NEW YORK (BankingMyWay) -- With many homes’ values down more than 30% in the past few years, you’d think real estate investing would have lost its allure, but some market experts are pitching the idea of buying and flipping, investing in fixer-uppers and dabbling in rental properties.
Even if investment properties are starting to look attractive, the prospective investor should think long and hard about whether the potential gains justify the work, risks and headaches.
Whether a collapse involves homes, stocks, bonds or sowbellies, any price decline will eventually look like a chance for savvy investors to pick up some bargains. Some experts suggest now’s the time to get into real estate, as the market is showing signs of bottoming out. Wait too long and a recovery could strip away the choicest bargains.
In a recent article by HSH Associates, a mortgage tracking firm, researchers outline six reasons real estate is attractive again. They range from today’s low mortgage rates to predictions that prices will rise to tax benefits and the profit-magnifying effects of buying with borrowed money. All look good on paper, but many potential investors are not in a position to make them work in real life. While many people view real estate investing as a path to prosperity, you need to be fairly prosperous before you start.
In the past, for instance, it was possible to buy rental properties with as little as 20% down. Today, skittish lenders may well demand twice that, maybe more.
An investor in rental property also needs a solid cash reserve for the unexpected, like the rent-free months it might take to evict a non-paying tenant. People who invest in fixer-uppers can face big, savings-depleting outlays unless the property is used as a primary residence and the improvements are spaced out over time.
Here are four questions to consider:
1. What is your staying power? How long could you afford to pay the expenses if rents or property values did not rise as fast as you expected? Real estate is an “illiquid” investment that’s hard to get out of if things don’t turn out as expected. If mortgage rates rise over the next few years, as many experts expect, buyers won’t be able to spend as much as they can when rates are low.
2. How knowledgeable are you? Picking a good investment property is a lot like picking an obscure stock. The investor needs to understand the local economy, local renter’s rights laws, zoning regulations, building permits and many other subjects.
3. How much work are you willing to do? You can hire a property manager, contractors, landscapers and other professionals, but all those expenses will increase losses in the early years and cut profits later, as most investment properties run in the red for a number of years. The most successful real estate investors view the enterprise as a second job involving many hours each week.
4. How well do you handle adversity? Even the most carefully planned investment is subject to surprises, like the “perfect” tenant who turns out to be a monster, the air conditioning system that dies in August, the contractor who doesn’t show up or the noisy neighbor who drives the renter crazy.
Many people who have owned investment properties are thrilled with results. But many dabblers don’t actually have very precise figures on their costs, profits and annualized rates of return. A healthy gain in property values does not necessarily signify a fat profit given the damage from taxes, maintenance and other expenses.
Real estate investing is best done by the pros – or at least by amateurs willing to shoulder a lot of risk and expense while they learn the ropes.
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