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Is it safe to invest in real estate again?

By Peter Andrew

Is it safe to invest in real estate again?

My dad worked in real estate his whole life. By the time I was 10 years old, I'd learned more through breakfast- and dinner-table conversations about the jargon and mechanics of buying, selling and renting homes than most adults ever know. Later, I spent the first five years of my working life in the business.

And yet I still get sleepless nights whenever I'm buying property. Sometimes I worry I'm paying too much. Other times I wonder why the home's so cheap. What's wrong with it? The neighboring homes look fine, but suppose one's a crack den. Is the house structurally sound, or will I discover some defect when I move in that's impossibly expensive to fix? Does the seller have good title, and are there plans to build an airport nearby or run a highway past it?

I can while away hours (usually the later ones) pondering such things when I'm buying a home to live in myself. Some people buy multiple homes they plan to flip or offer as rentals, and I admire their nerves of steel. Now, a new generation of entrepreneurs is seeing real estate as an investment opportunity, and starting to get into the market. Are they being wise or foolish?

Ways to invest in real estate

There are four main ways of investing in real estate:

  1. Buy to rent: You purchase a home and find tenants to rent it.
  2. Flipping (or real estate trading): You buy a home with the intention of selling it soon at a profit, usually having added value by carrying out some at least cosmetic improvements.
  3. Real estate investment groups: You join with others to buy condos or apartment blocks. Each group has its own rules, but a good one might pool the risk posed by periods when individual units are vacant. So you pay into a fund that covers you when the units in your name aren't occupied.
  4. Real Estate Investment Trusts (REITS): You buy stock in a traded trust or corporation that owns and rents out properties. These can have tax advantages over normal companies.

Risks and rewards

As with all investments, each of these involves a trading of risk for return. Generally, you may find yourself making more money (though putting in many more of your own hours) with either of the first two, but you're also taking a bigger chance on your bet paying off. If you're flipping, and a home proves unexpectedly expensive to restore or takes a long time to sell, it's easy to end up taking a loss. Similarly, a rental property that has a high turnover of tenants may have many months when it's empty -- and not earning.

There was a time when rapidly rising home prices generally made these minor issues. Even significant miscalculations in restoration costs could quickly be overtaken by rising market values, and easy refinancing made it simple to take equity out of a home to make it more attractive to tenants or cover income-free months. Then the credit crunch and Great Recession came, and many property entrepreneurs found themselves paddle-less in a deeply unpleasant creek.

Now, we're seeing home prices rising again quickly. CoreLogic reports they on average jumped 12.4 percent over the 12 months ending August 2013. That was the 18th month in a row in which they rose year-over-year, and the seventh consecutive one in which that growth was in double figures. So does that mean it's now safe to get back in the water of the real estate ocean?

Taking your chances

Well, it might be for some. CoreLogic's figures were national averages, and just as there are some areas of the country where prices are hardly moving, there are others where once again they're going up so fast that any unexpected problems for investors might soon be washed away by rapidly increasing home values. And even the most gloomy commentators aren't suggesting that nobody's making money in today's market. But plenty are offering warnings.

Last year, MSN Real Estate quoted the advice to prospective landlords of Mark Kreditor, a manager of rental properties for more than three decades and a past president of the National Association of Residential Property Managers: "It's going to be a hardship on your checkbook every month, and every couple years there's going to be a tenant that does something really awful, and you're going to hate it, hate it, hate it," he said. "I've never seen a better time than now to invest in real estate, and I still wouldn't do it."

Comparing investments

Meanwhile, others question whether real estate really beats the stock market as a safe investment. Writing in The New York Times on July 29, Carl Richards pointed to two factors that can make it less so:

  1. You may find yourself over-leveraged. Most people borrow money to buy investment properties, and many of those lack the resources to keep up mortgage payments if they face major repair bills or extended periods when the property is empty or tenants aren't paying. He quoted one insider who said there were many empty rental homes just sitting on the market at that time.
  2. Historically, the stock market compares well with real estate as a long-term investment.

In March, Dividend.com provided an answer to those who cite the success of big institutional investors such as Blackstone in buying up many homes for the rental market. These, the article suggested, have an inside track to sweet deals on foreclosed homes, and this provides them with an advantage denied to small investors.

Make your own calculations

Of course, you may know of a sweet deal right now that's a surefire bet. And, if you have the resources to cover the bad times and pay for major repairs, I'd be the last one to put you off -- provided you understand the risks. Indeed, I'm currently planning to buy an investment property (a cheap vacation home, just for short-term rentals) myself. Anyone know of a good insomnia cure?

Peter Andrew has over 25 years of experience writing about marketing, advertising and management. He regularly covers consumer credit card topics for IndexCreditCards.com and other personal finance publications including Fox Business, TheStreet and MSN Money. He also writes frequently about mortgages and auto loans. Peter has spent extended periods living overseas, in the UK, France and Africa. He lives with his partner of 20+ years, and wastes too much of his time on cryptic crosswords.

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