Real estate in DC offers safety of principal, solid cap rates, and above average ROI potential.
Hedge Against Inflation
Inflation is the number one destroyer of wealth. Just ask Warren Buffett. Average inflation in the United States is 3.22% per year. That means, the value of your home needs to double every 20 years to keep up. Thankfully, the average rise in real estate prices is 4.75% a year, and in DC it’s been double that over the last 20 years.
One of the biggest benefits to real estate investing is cash flow – buying and leasing provides a regular income stream that is typically higher than the stock dividend yields, and the asset is generally more stable than marketable securities, and in some cases better long-term performance.
Investing in real estate allows you to leverage cash to own more assets with less money and significantly multiply total value as the loans are paid down. Unlike the stock market, where high use of leverage can (and should) only be used for short-term positions, in real-estate you can get 4, 5, even 20x loan to cash depending on the type of property.
Maximize Tax Benefits
The US Tax Code benefits real estate owners in a lot of ways, including unlimited mortgage interest deductions and depreciation accelerations that can shield a portion of the positive cash flow generated and paid out to investors. At the time of sale, IRS allows investors a 1031 provision, allowing investors to exchange into a like-kind instrument and defer all taxable gains into the future. (See your tax advisor for full explanation.)
Income-producing real estate is has meaningful value. The property’s land has value, so does the structure itself, and the cash it produces has value to future investments. Maybe most importantly, income producing real estate is not subject to volatility the same way the stock market is on a daily, short-term basis, and investors can typically still liquidate within a 30-60 day window.
Along with the ability to lease for cash flow, you retain ownership of the asset, which if owned long enough will greatly appreciate in value. And, while your cap rates will increase with rising rents, so will the value of the underlying asset. That’s why you want to own. In DC, we’ll see more and more development (like the SW waterfront and Brookland) and that will help values across the city rise.