Beginning real estate investing

So why invest in real estate?

Unlike stocks, real estate isn't just an investment, but it also provides something that all people need: A place to live, to go to work, and to go to school, among others. This fact makes real estate something that is always in demand, and has shown to be one of the few investments that continues to increase in value over time. You can make money in real estate by building equity through price appreciation, in addition to earning a continual stream of monthly or seasonal rental income by investing in rental properties. And beginning real estate investing now might be the best time ever due to record numbers of foreclosures selling at fire sale prices!

Real estate property types

There are several different property types within real estate that you can invest in, and each type comes with it's own unique opportunity for profit:

• Single Family Residential (houses and condos)
• 2-4 Units (i.e. duplex, triplex, etc)
• Apartments
• Commercial property (retail, strip centers, offices)
• Land

What you invest in depends on whether you are looking for income, appreciation, or both. Do you plan to live in your investment as your primary residence, or do you want to rent it out? Other factors to consider include the geographic market you are looking to buy in, and what real estate investing opportunities are available in that market.

Is now a good time to invest in residential real estate?

I remember in around 2004 or 2005 I heard people asking if it was a good time to invest in real estate. And at that time, most of the "experts" I heard on TV or read about said "Yes!". Personally, I was a bit skeptical. There really was no doubt in my mind we were in a "bubble" (where prices rise unsupported by fundamentals), but the real question was how big of a bubble were we in, and how high would it continue to go? The one thing I had learned from my experience investing in technology stocks in 1999, was that bubbles do eventually pop, and sometimes the consequences can be quite nasty. So although I owned real estate at the time, I really couldn't figure out why the experts would think that buying into a bubble was a good time to buy. Couldn't they see what was coming? Not only did I not think it was a good time to buy, but I thought it was a very good time to sell, which I did, in 2006. Although I didn't make a huge amount of money, I did make enough so that it made the investment worthwhile.

Anyway this brings us to where we are today. In the US, housing prices have dropped by as much as 30% to 40% off their peaks in some areas, and they are still falling. In my opinion, this is the time when you want to start thinking about investing in real estate, especially if you are thinking of beginning real estate investing now. Real estate is cyclical (meaning the market goes in cycles based on supply and demand), and right now we are coming off a period of record high demand (or maybe hyper demand is a better word!), and prices have stopped appreciating. Not only have they stopped appreciating, but they are falling, and hard. The reason for this is that unlike a normal supply/demand cycle, there are a record number of foreclosures literally being "dumped" on the market at fire sale prices, which results in rapidly declining market values. For those who don't know, a foreclosure is when the homeowner stops making their mortgage payments, the loan goes into default, and the bank starts the process of repossessing the home. This legal process is called "foreclosure".

So why so many foreclosures?

Well, one of the features you tend to see in real estate boom cycles is relaxed lending standards from banks and mortgage companies, due to increased competition for mortgages fueled by the demand. What this does is allow people who might not normally qualify for a mortgage in leaner times, to qualify. While this is normal, what isn't so normal is that in the recent housing boom you had a large increase in loans to "subprime" borrowers (people with poor to very bad credit), using financing options like ARM loans (adjustable rate mortgages), interest-only loans or loans without verification of income or other assets. You also had a good number of speculators and "flippers", who were buying properties with no other intention than holding on to them for a few months and then reselling them for a higher price. Add to this the astronomical increase in prices (some areas of the country saw 100%+ increases in home values in just 2 or 3 years), and you had a recipe for disaster.

How low will prices go?

While nobody can say for certain how low housing prices will go, the housing market will stabilize eventually and if history is any guide, prices will recover. And, with prices already down 30%-40% off their highs in some areas, much of the speculation premium that worked it's way into the market 3 and 4 years ago is well on it's way to working itself out. Where the opportunity lies is finding substiantually below market properties that are owned by banks (called REO properties, or "real estate owned"), or by homeowners or investors in foreclosure who need to sell their properties as quickly as possible.