Should You Jump Into Real Estate? A Couple Bloggers Say Yes

Is it a positive sign when a couple blogs start pushing real estate for the small investor? A couple of pundits are suggesting that it may indeed be time to take a bit of a plunge. 

Paul Kedrsoky cites a blog post by James Saft at Reuters which makes the case that rental residential real estate might be a good buy. He cites extremely low interest rates, lower asset prices and the prospect for inflation for his recommendation. It’s also very important to note that he also views any investment as a five to seven year hold.

Kedrosky seems to endorse the idea, though he doesn’t say why save to cite a view of a future stagflationary environment. Given the sober analysis he usually employs, I’m inclined to accept Kedrosky’s endorsement.

A bit more of a hype article, can be found at Business Week. They’re also pushing the idea of buying single family homes, condos or small apartments. Once again the argument centers on favorable prices, low financing costs and inflation protection. 

The Business Week article does have a good slide show of their picks for the best communities to invest in. I will admit to a bit of head scratching over the inclusion of cities like Detroit and Cleveland but, hey, everybody is entitled to their opinion.

If this is your cup of tea, here are a couple things you need to keep in mind that didn’t make it into any of the articles.

First, though financing is cheap be prepared for rigorous qualification. My discussions with some mortgage lenders indicate you will probably end up putting somewhere between 20% and 25% down, are going to have to document your income and need to be able to show good liquidity. I shouldn’t need to say this but be sure you have your financing nailed down first and know exactly what your monthly payments are going to be.

Second, you should probably confine any purchases to the lowest end of the market. Think first time homebuyer type houses. This is where most of the price declines have occurred. Houses in this sector are probably somewhere around a bottom, in many cases they’re selling far below replacement value. If you move up the price scale, you’re taking more of a pricing risk. A lot of experts think that there is room for some heavy depreciation here.

Third, run the numbers hard. Make sure you calculate your monthly payment correctly. Don’t forget about insurance, taxes and homeowners association fees. Know what it will cost you for property management, throw in a hefty number for maintenance and factor in at least one month of vacancy. Now make sure that you know what you can expect in rental income. Get plenty of rent comparables from nearby neighborhoods and don’t kid yourself about getting more just because your property has granite counter tops.

Hopefully, when you’ve done all of this you have a property that’s going to generate a positive cash flow even if it is vacant for a month or so a year. If you don’t then don’t buy it. Your first goal is to generate cash flow. If the asset appreciates that should be viewed as a bonus. Remember that real estate is a good way to get rich slowly.

Now, if you’re ready to jump into the pool, let me give you one other thing to read. It comes from Clusterstock and concerns Flint, Michigan’s plans to destroy part of their town in order to save it. It’s a cautionary tale worth reading.

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