Is This A Good Time to Invest in Real Estate?

There is a lot of talk still in the news today about the ailing housing market and the continuing rise of foreclosures both here in Texas and across the country.

Unemployment is up, the housing market is down, the future is uncertain, we’re mired in a global recession; the news continues to get worse.

So is this really a good time to invest in real estate? Or is it wise to sit on the sidelines and wait to see how things play out?

If you dig a little deeper than the national media stories, then you may find a slightly different story. It turns out that this is a great time to invest in real estate, and for those of us living in Texas, the circumstances are especially favorable. There are several reasons why this is true. So while all the sensationalistic news outlets continue to focus on the doom and gloom let’s take a look at the other side of the coin.

Why is this a good time to invest in real estate?

In short, because real estate is on sale.

Due to the large number of foreclosures all over the country, the real estate market is like a giant clearance sale. It’s like buying a sweater in May, or shorts in December.

Today you can buy a house cheaper than you could have bought just a year ago, and in many cases you can buy a house for less than the cost of building a new home.

Cash Flow

In short, because real estate is on sale. Due to the large number of foreclosures all over the country, the real estate market is like a giant clearance sale. It’s like buying a sweater in May, or shorts in December. Today you can buy a house cheaper than you could have bought just a year ago, and in many cases you can buy a house for less than the cost of building a new home. I’m the kind of guy who does not like to spend money, but when things are on sale it seems to feel less agonizing to me. It just makes good financial sense to buy something when the price is discounted. The Yahoo! real estate front page shows a graph taken from zillow.com that illustrates the one year median home value falling from this time last year (take a look at the 5 year and 10 year trends too).

Because cash flow rates are up. As a direct result of buying a property at a low price, cash flows are higher today than they have been in recent times. Although this is not necessarily true of commercial properties, it is the case with residential real estate. A single family home bought in today’s market can be purchased for lower price than similar properties could have been purchased last year. Consider the following examples of realistic cash flow potentials in today’s real estate market versus the market a year ago.

Ex 1 (Last Year’s Market) Ex 2 (Today’s Market)
Purchase Price: $80,000 Purchase Price: $65,000
Rehab Cost: $10,000 Rehab Cost: $10,000
After Rehab Value: $100,000 After Rehab Value: $100,000
Monthly Payment: $900 Monthly Payment: $750
Monthly Rent: $1100 Monthly Rent: $1100
Cash Flow Per Mo.: $200 Cash Flow Per Mo.: $350

Higher Equity Capture

Along with higher cash flow is higher equity capture. Naturally, if you can buy a property for $15,000 less than you could just a year ago, as in the above example, then the equity capture is higher from day one. For the sake of simplicity in this example I have not taken into account closing costs and other factors that will lessen the realized equity capture. Keep in mind that the equity capture is in today’s market and will likely increase.

With all the foreclosures on the market today, it is difficult in some neighborhoods to get a comparative market analysis (CMA) that does not include distressed properties. At some point in the future the number of foreclosures and distressed properties will curtail and that will allow values to rise to a more realistic number. The reason I use the word “realistic” is because a property that has just had a $10,000 rehab is not comparable to a still-distressed property, however some appraisers are using the still-distressed properties in their CMA’s. When appraisers stop using distressed properties and toxic assets that banks are desperate to unload in their CMA reports, then property values will increase and equity capture will likewise increase.

In turn, a neighborhood doesn’t necessarily have to improve in order for values to go up, all that is needed is for the number of distressed properties to decrease. Eventually, that will happen and today’s large equity captures will be tomorrow’s very large capital gains.

Easy Negotiation

Negotiations are easier. As an investor, you should try to pay the lowest price you can negotiate when purchasing a piece of real estate. Unfortunately, many people are not very good negotiators. The good news is that in this current real estate environment, you don’t have to be a good negotiator. With prices so low, you can completely avoid the back and forth jostling that can occur during the negotiation process and still come away with a great deal even if you pay full asking price. Just keep in mind that being a good negotiator is what sets apart the professional investor from the amateur. So rather than avoiding negotiations all together, go ahead and try honing your negotiation skills.

If you end up getting a better deal than you expected, then you win! If you lose out on a deal, don’t sweat it. Learn from your mistakes, ask your real estate agent why negotiations fell through, ask for advice on how you could have made the deal work out, lick your wounds, then move on to the next property. There are enough properties for sale at a great price that if you miss out on one deal, it’s not a big loss. Just like the bus, there will be another one in a few minutes.

