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February 2008 Real Estate InvestingHave you seen ads for Real Estate seminars? Curious about what is presented there?Have you noticed that the gurus always quote from their rags to riches stories? Ever wondered how true these stories are? Finding these Real Estate investment stories hard to believe? Do you want to know if they are true? Read on and we will try to answer these questions. "Real Estate market in distress"No doubt you have seen headlines like this in your local paper or on your regular TV News show. The Real Estate market does not look at all like it was two years ago. Prices have come down dramatically and even for these lower prices the homes stay on the markets for months without getting sold.How did this all happen? Between 2003 and 2006 banks have lured home buyers into their "attractive" mortgage offerings, so-called sub-prime mortgages. Interest rates were so low that they could not be refused. During these years home prices were going up on a daily basis, so buyers of homes could sell them a couple of years later with great profits. Unfortunately the attractive conditions of the mortgage only lasted a few years after which the interest rate would be reset to a higher one which would drive up the monthly cost of the loan. However initially buyers could care less, after all they were going to sell the home with profit before that date anyway. Real Estate InvestorsIn recent years homes were selling like hot cakes in booming markets such as Las Vegas, Phoenix and Albuquerque.To whom? Were they people eager to move to these cities? Some were, but a substantial percentage did not have any intention to move there. A large number of the homes were snatched from the builders by Real Estate investors. A few pioneers in this practice told their success stories to the newspapers. "Sweet profits in just a few months". "Fat profits within days after the closing of the sale". Many other investors read these stories and caught on quickly. For a (short) while it was easy to make a quick buck in the real estate investment market. But at the height of the buying frenzy the bubble burst, which should have been predictable. First the price hikes leveled off. The real estate investors who had bought 2, 5, or even 10 or more (unbelievable, but true) houses could not sell quickly anymore, could not make their loan payments and had to drop the price or foreclose. They were soon joined by owner-occupied homes of which the owners could not afford the monthly payments after their interest rate was reset. Prices had leveled or come down. Sales had slowed dramatically, so there was no longer the prospect of selling the home at a profit. These home owners simply gave up their home and the banks were faced with a growing inventory of abandoned homes, so they had to resort to foreclosure and auctioning off these homes. See here the current situation: an ocean of foreclosure homes. What does this situation teach us?
Real estate a bad investments?Not at all, if you buy the right property at the right time and location.Real estate investments are like stock market investments. Over time they appreciate in price. Look at multi-year charts for the stock market and the real estate market and you will see an upward trend in both cases. You will make money for sure (!) if you are a long term investor. If you want to speculate short term you can make great profits, or get hurt badly in both the stock market and the real estate markets. Buy foreclosures in boom markets?Perhaps, if you look for a cheap home for yourself and have the patience and time to wait for the market to turn around. But one cannot call this an investment. An investment is only a good investment if there is a Return On Investment. If you want to buy a home to rent out, the recently booming markets are not the right locations. Many of the foreclosure homes are in the higher brackets of the market. Going rents in these affected cities will not even pay for your mortgage payments of these homes. For example a $400,000 home costs at least $2,000 monthly in interest. It is unlikely that you will find a tenant willing to pay $2,000 per month. So this would be a bad investment.Buy pre-foreclosure homes?This is one of the popular guru seminar topics.A pre-foreclosure home is a home of which the owner is behind in mortgage payments. He knows he can no longer afford the house. The bank is also aware of this. The market situation does not enable the owner to sell his house quickly enough and/or at a price that recovers any equity. Foreclosure may be unavoidable or the process has already been started by the bank. The gurus teach how to help the home owner by organizing a short sale, negotiate a low price with the bank and flip the property to a new owner without any investment by the "investor". There are multiple reasons why you should avoid the gurus' advice:
Then you will ask: "when, in what and where should I invest in Real Estate?" When? The Real Estate values have come down dramatically. Are we at the bottom? Whatever the experts say, there are many opinions and theories, but nobody knows. Truth is that if you buy today, you buy at a great discount. Values are bound to go up. If you wait with getting in, you may miss your first profit. Now is the time to start investing in Real Estate. The stock market advice also applies to the real estate market: "Bottom fishing is very difficult". Warren Buffet waits for bargains and grabs them while he can. He never waits for the bottom. What Real Estate should you buy? The opportunities for finding a golden egg are very slim. Be very careful with buying a property that you expect to bring you big profits quickly. The only way to do that is when you have a buyer lined up, so-called flipping a house. Buy the way, this is another investment method preached by the gurus. Now is the wrong time for this method. This may work when properties are scarce. In the current market anyone can find "bargains" everywhere; why would they wait for you to buy a property and then buy it for more from you?. Only fools would do that. In this market situation the only profitable real estate investment is in rental properties in the right markets. Buy a property today which will appreciate over the next few years. Let a tenant pay for the investment on a monthly basis and generate positive cash flow from the investment. Have a steady income over many years to come and sell after the market has recovered in a few years. Where to invest in Real Estate? In places where there is a good ratio between real estate value and property rents. For example purchase a house for $70,000 (interest $350 a month) and rent it out for $700 per month. This is an investment with positive cash flow. In these markets the price level itself is an additional advantage. One can spread investments over multiple objects instead of having to bet everything on a single investment of say $400,000 in states like California, Nevada or Arizona. Bowery West Want to know more? Send us an email: Enquiries@BoweryWest.com 
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