With the stock market looking more and more dangerous, investors are looking for other places to put their cash. Is now the time to invest in real estate?
The short answer is: it depends.
Before detailing some scenarios, let me first say that I do not expect real estate prices to rise much over the next 5-7 years. In fact, I expect real prices will fall for the next couple or years. That goes for single-family homes, commercial property, and both large and small apartment buildings. And as long as the economy remains sluggish, I wouldn’t expect overall rents to increase much either. It would not be wise to make real estate investments, speculating that either the value or the rents will rise much in the next 5-7 years.
Real estate investing also has some very practical drawbacks: your money is tied up for a long time, you may need to invest even more money into upgrades and repairs, sometimes tenants don’t pay their rent on time, and real estate investors get sued a lot more often that stock market investors.
Despite all of these concerns, real estate investing does make sense right now for certain people and in certain scenarios.
It Depends on You
Small Investors: simply wait.
I define a small investor as someone who owns 3 or fewer properties and dreams of buying 5-10 more over the next 5 years. For this group, there is simply no reason to jump in now, versus a year or two from now. The low-end housing market is up since 2009 because of HAMP and other foreclosure-slowing programs, but now prices are sliding again. Unless you get a heck of a deal, keep your money in your mattress.
Medium Investors: pick only the sweetest cherries.
I define a medium investor as someone who already owns 5 or more properties and has dreams of buying 10-20 more over the next 5 years. This group’s overall success is less-dependent on individual properties, so they can afford to average-in. If you are going to buy 20 homes over the next 5 years, there is nothing wrong with buying a couple this year – just make sure you are getting the best values in the best locations that will attract good renters.
Large Investors: play in different markets.
I define a large investor as someone who already owns $1M+ worth of investment property and plans on buying a lot more property over the next 5-10 years. These are the semi-pros and pros.
High net-worth investors should look selectively at real estate investments, but not the same way that the medium and small investors do. If you want single-family homes, buy for cash on the courthouse steps, not retail in the MLS. Otherwise, look for smaller-medium apartment buildings that are out-of-reach for average investors.
Importantly, go slow and be cautious. There will be a lot of “once-in-a-lifetime” deals over the next 5 years. Make sure you are liquid-enough to take advantage of them.
It Depends on The Deal
An investment must have all three: a great location, great cash-flow, and a great price. Two of the three doesn’t cut it. If you buy just because you think you get a great price, prepare to be disappointed when values move even lower.
Be very picky!
Consider the following:
- Outperforming Locations. Think like this…if average prices in 7 years are the same as they are right now, not all investments will be flat. Some will do better than others and the main reason why is location. Make sure your property will outperform the market.
- Stable Rents. Better to have decent returns all the time than awesome returns some of the time.
- Prefer Multi-family: find a great 4-plex instead of buying 2-3 mediocre single family homes.
- Buy pricier homes closer to city-centers than cheaper homes further out.
- Avoid the worst suburban sprawl. The areas that saw the most new construction over the last 15 years are also going to see the most construction over the next 15 years. That’s where the land is and that’s where the builders all have huge swaths optioned-up. These areas will underperform.
Other Real Estate Investment Options
1. Medium and Large Investors, consider making passive investments in larger apartment buildings and commercial properties. There is a sweet-spot in the market with properties in the $1M-$5M range. These properties are too big for the little guys and too small for the institutions. There are a lot of properties available and very few actually selling in this range. There are great deals to be had. Even better, as a passive investor, you don’t have to deal with any of the headache of being a landlord.
If you would like more information about getting involved with this type of investing, please call me to discuss it further. I work with an investment group that has been buying select properties in this range in the San Francisco Bay Area and new investors are always welcome. Minimum investments are usually around $50,000, with an annual dividend and 7-year payout.
2. Invest in rehab projects. Basically, partner with successful property-flippers by funding them. Not only could this increase your annual returns to 20-30% or more, but your money isn’t tied up for very long – typically 6 months or so.
If you can find a team with a track-record and market-savvy, the risk is minimal for the reward. If you have always wanted to be a successful property flipper but don’t have the time to do it right, consider getting involved this way. I’ve been working with a successful group of property flippers for the last 3 years. We have a strong track record and are always open to new investors. Call me at 925-212-2908 for more information.