We all know what has happened to real estate values over the last five years. Many homeowners who bought at the top of the market have been devastated by depreciated property values. However, we should remember that the primary cause of this decline was a vastly overheated market. It actually spiraled totally out of control. In contrast, those who bought their properties prior to 2000 had realized enough equity to weather the storm and their real estate continues to be a route to financial security.
Every change in economic conditions affecting real estate creates a new opportunity for financial gain. If you currently own your home, this may be a great time to purchase a residential rental property. For those who are in a position to make the 20% down payment required by lenders for investment property, all of the other elements are in play for a successful purchase. Interest rates are low, property values are down and all of those homeowners who couldn’t survive the housing downturn have created a very strong rental market. There are bargains to be had. Foreclosures, short sales and otherwise desperate homeowners have produced an exceptionally fluid buying environment.
In years gone by, the axiom was “if you can rent it for within a few hundred dollars of the mortgage payment, appreciation will take care of the rest”. Well, that may or may not be true today, at least for the immediate future. If the purchased property can be rented for close to the monthly payment, short term appreciation is not the primary concern. After all, one should buy rental property for long term gain. With today’s low interest rates and a substantial down payment, a rental property purchased at the right price and the right location, should produce a positive cash flow. Rental rates have remained stable and even increased during the downturn and that stability is likely to continue for the foreseeable future.
Although this slump is by far the worst one since the great depression, we have experienced downturns in the real estate market before. In fact, on average, we have had declines in property values every seven years. Assuming we can return to a sustained growing economy, history will almost certainly repeat itself and substantial appreciation will occur. There are many factors that determine property value. Inflation, location, and supply vs. demand are the primary factors. It is very improbable that we will ever see zero inflation. If inflation dictates that a home builder has to pay more for materials, he must sell the home for a higher price or stop building. The older population keeps increasing, but land, in highly desirable areas, is in short supply. When the demand is greater than supply, appreciation occurs. This is an over-simplification and does not factor other economic considerations, but over time it is probable that well-located real estate in growing communities will show substantial increase in value.
In conclusion, diversification in one’s investment portfolio and today’s real estate market provides a window of opportunity. Buyers should be careful and remember the old axiom, “The three criteria for buying real estate: location, location, location”.