Is Real Estate a Good Investment Now?
By Steve Gillman - 2009
After watching prices fall for years, people are asking, "Is
real estate a good investment now?" Of course, like most
classes of investments there are opportunities even in the worst
of times. Even as the stock market crashes some stocks go up
in price, after all, and even while some people lost money buying
houses in the last few years, some made money. The better question,
then, is "Which real estate investments are best right now?
Perhaps the worst kind of real estate investing is the purely
speculative bets on rising prices. This is what we saw all over
Tucson Arizona up until we moved from there in June of 2006.
Homes had been appreciating at 20% annually for several years.
many people began to buy them even if after rent was collected
they lost $500 or $600 per month. After all, you might not mind
paying out $7,000 in negative cash flow on a $200,000 house if
you get to sell it for $240,000 a year later.
As we left town the bubble was about to burst. The fact that
11% of all houses sold were to speculative investors should have
been a clue that much of the demand that drove prices higher
was artificial. This kind of "buy and hope prices go up
fast" investing is dangerous in the best of times.
Making Real Estate a Good Investment
On the other hand, if you were to buy a fixer upper at the
top of the market, you could have made money even as prices fell.
For example, suppose you bought a house that would be worth $200,000
when prepared, and because it was trashed you only paid $130,000.
If all of your repair costs, holding costs and other expenses
came to just $35,000 , you might have been looking at a $35,000
profit. Now, if prices fell by 10% and you could only get $180,000
for the home, you would still make $15,000.
Fixing and flipping a house can be a good real estate investment
much of the time, even in a weak market. The key here is to buy
right and move fast. Time cost money not only because of the
interest, utilities and other expenses you're paying, but also
because of falling prices.
Another way to make real estate a good investment now is to
invest in properties that produce positive cash flow. If you
are making money with it every month it doesn't necessarily matter
whether the sales value of a house goes up or down. Let's look
at a simple example to show how important cash flow is. Suppose
you buy a home for $100,000 with a $10,000 down payment, and
you net (on average) $150 per month for 30 years while renters
pay off your mortgage. You'll have made $54,000. What if you
bought in the one place where values dropped for thirty years
and the house is worth only $60,000 now? You can pocket that
too, and have made a total of $114,000 ($54,000 + $60,000) from
your $10,000 investment.
What's more, rents probably went up. Though there are some
places where property values have dropped for decades, I have
not heard of a place where rents didn't rise in 20 or 30 years.
Perhaps you are making $300 cash flow towards the end of the
thirty years, and then when the loan is paid you are making an
additional $600. Making $900 per month, or almost 11,000 annually
on an original investment of $10,000 isn't all that bad, even
if the home is worth 40% less. Cash flow makes real estate a
good investment even during the worst price declines.
One more thing to keep in mind, since we all would rather
have cash flow and appreciation: Not all areas are the same.
We bought a small home in Colorado after leaving Tucson. We closed
in June of 2006, which was close to the top of the market. A
month ago, in June of 2009, we sold the house for 11% more than
we paid. That only meant breaking even after all the costs of
the sale, but it does show that the real estate market is not
the same in all places nor with all types of properties. In many
areas (including here) prices fell at the high end while staying
the same or even rising on the lower-priced homes.
So is real estate a good investment now? It is if you make
the right kind of investments and in the right places.
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