Even in Market Today Arizona Real Estate is Still a Good Investment

A soon to be Arizona State University graduate recently told his family that he has borrowed $40,000 in student loans for down payments to purchase three homes in a Queen Creek subdivision, in the past year.  The student says that in the next three to five years home values will appreciate rapidly, and he should then be able to make over $100,000 on the sale of these three homes.  Student loans are not dischargeable in bankruptcy, and his parents are concerned that he is in a messy financial situation.  Is it realistic to expect that the values of Arizona real estate and these three homes will appreciate rapidly in the next three to five years?

According to a Case-Shiller study the value of homes in the 100 years from 1900 to 2000 increased by 3.35% per year, just a little better than the rate of inflation.  In other words,based on the historical 3.35% annual increase in home values, if a $100,000 home were purchased today, the home would be worth $110,000 to $120,000after three to five years. In light of a seller’s normal payment of 8 to 10% for closing costs such as broker’s commissions and title insurance, the profits would be minimal, if any.

However, home ownership today is a better investment than home ownership has been historically.  Homeowners today who live in their home have tax deductions for mortgage interest and real property taxes, and since a 1997 federal tax law generally pay no tax on any gain on the sale of their home. In light of these tax advantages, and current low interest rates, values of homes, including these investment homes should increase in the next three to five years greater than the historical 3.35% annual rate.

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