Reason #8 - Hedge Against Inflation
For most people, they may feel that the most practical thing to do, is take your money and put it into a savings bond or bank account that yields 2 to 3 percent per year. The main argument here is that this type of investing, is what most people consider "safe", or at least safer than other types of investments. The problem with this type of thinking, is that you don't make any money. This is because of one word, inflation.
Inflation is the price of goods on things like cars, food, clothes, and so forth measured against a standard of ability to purchase those goods. For example, the price of gas has basically risen fairly heavy recently. Of course, this depends on where you live, but for most people there has been at least a $2 to $3 increase in just over one year. Really when you think about it, that's a 50 percent increase! Did your salary at work increase by 50 percent? What this means, is you have less purchasing power when it comes to gas, than I did a year ago. This is because your dollar doesn't buy as much gas as it used to.
Now you may feel that using gas is a fairly extreme example, but it drives home an important point - that the price for consumer goods has consistently risen at a fairly consistent rate. To put it simply, you are actually losing your wealth because inflation is higher than your returns. Any gain in interest is wiped out by the rising cost of living. You are not becoming wealthier, you are just maintaining.
Another important fact to consider is that only time inflation was negative over the last century was during the Great Depression. If you factor that out, inflation has historically risen by 4.1 percent per year. Which means, if you have your money in a savings account earning 3% interest per year, you are actually losing money. Because the cost of good is growing faster than the value of your money.
The beauty of real estate is that it is a tangible asset (rent is a tangible asset, much like gas, food, and clothing). What does that mean? It means that your tangible goods (i.e rent), will rise at the rate of inflation or much higher, just like other tangible consumer goods. Historically real estate has risen at 6 percent per year - a full 2 to 3 percent higher than inflation. And that is just appreciation. That doesn't take into consideration the cash flow you generated from a real estate investment, nor the tax advantages, depreciation, and tax-deductible mortgage interest. So, do you still think that real estate is an "unsafe" investment?
Often times, even real estate investments that perform poorly will still perform better than what many people consider a "safe" investment (i.e. bonds, stocks or mutual funds).
For most people, they may feel that the most practical thing to do, is take your money and put it into a savings bond or bank account that yields 2 to 3 percent per year. The main argument here is that this type of investing, is what most people consider "safe", or at least safer than other types of investments. The problem with this type of thinking, is that you don't make any money. This is because of one word, inflation.
Inflation is the price of goods on things like cars, food, clothes, and so forth measured against a standard of ability to purchase those goods. For example, the price of gas has basically risen fairly heavy recently. Of course, this depends on where you live, but for most people there has been at least a $2 to $3 increase in just over one year. Really when you think about it, that's a 50 percent increase! Did your salary at work increase by 50 percent? What this means, is you have less purchasing power when it comes to gas, than I did a year ago. This is because your dollar doesn't buy as much gas as it used to.
Now you may feel that using gas is a fairly extreme example, but it drives home an important point - that the price for consumer goods has consistently risen at a fairly consistent rate. To put it simply, you are actually losing your wealth because inflation is higher than your returns. Any gain in interest is wiped out by the rising cost of living. You are not becoming wealthier, you are just maintaining.
Another important fact to consider is that only time inflation was negative over the last century was during the Great Depression. If you factor that out, inflation has historically risen by 4.1 percent per year. Which means, if you have your money in a savings account earning 3% interest per year, you are actually losing money. Because the cost of good is growing faster than the value of your money.
The beauty of real estate is that it is a tangible asset (rent is a tangible asset, much like gas, food, and clothing). What does that mean? It means that your tangible goods (i.e rent), will rise at the rate of inflation or much higher, just like other tangible consumer goods. Historically real estate has risen at 6 percent per year - a full 2 to 3 percent higher than inflation. And that is just appreciation. That doesn't take into consideration the cash flow you generated from a real estate investment, nor the tax advantages, depreciation, and tax-deductible mortgage interest. So, do you still think that real estate is an "unsafe" investment?
Often times, even real estate investments that perform poorly will still perform better than what many people consider a "safe" investment (i.e. bonds, stocks or mutual funds).
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