Tuesday, March 3, 2009

Protect Your Money With Real Estate

Do you have jitters about putting your money towards MN real estate? After-all, the media LOVES to talk about what tumultuous times we're in right now. Home prices falling! Buyers beware! Protect yourself!

Never believe anyone that tells you an investment is 100% safe and smart. EVERYTHING that you do with your money has a certain amount of risk involved with it, even if it's just putting bills under your mattress; speaking of which, let's talk about what happens if you do NOTHING with the money you save (e.g., putting it under your mattress). That wouldn't be very smart--fire, flood, theft, etc. could make your money disappear very quickly with no hope for return.

What if you are the type who'd rather keep your hard-earned money in a safety deposit bank? Well, consider the fact that inflation reduces your money's buying power. More concretely, this means that your bills are only worth the currency's present value. Over time, you will find out that you have wasted an opportunity to expand its value.

In the US, the annual rate of inflation is about 3 percent that translates to commodities increasing by almost 3 percent every year. In other words, your money is worth 3 percent less if it is being kept inside a safety box. Would you still perceive of it as "saving" when obviously your money's purchasing power is gradually vanishing?

Let us also look into savings account. Those with this mode of saving are lucky because the FDIC or the Federal Deposit Insurance Corporation protects them. The risk involved is minimal as far as losing money is concerned. However, there is such a thing called inflation that even the best savings account in the world will have a hard time counteracting. Inflation can also negatively affect your savings account interest earnings.

How about stocks? I like to think of investing in stocks as investing in an "idea". You don't hold claim to any tangible item. You only "own" the fact that you have contributed funds to the "idea" that the entity you contributed your money to will somehow add value to itself and subsequently add a gain to the money you started out with.

How much control do you have over this "idea"? ALMOST NONE! The only thing you can do is research the track record of the entity and the people close to it (e.g., the CEO, CFO, etc.) to guess whether or not the "idea" will work out in the way you hope it will, but it's very difficult to know ALL the factors that will come into play. My opinion is that unless you invest in the stock market as a profession or spend a great deal of your time researching companies, investing in stocks is very distant from your personal interests and can be of great risk. That is why I, and many others, have chosen the last option we'll talk about: real estate.

What primarily distinguishes real estate from the ones mentioned above is its being "tangible" (this presupposes that you can experience it with all your senses: you can see it, touch it, and even improve it.) Likewise, the risk involved as far as losing the physical asset is concerned seemed distant. If it does, there's a wonderful thing called insurance! Can you apply the same in the case of stocks? Your property's value also grows with inflation unlike paper currency so you do not have to worry about your investment losing its purchasing power every year.

The bottom line: real estate gives you surprising benefits in numerous ways that includes huge tax breaks, gained equity through renter-paid deduction, equity gained through improvements, and appreciation. As I have mentioned previously in this article, any investment is not 100 percent safe. But it is in real estate where I am sure that with some forethought, you will find the most satisfaction, security, and enjoyment with your money!