Real estate has been the favorite whipping boy of the investment community for the past few years—heck, and most of the media too—but is it time to rethink that position? I’m not talking about the decision to buy a house as a primary residence—that’s a deeply personal decision based on your unique circumstances. No, I’m talking about real estate for investment.
A lot of people are nervous about real estate right now, and you can hardly blame them. Given the wild ride the housing market has been on for at least the past three years, this is hardly a time for unbridled optimism. Yet investing in real estate is probably a better bet than it’s been in decades.
Consider the following:
The speculation—and the high prices it caused—are gone
In many markets, house prices have come down so far that all of the speculation that caused the crash has been flushed out. The good news there is that future price declines may have been washed out of the system, lowering risk as it did.
It’s ironic that so many people were paying top dollar buying at the top of the market—and doing so confidently—and now that prices have collapsed, there are few buyers anywhere. The reality—that we now know to be true only in hindsight—is that high prices equal high risk. Much of that risk is now gone.
Cheaper than rent
House prices have fallen to a point where a typical monthly housing payment is lower than what you’d pay to rent an equivalent property. That means two things, and both are REALLY significant:
- There’s a greater likelihood of buying property that can generate an immediate positive cash flow, and
- When the typical rent exceeds the typical house payment in a given market, the situation is ripe for a surge in house prices as renters look to become owners.
From an investor’s standpoint, low prices mean rich buying opportunities. The most critical decision in any investment plan is buying smart—if you do, you lower risk and raise the likelihood of profit immensely.
When everyone is selling, it’s time to buy
The real estate market has had its purge, and the “blood is running in the streets”—which is usually considered the optimum time to buy—i.e., buy when everyone else is selling. Right now there are a lot of properties on the market and relatively few buyers. Not only has that been the driver in lower prices overall, but it also creates the opportunity to find real bargains—properties that are low priced even by today’s depreciated standards.
As all coins have two sides, herewith the flipside of the real estate investment coin–the negatives…
Financing is harder to get
The Great Mortgage Giveaway that began in one or more distant decades and reached its crescendo some time around 2006 is now in the history books. Getting a mortgage these days—especially for investment purposes—won’t be easy. It will require sterling credit, a large down payments, a pile of cash reserves after closing and VERIFIABLE income
You won’t have appreciation to bail you out of a mistake
THE factor that’s made real estate close to the perfect investment is the fact that—at least until 2006 or 2007—any mistakes made by a property owner would be fixed simply by hanging on to it long enough. It was called “appreciation” and it was the real estate owner’s ace in the hole. It didn’t matter if you paid too much for a property, or even if you were carrying it with a negative cash flow (a.k.a., subsidizing your tenant)—time and rising prices would cure all ills and make nearly everyone look like investment geniuses.
Well, we don’t have that critical advantage right now, and may not for a long time—if ever. Not to sound too gloomy and doomy, but the reality is that future price directions in real estate will be dependent on external factors, particularly interest rates and employment. Those cannot be predicted with any degree of certainty.
In practical terms, that means that it will be completely essential to buy property A) at prices well below even current depressed market values, and 2) at a price level that will ensure a positive cash flow from rent.
What’s old is new again, and we’re back to normal here, back to the days when investment real estate was purchased only if it made immediate investment sense. That is, the rent income should be expected to cover:
- Principal and interest on the financing, plus real estate taxes and any required insurance
- Expected repair and maintenance costs
- A reasonable estimate for vacancy—the time in between tenants—as well as the marketing costs to obtain those tenants, and
- A reasonable rate of return on the cash invested in the deal—your down payment
Real estate isn’t very liquid these days
Liquidity is a double-edged sword: the lack of it is the very reason prices have fallen so low, but it’s also why you won’t be able to flip for a profit in a few short years. Any decision to buy property will need to be long-term—check that–very long-term–in it’s time horizon.
Timing may not be the only issue on this front either. Once you buy a property, especially if you’re looking to do so for investment, all the problems of the previous owners of any house you buy will be yours. That means your property will be subject to future declines in value.
We can’t discount the possibility that the market isn’t done sliding; the same factors which have caused the value of a house to fall from say, $200,000, to $100,000 in three years could also drive it down to $50,000. Mind you, I’m not predicting that outcome, only pointing out that it can’t be discounted. Instead of get-rich-quick, we may be playing a game of get-poor-quick if prices don’t stage a convincing turnaround.
Considering all of the potential plusses and minuses involved in real estate investing, it maybe that the most important qualification that you can have going in is nerves of steel. Much like the stock market, real estate maybe a game of riding the ups and downs. But one thing we do know going in—buy now and you’ll be buying into a certified bear market—and those are usually the best times to make long-term investment decisions.
What do you think—is now a good time to move into real estate investing? Can you think of any other reasons why we should? Do you have any thoughts on why we shouldn’t?