When the bear market mauled Wall Street last week, investors bullish on real estate charged the podium of rhetoric to remind investors that real estate would not have left them licking their financial wounds.

Experts caution, however, that real estate investments are not a panacea and each one of them comes with a certain level of risk.

There is however, a basic consensus -- buying a home, or two is hard to beat because it provides layers of "investment" potential. It's a highly leveraged investment (you purchase a lot for relatively little up front cost) it's physical shelter, it's shelter from taxes and, when equity grows, it's financial shelter from the kinds of personal economic disaster hitting some households today.

In any event, experts say, investment fundamentals always apply -- investments should be long term programs based on specific personal goals; investors should use the dollar-cost averaging approach to financing investments; investors should allocate money spent on investments based on goals and investors should balance risk with diversity.

Also, whenever possible, buy low, sell high.

"I have been interested to note that over the recent months, I'm hearing more and more people say they are giving up on stocks and investing in real estate. Just as with the public fascination with stocks in the late 1990s, some people seem to mistakenly believe that real estate does nothing but go up. I think that both real estate and stocks are good long-term investments. Selling stocks now (low) to buy real estate now (high) is potentially foolish," says New England personal finance counselor Eric Tyson.

"And one of the biggest mistakes that I see people make is to rush into financial decisions without considering what is really important to them," said Tyson, author of "Investing for Dummies" (John Wiley & Sons, $21.99) and other personal finance tomes.

Last week, the Dow tumbled to just above 8,000, down 20 percent for the year. The Standard & Poor's 500 index sank below 900 and is down 27 percent this year. And the high-tech stock index, the Nasdaq composite, tumbled to just above 1,300 -- down 35 percent this year. Earlier this week the markets continued to slide, albeit at a slower rate.

Investment shelter

Meanwhile, money is pouring into real estate investments.

Since the beginning of the year, $2.41 billion has flowed into real estate mutual funds, according to AMG Data Services, compared with only $307 million in the same period a year ago and shares in real estate investment trusts (REITs) have climbed 11 percent this year.

Perhaps the biggest real estate investment is happening at home.

The National Association of Realtors forecasts the national median for existing homes to rise 5.5 percent this year and the new home price is expected to surge even more, 7.4 percent. Sales of new and existing homes hit $522 billion year-to-date, up about 16 percent from $451.3 billion a year ago.

That's partly because investors burned by Wall Street are looking to capitalize on Main Street, but some experts are concerned those investors are turning to real estate at the top of the market. Experts warn, the real estate sector of the economy, like the stock market, is also a bubble big enough to burst.

If it does, investors heavy in mutual funds and REITs that invest in stocks of home-builders and apartment complexes could take it in the wallet if interest rates rise and slow the pace of home sales.

Those who own one or more homes, however, could easily weather the storm, provided they stick to solid investment principles.

"I don't think that buying a house is more important from an 'investment standpoint' than buying stocks, etc. Buying stocks is strictly an investment, as opposed to housing which is an investment and it provides other benefits such as shelter," says real estate investor Richard Calhoun, who is also the real estate broker/owner of Creekside Realty in San Jose, CA.

"You might buy a house even though it is not a good investment, because of the secondary benefits. But you would not buy a stock if it was not thought to be a good investment as there are no secondary benefits. I'm not sure home ownership is a hedge against the stock market, but diversification is a fundamental rule in investing," he added.

Purely from an investment standpoint, those who buy homes typically must give it plenty of time to season before realizing a return.

Realty risks

"Buying and reselling real estate uses nearly 10 percent of the sales price. The market must appreciate 11 percent just to break even. Typically two years is not long enough to see that level of appreciation," Calhoun said.

For that reason and others, experts also warn green investors about trying to move in on rental housing -- even in the form of second homes and properties of four units and less.

"The barriers to entry are very high. Banks generally expect at least 40 percent equity for multi-family deals. That's a lot of money to put at risk. The key is paying the right price up front, having the management and financial wherewithal to manage the property effectively, and selling at the right time," said Kathy Thibodeaux, chief executive officer at the Tri-County Apartment Association in San Jose, CA.

Tax considerations also come into play for rental property investors.

"If the property owner or owners have a modified adjusted gross income (AGI) of over $100,000, the amount of rental loss will be reduced. Modified AGI is the AGI without including the rental loss. The phase-out begins at $100,000 and is completely phased out when the AGI reaches $150,000. Unless the property owner comes in with a very large down payment, there will be rental losses for a while," says Marie Sternberger, an enrolled agent in Sunnyvale, CA.

"I am not saying that it is bad to invest in rental property, but the potential property buyer should speak with a tax professional before buying," Sternberger added.

That applies to all forms of real estate investments from buying a home to REITs and real estate mutual fund investments.

Seek professional help.

Published: July 24, 2002

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.