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Inevitably, every year I am asked about buying, selling, and investing in real estate. Is real estate a good investment option now? Should I buy a new primary residence and/or rent out my current home? Is it a good time to sell some of my properties at today’s market values? The answer is: it depends! It depends on your individual situation, risk tolerance, overall goals, projected income and expenses. We offer property management services in Lake Oswego, USA, based on client needs. In the following article, I will give you some examples for when it makes sense. Moreover, I will review alternative real estate investment options that may meet your risk tolerance. Historically, real estate has been a great investment option to hedge against rising inflation. The 2007 economic downturn and its impact on residential values, however, caused great concern for clients holding real estate as part of their portfolio. Here are some current market conditions to consider:

Interest rates are still low for now. Yet, with rising oil and food prices and increasing national debt, it’s only a matter of time before interest rates rise again. Some analysts believe primary mortgage interest rates may climb to 5.5% or higher in 2011.

Credit continues to be difficult to obtain. Lenders are tightening lending guidelines and padding their reserves for potential merger and acquisition opportunities. Regulation continues to be pushed into legislation, which may add to barriers for lenders and costs to borrowers.

Home prices are starting to fall. As per a recent home price report from S&P Case Shiller, prices in the top twenty U.S. markets fell 3.1% in January and the slide is accelerating. They say prices are just 1.1 percent above the low of April 2009.

According to a recent CoreLogic report, 23.1% of all residential properties are upside down in their mortgage (worth less than the amount owed). Unfortunately, this number is projected to rise through spring of 2012 before leveling out.

So, does it still make sense to buy a property? Let’s look at the following scenario:

Client A is considering purchasing an investment property for rental purposes, but is nervous about the declining market. Does it make sense to buy a property now?

Example:
Home Price: $350k
Down Payment: 20%
Total loan amount: $280,000
Loan: 30 year fixed
Rate: 5.25%*
Monthly Payment (P & I): $1,546.00/month
*(note: rate fluctuates daily and is dependent on property type and borrower)

Over the course of the loan, the total potential loss due to the decline of property value ranges from $5,566.00 to $25,048 assuming a maximum 4.5% drop. Or, a rate increase of ½ percentage point results in a total loss of monthly payments up to $31,620 (over the course of the loan assuming all other conditions remained the same). Given the above scenario, there IS a viable argument for purchasing an investment property at today’s rates.

If client A waits until 2012 when property prices have declined 5% while interest rates climbed to 6.25%, the scenario would look like this:

Home Price (5% decline): 332,500
Down Payment: 20%
Total loan amount: $266,000
Product: 30 year fixed
Rate: 6.25%
Monthly Payment (P & I): $1,638.00/month

To summarize, in the first scenario property is purchased at the higher price with a lower interest rate resulting in a monthly mortgage payment of $1,546. In the second scenario, the same property purchased at a lower price but a higher rate results in monthly payments of $1,638. Clearly, the best option for this client is the first scenario saving $92/mo or $33,120 over 30 years.

Bottom line, there are opportunities in distressed situations. However, an individual needs to understand the plethora of factors and risks to make an informed decision about buying real estate. As Warren Buffet warns, “Don’t try to catch a falling knife until you have a handle on the risk.”

We provide property management services in Oregon, United States and can easily determine if purchasing investment real estate makes sense for you, please call or email me at jason@llwmg.com / (503) 747-6534. I look forward to hearing from you!