Demand for rental property is up. The news continues to report that foreclosure rates are still on the rise. The third quarter of 2009 saw
record high foreclosure activity record high foreclosure activity. What does that mean to the real estate investor? What it means is that a one time home owner has been forced to become a renter. Those families who have lost their homes to foreclosure still need a place to live. They don’t just disappear, they go into the rental market. This means that thousands of families are in need of clean, functional housing that is provided to them by the real estate investor.

Servicing debt is still cheap. Because mortgage interest rates have been low for a few years now, it is easy to consider these low rates as the norm. But if you look at historical rates for a 30-year mortgage you will realize that interest rates are actually lower now than they have been compared to years past. The web site Home Finders, which graphs historic trends. shows the 2009 entry as having the lowest rates for a 30-year fixed loan over the period dating back to 1983. It is cheaper now to borrow money for real estate purchases than it was ten years ago, twenty years ago, even thirty years ago. Combine low property prices with low interest rates to borrow money and that makes for a winning combination.

Although it is cheaper to borrow money to purchase real estate now than it has been in decades that does not mean that it is easier to qualify for that loan. Two years ago loans were very easy to obtain and lenders approved countless thousands of loans that should not have been approved. Those thousands of loans have become thousands of foreclosures. Remember again that those people who have had a home foreclosed on them still need a place to live, but they now cannot qualify for a home loan. That means they will rent a home or apartment from an investor, hopefully from you.

Income Streams

It’s always a good time to make more money. One important principal to remember when buying investment property is that you are not spending money just for the sake of spending money, you are spending money to buy an income stream. It’s like buying a miniature business. If you use the numbers from the example above, then you will have an extra $350 a month in passive income. That comes out to an extra $4,200 in your pocket in a year. Accumulate just four such miniature businesses and you could be adding over $16,000 to your bottom line. Tough economic times are an especially good time to add to the bottom line.

Naturally you have to do your due diligence to make sure that your business will generate income. What does it mean to do your due diligence? It means research what a property will sell for after you have made all the necessary repairs by doing a good CMA. It means finding out how much it will cost you to do the necessary repairs. It also means finding out what the house will rent for when you put a family in there, and ensuring that the rent is enough to cover the expenses you will incur to own the house; expenses such as servicing the debt. In order to find out all this important information you will need to access recent home sales information, property tax information, and get a good faith estimates from reputable lenders.

It’s always a good time to pay less tax. Real estate is a tax shelter, plain and simple. I try not to look into the reasons why that is, and I don’t overly concern myself with tax law; that’s why we hire attorneys and CPA’s. The way I look at it, the people who make the laws own a lot of real estate and always have. They make the laws to favor their financial situation. Mortgage interest is tax deductable. There is the depreciation that you can deduct even though your property is actually appreciating over time. Property taxes are deductible from your income. The beauty of that fact is that you get the tax deduction even though your tenant is paying the tax bill through their rent. The list of things you can deduct goes on and on. I am a firm believer that we can pay a third less taxes in this country and still enjoy the exact same standard of living. And as it turns out, I’m on a one man mission to prove myself right. Won’t you join me?

Act Now!

The time to act is now. Although it is true that patience is a virtue, it is also true that very often in life the time to act is now. I was asked just this week if now is a good time to invest in real estate. I get asked that question often. When I tell people that it is a great time to invest, they always seem surprised because the news says that the real estate market is down. Then I point out to them the same reasons I stated above, at which point they tell me that it sure makes a lot of sense.

Today’s real estate market is not just a typical “time to act”. It is an atypical market with so many factors making it the most favorable time in decades to be a real estate investor. Don’t let the bad news on TV and in the magazines and newspapers scare you. The news says the real estate market is down and foreclosures are up, and consumer sentiment is down, and unemployment is up. That just means that prices are down and demand for rental property is up, because fewer people can buy right now.

If you have been patiently sitting on the sidelines, not sure if you should make the move to start investing in real estate, you’re in luck because your number has just been called. Get in the game! If you’re not sure how to get in the game, then go find a coach. I do wish you well.

