Real Estate Investing: Do It Now!

Despite a weak overall market, investing to rent is a solid option

A slew of recent mixed housing reports continues to befuddle investors — and would-be home buyers — as to whether the housing market has bottomed, and where it’s headed in the immediate future.

Just consider some recent reports: Housing starts were down, yet building permits were up; foreclosures rose month-over-month (keeping “shadow inventory” high), but were down year-over-year; closed sales were down, but median prices rose.

How are we to interpret all this confusing data? Is it time to buy a home yet, or should one continue to rent? Is now a good time to buy investment property?

Despite the conflicting overall statistics, the worst of the decline may be behind us. I’m anticipating a long, drawn-out L shaped bottom, in which prices and interest rates remain depressed, while weaker demand than in previous cycles will keep housing from gaining any real traction.

Most important, without a much stronger labor market that puts millions of Americans back to work, real estate will limp along. Other long-term drags are tougher lending standards and a general mistrust of home ownership among the young.

But do all of these negatives mean one shouldn’t buy a home? On the contrary, I still believe in home ownership, for several reasons:

  • With prices and interest rates as low as they are, buyers in many areas can now get a home with a 15-year, rather than the traditional 30-year, loan. This means in as little as 15 years, one can own a home mortgage-free for the rest of your life.
  • In areas where taxes are based on sales price, property taxes are considerably lower now than in previous years. Plus, 39 states have homestead exemptions, in which a portion of the appraised value isn’t taxed and tax increases are capped at 3% a year.
  • Renting a home garners no equity. Renters simply pay off their landlord’s mortgage, taxes and insurance (see below). Fifteen years from now, a renter will still have zero equity, while the buyer with a 15-year loan has earned full ownership.
  • Home ownership isn’t just about the numbers. It’s about being able to paint your walls purple, plant a garden, build a deck, add a pool or anything else that you choose to personalize your iving space. Renters face severe limitations in that regard.
  • According to real estate website, buying is now a better deal than renting in 98 of the largest 100 metropolitan areas. As the demand for rentals has increased in recent years, renting costs have increased as home prices have declined.

Positive Cash Flow — and More

Naturally, that last point has led to a large increase in investors buying rental properties in recent years. The decimated values of foreclosure and other distress sales, coupled with low interest rates and higher demands for rentals, present real estate investors with the best opportunity to prosper in years.

It’s not uncommon these days for cash investors to net returns in the high-teens, and even investors taking 15-year loans are able to generate positive cash flows each month. Contrast that with the market peak of 2006, when investors banking on unsustainable appreciation trends were lucky to break even each month with 30-year loans.

Here’s a real-life example: A foreclosure I purchased in 2010 for $80,000 has a 15-year fixed loan at 5.125%. My total principal, interest, taxes and insurance is $654 a month, and I collect a monthly rent of $980! The house is still worth more today than my purchase price, the tenants have already paid off about $6,000 of the principal and I’ve collected over $7,500 of cash flow in about two years.

Not a bad return on an initial outlay of about $27,000 for down payment, closing costs and repairs.

So the economics of owning real estate are improving, and that trend should continue for several years. Investors would be wise to ignore the inconsistent data, and instead focus on the pure numbers. Right now those numbers are suggesting that owning real estate is still the superior way to build wealth.

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