Is Now the Right Time to Buy a Real Estate Investment?
We all know what has happened to real estate values over the last five years. Many homeowners who bought at the top of the market have been devastated by depreciated character values. However, we should remember that the dominant cause of this decline was a greatly overheated market. It truly spiraled totally out of control. In contrast, those who bought their similarities prior to 2000 had realized enough equity to weather the storm and their real estate is continues to be a route to financial security.
Every change in economic conditions affecting real estate creates a new opportunity for financial gain. If you currently own your home, this may be a great time to buy a residential rental character. For those who are in a position to make the 20% down payment required by lenders for investment character, all of the other elements are in play for a successful buy. Interest rates are low, character values are down and all of those homeowners who couldn’t make a go of it have produced a very strong rental market. There are bargains to be had. Foreclosures, short sales and otherwise desperate homeowners have produced an exceptionally fluid buying ecosystem.
In years gone by, the axiom was “if you can rent it for within a few hundred dollars of the mortgage payment, appreciation will take care of the rest”. Well, that may or may not be true today; at the minimum for the immediate future. If the purchased character can be rented for close to the monthly payment, short term appreciation is not the dominant concern. After all, you buy rental character for long term gain. With today’s low interest rates and a substantial down payment a rental character purchased at the right price and the right location should produce a positive cash flow. Rental rates have remained stable and already increased during the downturn and that likely to continue for the foreseeable future.
Although this one is by far the worst slump since the great depression, we have experienced downturns in the real estate market before. In fact, on average, we have had declines in character values every seven years. Assuming we can return to a consistent growing economy, history will almost certainly repeat itself and substantial appreciation will occur. There are many factors that determine character value. Inflation and supply vs. need are the dominant factors. It is very improbable that we will ever see zero inflation. If inflation dictates that a home builder has to pay more for materials, he must sell the home for a higher price or stop building. We keep making more people but we can’t make any more land so when need is greater than supply appreciation occurs.
This an over-simplification and does not factor other economic considerations but over time it is probable that well located real estate in growing communities will show substantial increase in value.
In overview, everyone should diversify their investment portfolio and today’s real estate market provides a window of opportunity. Be careful and remember the old axiom “The three criteria for buying real estate: location, location, location”.