Is It A Good Time To Invest In Real Estate?
Even though I’ve experienced phenomenal returns in real estate, I think its getting exceedingly difficult to invest in that asset class.
If you’re flipping houses and you have a good buying and selling system in place, then the story is different, but thats probably your full-time job. If you a part-time passive investors like me, then now might not be the best time to invest.
According to my own experiences, trying to refinance a loan has become a lot more difficult than it was 2 years ago. This tells me that the pool of potential buyers has dried up. This is due to the tightening of lending standards as a result of the subprime meltdown. Common sense tells me that this is likely to get a lot worse over the next few years. As a result, buyers of investment homes now may not find it easy to sell the home in a few years.
According to real estate research consultant John Burns, many places in the US still might fall another 30%. Popular places to invest like Miami, Los Angeles, San Diego and Orlando need to drop another 28-40% to become affordable. When prices are rising, people tend to think they’re getting left out and so they tend to push prices way beyond fair value. On the flip side, when prices are dropping, people think they’ve gotten a raw deal and just want out at any price. This usually pushes prices far below what is a fair value. At the bottom of the cycle, you can usually buy property that will cashflow and provide excellent cash-on-cash returns.
There’s no urgency in investing right now. Things are probably going to get a lot worse before they get any better. I feel for most people, sitting on the sidelines waiting for a few years is a good idea. As Warren Buffett says, patience is an investors biggest virtue. As loans become more difficult to get, rents should increase and prices will drop. This will compensate for any increase in interest rates that may occur (although I personally think that interest rates are going down before they start going up).
But that doesn’t mean you should write off real estate completely. Now is a good time to learn as much as you can so you hit the ground running when the opportunity presents itself. Also, you might find a stellar deal once in a while and if you’re well prepared, you can make a pretty penny. It may be more difficult to make money in a down market, but it doesn’t mean that its impossible!
I have personally lightened my real estate investments in favor of more commodity-based investments, but I haven’t completely gotten rid of everything.
I think keeping a few good real estate investments long term is a good way create wealth. But now is definitely not a good time to buy 95-100% financed properties that have no chance in hell of cashflowing with a 3 year adjustable mortgage in a place like San Diego or Miami!
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June 28th, 2007 at 6:21 pm
In the San Francisco Bay Area market, it appears property prices are actually moving up, at least in the Peninsula area:
http://realestateandhomes.blogspot.com/2007/06/are-bay-area-home-prices-going-down.html
- Henry
http://www.movoto.com
June 28th, 2007 at 9:51 pm
thanks for visiting my blog.
taking data off the sales of a few hundred homes really is meaningless.
unless you have a very large subset to choose from, the data can be skewed by a number of factors.
One thing I wish they would print is change is price/sq ft. Initially, sales (and pricing) at the lower end of the spectrum declines faster than the top end which then pushes the median price higher. This happened in san diego about 2 years ago.
the bay area market is more resilient because of the large number of highly paid individuals. The bay area also has the highest density of millionaires so the market dynamics will be slightly different from the rest of the state.
however, I feel the market their will decline a little bit too.
I spoke to a friend of mine. He says a condo that rents for $2000/mo would sell for $650k. the rent to mortgage ratio is so low, either the rent has to double or the price has to drop a lot.