Comments

  1. Victor Sifuentes says

    One thing that is not being considered here is the real potential hit in the employment base in the Houston area. Many large oil and gas companies are planning large lay offs in the coming months. If this comes to pass, the housing picture will become as bad here as it is in other areas of the country. Some have hinted “real unemployment” could approach 25% here in Houston. It is not unreasonable to assume a 25% hit in real estate prices from current levels. Buyers should make sure to purchase 40% below current “market prices” to ensure not becoming upside down in the downdraft to come.

  2. As a Lifestyles Realtor, I am seeing exactly what Alfonso suggests in this terrific article. Prices of the properties are lower, yet rents are still high. By buying now the investor captures extra equity and enjoys the increased cash flow. This is across-the-board, not an isolated example.

  3. Victor, thanks for the input. That’s a great point to bring up about unemployment. One of the concepts we teach here at Lifestyles is to offer the best product at the best price. That way you get the greatest number of prospective tenants. Thus, even in times of high unemployment, because you offer the best product you give yourself the best chance of always having a tenant in place. Also, if you buy at a deep enough discount, as you say, then you will still be shielded from a further dip in prices.

    On the bright side, as a geologist myself, I have several friends in the oil and gas industry and the word I got just today from a friend is that layoffs have not only slowed, but that hiring has actually picked up again. Let’s hope this is indeed the case.

  4. Elijah Murray says

    Great article. I am new to the real estate market and am learning as quickly as I can. If I can muster enough for a down payment by April, I would like to either enter a rent to own program (me being the landlord) or buy a small rental property. I’ve been doing a lot of online research, but sadly still cannot find an answer to my query: how do I invest as a teen?

    I am 18 years old, and know that now is the best time to invest. I have spoken to a few financial advisors (all of whom suggested mutual funds), gone to local real estate meetings, read several books and am setting up a meeting with an agent to see what advice he has to offer.

    I believe that my biggest obstacle is credit. If I want to be approved for a mortgage, I need an established line of credit (or a cosigner) which I’m not sure I can build quickly enough. I applied to for a couple of credit cards all of which were turned down, most likely due to the market. Going as basic as possible I applied for a secured credit card but I feel that this will take too long.

    I am open to any suggestions, advice etc. and would ever grateful. Please let me know by responding here, or directly to elijah.murray@gmail.com

    Thanks again!

  5. Elijah, cudo’s to you for wanting to take positive steps. When I was 19 I put $500 in the bank then took out a loan for $500 (that was over half a month’s salary for me back then, I was in the USMC). I paid it off in 2 months. Then I got a secured credit card with a $500 limit. That started building my credit. Before I knew it I had great credit, even though I hadn’t made over $15,000 a year when I was in the military and in college.

    Every financial advisor in America is going to tell you to buy mutual funds. That’s all they know because they aren’t truly financial advisors, they are mutual fund salesmen who have to obtain the title “Financial Advisor” in order to be allowed to sell mutual funds. You’re doing the right thing by exploring different options.

    Keep educating yourself, there is no real hurry. Keep reading books and you’ll learn a lot. Kick around the Lifestyles Unlimited website, there is a lot if helpful information here.

    Good luck.

  6. Amber FitzPatrick says

    This really hit home for me. “Demand for rental property is up. The news continues to report that foreclosure rates are still on the rise. The third quarter of 2009 saw
    record high foreclosure activity record high foreclosure activity. What does that mean to the real estate investor? What it means is that a one time home owner has been forced to become a renter. Those families who have lost their homes to foreclosure still need a place to live. They don’t just disappear, they go into the rental market. This means that thousands of families are in need of clean, functional housing that is provided to them by the real estate investor.”

  7. You would think these people needs some place to live. I can say that from leasing 3 sfh from November 2009 to January 2010 a big percentage of my callers were living with family and friends and a lot continue to do so. My homes are in great shape as alway and I had to come down $50.00 on each to get them rented. I had more call than ever but its the first time I had someone ask me if I had a house for $750 or $800. I do not know if multi familt rents are up or not, I just know my sfh are down.

    It is the best time to buy ever. If you can buy. There is always some way to do it, but it is not easy. It just does not seem right that you can have 780 credit scores, cash reserves and steady income, and lenders will not lend because of this or that. They should look at the fact that I have owned many houses for 5 years and never missed a mortgage payment. If I were a lender, that would do it for me.

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