Buy Real Estate Now – Or Maybe Not

real-estate-market I’ve been a professional writer and business consultant for over a year now, but many people still remember me from my financial advisor days.  So, I get plenty of questions about investing, the stock market, and real estate.  The number one question I get these days, is, “Should I be buying real estate now?”

The answer?

Yes, if you need a new house.

Real Estate Investment Cycles are Long

The funny part about all of this to someone who has been “on the inside” is that these are the very same people who refused to have anything to do with the stock market following the Internet bubble of the late 1990s.  While I patiently tried to explain to them that buying low and selling high meant buying now, when things looked at their worst, they shook their heads and said they were going to do something else. 

The same thing about the stock market holds for all investing.  Buying low and then selling at a higher price is how you make money.  But, here is the thing everyone seems to have forgotten, or maybe they just never knew.  Real estate market cycles take much longer than stock and bond investment cycles. In other words, the time from bottom to top (and vice versa) is much shorter in the stock market than it is in the real estate market.

This is not true, but for example, if today was the bottom of real estate prices and the bottom of stock market prices, and if both markets are headed for 25% gains, the stock market will be up 25% way before the real estate market will be up 25%.

How do I know?

History. Facts. Reality. – Take your pick.

Real Estate Bubble – Stock Market Bubble

There is a reason people keep calling the real estate market of the last few years the real estate bubble.  Just like the stock market bubble of a few years prior, it was an unsustainable, and phony rise in real estate prices.  Prices were driven up by a variety of factors, all of which led to increases that were too quick and not supported by the fundamentals.  Just like in the stock market bubble.  If you are intelligent, you don’t count on 50+% up years for the stock market any more.  Similarly, if you are intelligent, you don’t count on 20+% up years in the real estate market any more either.

What can you expect from the real estate market?

When the price increases do come, numbers like 5% are much more common in real estate than numbers like 10%.  A little math is in order.

If you buy a $200,000 with 5% down (good luck getting an investment loan like this anymore) that means you will pay $10,000 out of pocket.  We’ll ignore closing costs, but they could be a thousand dollars or so.  If your real estate goes up 5% starting next year and keeps going each year thereafter(unlikely) then, it will be worth $210,000 at the end of 2009, $220,500 at the end of 2010, and $231,525 at the end of 2011.  That is a $31,525 profit in raw numbers.

Now, real estate cheerleaders will point you toward the math of $31,525 from a $10,000 investment is around a 100% per year return.  Of course, the devil is always in the details.

Your monthly payment on that $190,000 mortgage at 6.0% for those 36 months is $1,139 for a total of $41,004.  Some of that pays down the mortgage, but thanks to the way amortization works, those first few years are mostly interest.  At the end of year three, you will still owe around.$182,500.

So, the real math is $10,000 investment (down payment) + $41,000 in payments = $51,000 total investment.

$182,500 remaining mortgage value sold at $231,525 = $49,000 profit.


And we haven’t even included property taxes yet. 

Right about now, someone will mention the mortgage deduction, and yes, there is some value there.  Rough math suggests that if you are in the 30% tax bracket then you would have saved around $10,000 in taxes if you deducted the mortgage.  Of course, if we are going to get detailed, there is also possible capital gains taxes, maintenance, upkeep, repairs, real estate commissions and so on.

The next argument involves renting the house to pay the mortgage.  The counter argument is that there are costs to renting a property, it might sit empty for some number of months, and the taxes all change when you rent a property.  (You can’t claim a home as your primary residence if you are renting it out.)  Again, there are a million ways to slice this, but no matter how you do, this is not a no-brainer.  And, no matter how you slice it, the same arguments being made now for real estate are the arguments made for stocks. 

Keep in mind that I am not your stock broker or your real estate agent, so I don’t get anything out of it either way.  Just don’t give in to the feeble minded tricks that social conditioning creates.  If real estate is a good investment at the bottom, then so are stocks.  If you are too afraid to invest in stocks right now, why aren’t you too afraid to invest in real estate?  Answer those questions honestly and completely and you will be in a much better position to think rationally about your money and investing, both now and in the future.

The point still remains the same.  Yes, a LONG-TERM investment in real estate might make sense now.  Of course, so would a LONG-TERM investment in stocks.  Just THINK first, and remember that you are not sitting on a “sure thing” idea.



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