Real estate has made a lot of people very wealthy over many generations. Granted, we are now seeing price falls like never before (for some). Some start to question if they should still invest in real estate.
Consider that 91% of homeowners surveyed by real-estate-services firm Realogy Corp. thought that owning a home was the best long-term investment they could make, according to the Wall Street Journal. That is what the homeowners think – but what about the experts?
According to this article (I read) , most experts expect housing prices to level out over the next few years, and then regain a more historically balanced appreciation rate of between 2%-4% per year. The tone of the article—seems to imply that real estate is not really a good investment anymore. Do you think perhaps the growth that was experienced in the past decade was not only unparalleled, but unsustainable as well? Therefore, as ROI (returns on investment) come back to realistic levels, we suddenly interpret them as “not worth it”.
I think that they left out some important facts to consider. In the article Kenneth Rosen, chairman of the Fisher Center for Real Estate at the University of California, Berkeley, advises that people should think of their own homes mainly as places to live, not as investments. In fact many experts will tell you that the house you live in is not an investment nearly as much as it is just a roof over your head.
Throughout the article the author evaluates the merit of real estate investment assuming solely that the “investment” is a person’s primary residence. Yet, when he interviews investors that talk fondly of real estate, they talk not about their primary residences, but about rental homes they own. There is a huge difference. Primary residences might not be your best investment. Rental housing however, can be an incredible investment if managed properly.
No one can predict which way prices will go, but true investors do not rely on appreciation estimates when evaluating the worth of an investment opportunity. Investors look instead at the cash flow numbers. Cash flow is something tangible, and can be budgeted for in the present and future.
Furthermore, the market drops are generally based on personal residences, not income properties. Properties that provide good cash-flow typically do not drop in price as much during market fluctuations. Dramatic price drops happen when people sell in desperation. They are forced to get out of their mortgage or other debt, so they drop the price until it sells. What motivation does an investor have to drop the price on their rental house if it is bringing in money every month? The answer is that they have very little motivation to do so, and so they probably won’t.
Investors can still make great money in the real estate market if they focus on the right things.
