We have become so accustomed to the 30 year fixed mortgage in the U.S., that I think we often overlook the very unique investment opportunity that it creates. The U.S. is one of the very few countries in the world that offers a 30 year fixed mortgage product. Prior to the emergence of our modern mortgage market (with the 30 year fixed product becoming the standard of financing) most Americans were renters. Its creation is what has allowed most people to become homeowners. It also creates unbelievable investment opportunities.
A 30 year fixed mortgage has a fixed payment for 30 years. Period. The debt service on a fixed rate loan will never change (unless you choose to refinance it). This is incredibly valuable, and extremely rare (outside of the U.S.). I’ve written other posts about the financial benefit long-term fixed financing offers as a hedge against inflation, but here I’ll focus on the investment opportunity it creates.
There are few returns on investment that are more consistent than rent paid for a primary residence. I’ve provided the above graph to show the historical trajectory of rents. You can see that this graph moves up and to the right, with almost no downward movement. If you were to compare this to the stock market over the same period of time, the overall trend is also up and to the right, but with a regular peaks and valleys.
This is particularly important information for investors, renters, and retirees. See why below:
Real Estate Investors
If you finance your property purchase with a fixed rate loan then your profit margin will reliably increase over time. Your debt service is fixed for the life of the loan, while your rental income consistently increases. I like the sound of that!
Renters
If you buy a home with a fixed rate mortgage, you are guaranteed to have the same debt service payment for the life of the loan. However, if you rent, you are almost guaranteed to have a consistently upward moving housing expense overtime.
Retirees
When I look at the above rent graph, the main thing that jumps out at me is the absolute lack of volatility. It is a steady, reliable upward tick. This is perfect for minimizing risk and diversifying your retirement portfolio.
To be clear, I’m not saying property is the only place you should invest your money. But I am saying that it makes a strong argument to at least be part of your plan. It is a proven way to build wealth over time and have a diversified retirement portfolio.
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