High prices, higher interest rates, rising inventories and skittish buyers have driven speculators from the marketplace, but some investors are here to stay. While it's no longer possible to flip a home to another buyer at a substantial premium, perhaps even before taking possession, it's still possible to make money in real estate.
Policymakers such as Federal Reserve Chief Ben Bernanke and David Berson, chief economist for Fannie Mae believe that investor involvement in housing will continue to recede, causing the housing market to soften further, but the numbers suggest otherwise. Investors, as defined by the National Association of Realtors, as non-occupying homebuyers, were as much as 20 percent of homebuyers in 2005, the biggest sales year on record.
Sales in 2006 were still the third best on record, yet the precipitous 17.3 percent drop in volume from the all-time high achieved in 2005, (the largest decline since 1990) suggested that all investors had fled the market. Price gains were anemic, rising 1.1 percent to $222,000, from a median price of $219,600 in 2005, so no longer were investors looking for quick equity gains.
The fact that housing sales are still in recent record territory suggests that investors haven't necessarily fled the market. They may simply be changing to a longer term buy and hold strategy.
It's still a good time to buy a home, improve it and sell it at a profit. Why? Homes in move-in shape are always in demand by occupying homebuyers who wish to take advantage of tax benefits, neighborhood amenities, and the other joys of owning their home.
But are you up to the task? Do you have what it takes to be a real estate investor?
"One of the advantages of real estate can also be a disadvantage," says David Reed, author of Mortgage Confidential: What Your Lender Won't Tell You , Amacom. "It's not a liquid asset. You can't get your money out of it as easily as you can your ATM. If it's a stinker, you have to sell it and that takes time and it takes money."
Real estate investing needs commitment, he says. "You need to decide if it's right for you. Lots of people make money at it and love it while others quickly find out they'd rather have their teeth drilled on than buy investment property."
Becoming a real estate investor is simply choosing how you are going to spend your time. You have to know yourself and what you're willing to do and not do.
When you buy a home for investment, it's really like any other enterprise -- you have to choose whether to do it full time or part-time. Keep in mind that investors can wear a lot of hats -- they're real estate agents, property managers, contractors, handymen, landlords, neighbors, and community builders all at once.
The most painless way to invest is to buy a property, live in it yourself for two years, and then rent it, and sell it within three years so you can skip paying capital gains on it (up to $250,000 a year if you're single, and $500,000 if you're married.) Or you can take out an equity loan, and use the money to buy a second property. This is an easy way to get started -- one out of ten homeowners owns a second home.
If you have a full-time job, it's going to be a logistical challenge to find properties, fix them up, and rent them or sell them for profit, because your time is limited to weekends and nights, so the only solution is to put others on your team to do the work for you -- Realtors, contractors, and property managers. That means you have to be better about cost analysis because the more outgo you have, the less room for error. You won't make nearly as much money with a team, but there's a real advantage to working that way. You'll build loyalty with people who can help you again and again, and you won't have your investments bleeding over into your day job and putting it at risk. If you do business this way, you have to keep your expectations reasonable about what you are going to make.
If you plan to work on investment properties full time, then it makes sense to be more hands-on, keeping in mind that this should be fun and profitable. You'll be better at some parts of the job than others. You may be great at identifying properties, but not so good with a hammer. In that case, get a real estate license and resign yourself to hiring a contractor. Be honest with yourself. It's okay not to like some parts of the job, but the price is that you have to be willing to trust in and pay others to do the parts you don't like to do.
You should think about what kind of investments you want to make and stick to that as a niche. If you love to use your hands and you're good at it, then homes that need extensive remodeling are obviously a good niche for you. Broken down homes scare homebuyers, but they're your opportunity. If you don't like a lot of repairs, but don't mind some cosmetic work, you might consider condos or townhomes, because the exterior maintenance is typically handled by an HOA. As you build your expertise, you will find you have more of an instinct for whether certain properties will work for you or not.
One reason why condos made such gains in the last five years is that many were new, they didn't require investors to put in any sweat equity, they were in demand by homebuyers (more singles, empty nesters,) and they could be flipped easily. But that's speculation, not investing.
As an investor, you have to think longer term. Do the local demographics support the kind of property you want to buy? In other words are jobs coming into the market that are going to the people you think would like your properties? Is the neighborhood turning in your favor with improvements changing things for the better around your properties? Does the property you want to buy meet your criteria for work needed and the amount you can get in rents?
If you think it through, you'll come to terms with your own tolerance for risk, based on your own strengths and shortcomings. But don't let the shortcomings bother you -- simply plan to hire someone else to shore them up.
