The economic news continues to be grim. The equity markets have been in free-fall. Daily drops of "only" 300 points are heralded as a positive. The credit markets remain frozen. And more money is chasing commodities and government bonds, pushing yields on those investments ever lower.
One bright spot in this debacle? Oil prices have dropped, leading to dramatic price declines at the gas pumps. So there is SOME good news for the average American.
But what to do if you would like to make up some of that dramatic value decline in your stock portfolio?
I suggest you consider investing in income-generating residential real estate. Whether that means your "first" real estate investment, perhaps a small, modestly priced, single-family home, or your 50th, in major multifamily properties, there are some amazing opportunities.
Please note, I am absolutely not talking about speculative real estate investment, like building custom homes for resale, or "flipping" homes for quick cash. Leave that to the professionals and the risk-takers. But if you have cash to spend, and a willingness and ability to invest time and/or capital up front, income-producing residential real estate might be the best game in town. Here are the Top 10 reasons why:
- There is a glut of inventory. Supply far exceeds demand. The basic laws of economics mean this favors the buyer.
- Even in a down market, some people have to sell. I crassly call this the "Three Ds" - death, divorce, disease. Add relocation to this list and you have the basic reasons for "irrational" selling, i.e., selling in a down market.
- Investor-buyers evaluate real estate differently, and can identify overlooked opportunities. They are unemotional buyers. A home that doesn't appeal to the homeowner-buyer, who needs to L-O-V-E a property, could be a GREAT rental. If you can identify these undervalued properties, you can essentially "buy" equity.
- Any necessary repairs or upgrades may depress a property's price artificially below what I call the property's "intrinsic value," what the home should be worth in good condition. If you can do repairs or upgrades, you can add value exponentially greater than the out-of-pocket cost.
- Real estate is still a highly leveraged investment. In real estate, you need invest only 5%, or 10%, or 20%, of an asset's value in order to control that asset and generate income.
- Foreclosures and job losses mean there are more deals, and even "steals," out there.
- The macro-economic picture should mean a higher demand for rentals, as people are pushed out of homeownership by foreclosure or job loss, or delay homeownership to save a down payment.
- Real estate remains a tangible, appreciating asset. Get a renter into a property and have that person pay to build your equity.
- Income-producing real estate provides substantial tax benefits, including depreciation write-offs.
- Income-producing real estate can be sheltered from capital gains tax liability in your lifetime through Section 1031, or "Starker," tax-deferred exchanges. Your beneficiaries get a stepped-up basis in the property when you pass.
Now, real estate investing is NOT for everyone. If you do not have the time or the inclination to deal with tenant issues. or the money to hire a professional property management firm to deal with those issues for you, rental real estate may not be for you. But if you have always wanted to give real estate investing a shot, and you have significant cash reserves, there are some amazing opportunities out there. Give me a call. I'd be happy to help you. [;)]
P.S. No matter what, USE AN EXPERIENCED BUYER'S AGENT who knows how to evaluate income-producing property! NOT your sister's best-friend's Mom. No offense to your sister's best friend's Mom, of course.
