If you’re like me you’ve probably taken a beating on any and all real estate that you may own. For me, that makes it more difficult to invest in real estate now than before the downturn. That’s because when my home and investment property fall by 35 and 50%, respectively, it makes me feel both trapped and broke. Most of my equity has disappeared and along with it a substantial amount of what I consider part of my wealth.
However, this analogy is similar to saying that you shouldn’t invest in the stock market after it crashes. On the contrary, those are the best times to invest. You know it and I know it. And that’s why I can sit here today and write an article about why you should invest in real estate today.
And if you are a new real estate investor and haven’t suffered by drops in your assets, then it is perhaps an even better time for you to invest. Now, as the title suggests, I have seven reasons why you should invest in real estate today. They may not all turn out to be true, as bad things can continue to happen for a long time, and some corrections take decades to unfold, but these are the reasons why I think you’ll be safe if you start your investment today.
Real Estate Prices Are Low
As an investor, this fact is pretty obvious – prices on homes and other assets are low. At least they are much lower than they’ve been in over a decade. If you account for the past ten years of inflation, they are even lower in real dollars. Prices in many areas have fallen over 50%. In most areas, they have fallen at least 25%, and in only very few places have then fallen less than 10%. That means that no matter where you live right now there’s a good chance that you can find an investment at its lowest price in years.
Compare this to the stock market. Although it takes longer for real estate cycles to work their course, real estate prices react somewhat simlar to stock prices. As the economy continues to grow and as the stock market rises (assuming it does), people will want to move more money into real estate, meaning higher future demand and higher future prices. Also, the home building index is currently at historic lows right now. That means that new homes haven’t been built as quickly as people need housing. This is helping existing home prices by reducing the amount of housing supply on the market.
Mortgage Rates Are Ultra Low
And then there’s mortgage rates. Assuming you have good credit, you can get a loan on a first home for as low as 4 percent these days. On an investment property, still below 5 percent. If you include the fact that inflation has been close to 3%, you could say that the real interest rate on a mortgage is only 1%. And if you take off the tax benefit of deducting mortgage interest from your taxes, you could even argue that the real mortgage rate is zero, or negative.
Rates may remain low for quite a while, but almost everyone agrees that they won’t go much lower. In fact, they can’t go much lower. Thirty years ago, rates were over ten percent on mortgages. Ten years ago, investors couldn’t believe that rates were only 6%. Taking advantage of low interest rates on your loan is another good reason to buy real estate now.
People Can Afford to Buy Again
Remember the late 1990s and early 2000s, when nearly everyone could afford to buy a primary home? Well, they couldn’t really afford to. First of all, home prices were historically high at that point. But because interest rates were low, more people could afford the monthly payment. That meant that there were more buyers than ever. Then enter the new types of loans and loan products. Suddently, interest only loans and adjustable rate mortgages increased from less than 2% of transactions to as high as 30%. Monthly payments were lower and lower and lending standards were completely comprimised. People were being given (and taking) loans that they couldn’t afford on houses that they couldn’t afford.
Ten years later and the banks have tightened their lending rules, housing prices have fallen, and new homes are once again affordable to buyers. Another way to look at affordability is to look at the Fiserv Case-Shiller price to income ratio, which divides the median home price by the median income. In 2005 the ratio was over 4. That means that the average family buying a house was paying four times their annual income to purchase the house. Today, that ratio is around 2.6, which is once again the long term average of 2.8 times.
It’s a Buyer’s Market
A buyer’s market is created when there are more sellers than there are buyers. This is typically a result of supply and demand. During the boom days in the early 2000s, when people were heavily speculating and investors would line up to buy condos (yes, they called them condo lines) sight unseen, demand for houses was high. In fact, so many ordinary people turned into speculators and investors that the housing market couldn’t build supply fast enough. During that time, the supply and demand made buying a home a sellers market.
Now, with lower prices and millions of foreclosures and delinquent accounts in the queue, and with the lowest new home production in decades, the supply and demand has changed. Now, supply is high and demand is low. All the people that defaulted or got burned by the last market are no longer buyers, in fact, many are sellers. This new dynamic has completely shifted the supply and demand to now be a buyer’s market.
You can see it in everyday transactions or if you check with your real estate agent. Houses typically sell for less than what they are listed for. That’s because buyers know they have a good chance of getting a property at a lower price. And since the real estate market changes very slowly (compared to equity markets), it is likely to remain a buyers market for quite a while.
Rents Are Higher Than Ever
If you’re investing in real estate, chances are you’re going to rent out the property. Whether you invest in single family homes, duplexes, townhomes, condos or even apartment buildings, rents have gone up at the same time prices have fallen. That’s because many one-time owners have turned to, or been forced to turn to renters. Anyone that went through a foreclosure or had delinquent payments on their loan have been hit with poor credit and are no longer eligible to buy a home. That makes them renters. Also, because of all the fear generated by the real estate market, many people that could probably afford to buy a home decide to forego the risk and rent instead.
All of these extra renters add to the demand for rent. And because housing production has slowed, the supply demand ratio for rents has caused rents to steadily rise. Higher rents mean more income and higher prices for your real estate investments.
There are Lots of Foreclosures to Choose From
Believe it or not, the majority of foreclosures have not even hit the market yet. That’s because banks and regulators have been extra slow to foreclose and sell homes from their portfolios. So many lawsuits were brought against banks early in the downturn that most banks stopped processing foreclosures until they knew what the new laws would be. That means that there are hundreds of thousands of foreclosures still in the works. Furthermore, I saw a stat last week (can’t remember the source) that claimed that there were an additional 2-3 million homes that have delinquent loans but that are not in foreclosure. That means that there are a lot more foreclosures coming.
What does this mean to you as an investor? While it could mean more drops in home prices, it means that you are more likely to find a good deal on your purchase. While foreclosures aren’t always good deals because they are being sold by a bank, finding distressed sellers may be an even better way to get a good deal on your investment property.
Owning Real Estate Still Offers Great Tax Benefits
The final reason that real estate is a good investment is because of the excellent tax benefits. When you own a home, the mortgage interest is deductible and can save you hundreds or thousands of dollars a year on your taxes. When you own an investment property, your mortgage interest, building depreciation, repairs, maintenance, management costs and even your home office costs can be deducted against your income to produce very attractive tax benefits.
There you have it. These are seven great reasons to invest your money in real estate today. Have any others, or want to point out something I left out? Feel free to comment below.