Real estate investing – Taking a chance

Over the past ten or fifteen years, the real estate world has been on a wild roller-coaster ride. Housing prices have been rising so much and so quickly that fortunes have been made just by selling and buying a series of homes. Combining that with the mortgage tax deduction, real estate investing has seemed like an endless gold mine for anyone.

In addition, new mortgage schemes have come about that have made real estate investing even more attractive, even to traditional renters like young single people. Why rent an apartment for $1100 a month when you can buy a condo with no money down and interest-only payments for years? With the rapidly-inflating prices of housing, many have made a tidy sum just on increasing equity.

The question today is, is it a bubble? Can the values of houses keep rising without the market correcting downward? And the answer to this is, it probably depends on the part of the country you live in. Real estate investing, just like any type of investing, is a gamble. And if you gamble, you should be able to afford to lose.

Here’s the problem: interest rates have been very low for a number of years. Because of this, cheap loans have been available to banks and mortgage companies from the Federal Reserve, to the extent that they have more money to loan than they have customers ready to borrow. And when any business has too much stock, they have a sale. When you base your real estate investing decisions on whether the bank will loan you money, you’re basing your decision on, basically, an overstock sale.

That’s not to say money’s not being made through real estate investing, and of course historically real estate has always been one of the most secure investments you can make. This isn’t going to change. What’s different about today’s market is that lots of people are getting into a relatively limited market in specific parts of the country – San Francisco, New York City, the East Coast – and their investing is much closer to speculating. They aren’t investing real cash into it, but rather are letting the investment grow and reaping the growth.

If the market crashes, these opportunistic investors are going to be stuck with a mortgage that’s more than the value of their home. Many, having nothing to lose but a good credit rating, will simply walk away from a bad investment, letting the bank repossess it, and this will drive housing prices even further down. In a worst-case scenario, the housing market will spiral downward, taking good investors down with bad. Wise real estate investing decisions will take this danger under advisement.

There are still ways to make money in real estate investing. The primary consideration when purchasing your home or other real estate, though, should not be the value of the real estate around your potential purchase. Instead, consider the real value of the area in comparison with the current cost of the real estate. For instance, one of the fastest-growing states is Florida; and with the exception of parts of Orlando and Miami-Dade County, most of the real estate there is priced very reasonably. What would be the real investment value of a home in ten years if purchased in a town that Miami expanded toward?

By choosing wisely and not being swayed by the current hot market in real estate, investing in land and homes can be a very good choice. But if you’re investing in the areas where real estate already holds high value, you might want to step back and think about it. If the market cools off, you might find yourself holding a house you didn’t really want, and that you can’t easily get rid of.