considered the upside of additional real estate from a utility, enjoyment and financial stand point? Enough questions, lets look at some of the answers.

About 2/3 of American citizens own their home, leaving 1/3 to either live with an owner or rent. Residential real estate was never considered an "investment," specifically one's home, until inflation and the baby boomers arrived in the 1970s. We had a demand-pull inflation created by excess demand for houses by an unusually large group of people forming families at one time without enough supply.

Voila, prices in desirable areas started increasing. The rest is history. In that history are thousands of stories of people becoming fabulously wealthy simply owning their own home and eventually selling it for previously unthinkable profits.

I must note here, not every area in the country had the amazing increase in housing prices found on the two coasts, sunbelt, specific sections in various states in the continental 48, Hawaii and Alaska. Not to say that special areas in every state do not exist where the demand for residential real estate far exceeds the supply and is reflected in the prices. If you are not looking in these areas, you can easily miss them.

I grew up in Southern California, about 20 minutes from the Pacific Ocean. Nine of us started hanging together in high school and the group still exists today. None of us ever considered buying a house at the ocean's shore. Two who became doctors now live by the sea in Hawaii, another who also became a doctor eventually bought a house by the ocean in Orange County and a fourth who became a builder bought a second home at the beach in Orange County as well. Our oversight was very costly. Had we seen what those who came from other parts of the country without an ocean had seen, a uniqueness that is both desirable and scarce, we could have captured ocean front properties at land locked prices. Who knew?

One important point at the crux of this discussion is real estate, as with any other investment, does not go straight up or straight down, but has over the modern history of our nation, maintained an upward bias.

In the late 1980s, the aerospace companies moved out of Southern California and real estate took 5 to 7 years to come back, but back it came with a vengeance. At the turn of this century, the telecom companies abandoned the Denver area where they had recently arrived, and real estate dropped for years but is now on the comeback trail. Until we find a way to live without structure(s), residential real estate is here to stay and eventually will resume the upward long term trend.

The major benefit of owning residential real estate is using it or getting a financial return from others using it. Therefore, you can have a primary residence and a second home for your use or a rental home for financial gain. One can rent their place for short periods to help defer the cost, especially in unique locations.

Owning a rental makes more than sense: it makes dollars. In today's market with real estate prices down, you can establish a break even or a cash flow from your rental much more easily than in previous years and also set yourself up for a better capital gain as the upside is much greater.

If you have paid off your primary residence, you might get some write off you?ve missed in years past. With rentals, you can also get some depreciation, giving you some tax advantages.

Before some readers start writing to me, it goes without saying you can also lose money in real estate from a myriad of situations, but you can also lose money that was deposited in a bank. Baby boomers have now invaded the second home market, or some may say "created" the second home market primarily near or in desert, ocean, mountains and lakes. Baby boomers were looking for recreation, relaxation, companionship, camaraderie, reliving a youthful experience or capturing a long held dream.

Whether it is a second home or a rental, give it some thought. Inflation is very likely to raise its financially troublesome head and real estate has always been considered an inflationary hedge.