Are you considering investing in real estate? For a long time real estate was thought by many to be a sure winner – that is until the collapse and ongoing problems in the housing market. But if you had been paying attention, you probably would have known that investing in real estate is not a sure thing – and you might have been among those who foresaw the crash.
If you look back over time, you can quickly find other periods when prices for homes (or other classes of real estate) were inflated, and people lost money when they ended up selling (by choice, or otherwise). Of course, one thing different this time from many of the recent bubbles is that this was a national crisis, not localized as many of the problems typically are. This is part of what made the problem so severe, as many of the mortgage-based investments were constructed by creating bundles of mortgages from properties from diverse areas in order to reduce risk – the thinking being that bubbles tend to be restricted to specific localities, or at worst, regions. But this time, the problem was occurring almost everywhere in varying degrees, so the diversification ceased to work.
In spite of all of this, you still want to try your hand at this. After all, prices are down, so there must be opportunities. So how do you avoid a train wreck? First – just as you would do with other investments, do the research. And it doesn’t matter whether you are talking about commercial real estate or homes. In what kind of neighborhood is the property located? What are other similar properties selling for? What kind of condition is the property in? If it is a home, how well rated are the local schools? How does the cost per square foot compare with normal rates in the same general area? And so on.
But – here’s the rub. You could be looking at an area where there is a widespread bubble. So how do you deal with that? You have to look at some fundamentals. If it is a home, is it affordable for the average family that would be expected to live in this home? If not, then there is a possibility that the home is overpriced. Same thing for businesses – for example, if there is a glut of office space not too far away, then there may be an adjustment coming up. But, hey, if we had a perfect crystal ball … well, we don’t.
So at some point you have to use your judgment to determine whether your prospective purchase makes good business sense. Bottom line: if you are feeling overextended, then it might not be the best choice.
One other comment though – if the home you are looking at is for your own personal use, then you need to consider that, no matter where you live, you are going to have to pay something (unless you are living for free with friends or relatives). So then part of the equation is looking at whether you will come out ahead over time compared against your current expenses against what you might gain in equity over time. Again, if it doesn’t feel right – take a closer look. But, sometimes it is better to lease than to buy – do the math and then decide.
One alternative for investors who want to get involved with real estate but are uncertain about how to go about this is to invest in a real estate investment trust or similar security. To be honest, my own experience with these over the years has been that some have done well, and some have not done so well. But you can start with smaller chunks of your money – thousands instead of hundreds of thousands. So you can limit your exposure to a level with which you are comfortable until you have a better feel for this. One more caution – real estate investments can be complex when it comes to taxes, so keep this in mind when you are comparing alternative places to invest your money.
If you find these articles useful, please consider visiting our sponsors to help contribute to our time invested and to further development. Thanks for your kind support
No comments:
Post a Comment