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Business & Tech

Timing the Market for Purchasing Rental or Investment Property

Tips and observations for evaluating real estate investments opportunities in today's real estate market.

At the end of February billionaire Warren Buffett, commonly referred to and lauded as one of the most respected, successful investors in the world, told CNBC that if he were a young investor in the current market, with a choice of investing in the stock market or buying his first home, he would select buying a home as the wisest choice.

Buffett went on to say that as a first time investor, if he had the opportunity, he’d buy as many single family homes at distressed pricing as he could, and then finance them with a 30 year mortgage (to take advantage of current low interest rates), and find someone to rent them. 

Buffett closed this part of the interview by stating that, in his opinion, that this type of real estate investing, leveraging a cheap asset with a 30-year lowrate mortgage, is the best financial investment strategy that an individual could make right now — period.

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Now if you’re a first time, or even a seasoned investor, that kind of advice by a man who has proven himself as one of the most respected financial investors and advisors of our time has to be considered and explored.

When the real estate bubble burst back in 2006/2007, Florida was at the epicenter after the home market appreciated 80 percent from 2001 to 2006. I’ll say that again: an 80 percent increase.

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Now, after painfully maneuvering for the past 5 to 6 years through the ruins of what the ‘bubble burst’ left behind — the flood of short sale and foreclosure properties into the market driving home values to a steep decline both locally and nationally — we have come to a place where many real estate experts and financial advisors, like Warren Buffett, feel that it is not only safe to invest in real estate as a financial asset again, they believe it’s the top choice for making the most out of the declining value of our U.S dollar.

An article in the Washington Post last month pointed out the losses that many people saw with their stock portfolios in 2011 and suggested that 2012 might be a good year to move some of that money into real estate investing. The article suggested that condominiums that are investor friendly, (for example: have generous leasing policies, reserves for high cost common area maintenance issues, and low enough investor versus owner ratios for increasing buyer financing options) in areas that are particularly desirable, (close to beaches, in golf course communities, or active adult communities here in Florida) and with low association and maintenance fees, would make an excellent choice for the first time or ‘green’ real estate investor. These types of properties are, typically, easier to lease and command very attractive rental fees.

Single family homes, traditionally, will appreciate in value at a faster rate than condominiums and therefore offer more seasoned real estate investors an attractive option to condominium investing. Investing in single family homes also produces more risk and involves, in many instances, more direct management and personal involvement by the investor for property repairs, maintenance and oversight.

Timing the real estate market successfully pertains to monitoring and interpreting the changes affecting the market — in both directions — on the downside and on the upswing when the market shows signs of recovery. Knowing when to buy at the low and when to sell at the high, and having a plan for how to manage your financial assets in between those two extremes, has always been the savvy investors’ key to building and holding on to wealth.  

We are observing now, in our current real estate market, some pretty encouraging signs for investors who might be sizing up their investment options and thinking of making changes to their investment strategy and portfolio: 

  • Mortgage rates continue to be very attractive, as of Sunday the national average for 30 year fixed mortgages is around  3.88% and expert sources don’t expect rates to get much lower than they are right now.
  • Although we still have a market that has a high percentage of short sales and foreclosures, we have seen a (follow this link for a report by Corelogic) substantial reduction in the flow of those properties into the market both by banks holding on and releasing distressed homes more methodically, rather than hysterically, and by an increasing number of home owners who have been able to take advantage of governmental programs like HAMP and HARP, to either refinance, reduce principle, or payments allowing them to stay in their homes, or by HAFA, permitting them to do a short sale with less hassle, shorter time frames, and without fear of paying a deficiency for a home they no longer own.
  • Inventory levels are lower and demand is higher.  As reported by many of my local real estate colleagues who are in the trenches with buyers and sellers every day, and substantiated by statistics and by experts observing the activity in the real estate market, buyers are buying again, resulting in increased demand. Inventory levels, especially for foreclosure properties in median price ranges, is lower than at this time last year, and is resulting in multiple offers being common again for buyers who want to take advantage of distressed property pricing.  Remember what I said about timing; take these statistics and trends into serious consideration when determining your timeline for buying a rental property in order to buy at the best price for the area. 

                    (Click here for a printable PDF with Manatee County stats

                         provided by the Manatee Association of Realtors)  

  • Our area of Florida was listed as #6 in a list of the “Top Ten Turnaround Towns” when it comes to rebounding real estate markets by Realtor.com, after home sales increased by 17%, year over year, with prices actually rising against the national downward trend, and increasing by 2 percent — a small increase but quite significant when compared with national trends.  Again, I remind you about the importance of timing for best investor opportunity for pricing in a market that has been identified as a rebounding market. 
  • Rental demand has risen with the decline in homeownership. Changes in the way that people perceive homeownership, spawned by tragic personal loses and experiences with foreclosures and with short sales, has created a vibrant and increasing demand for rental homes and properties.  Reports across the country show that the demand for rental properties is seriously outpacing the supply and that real estate developers can’t build fast enough to satisfy that demand. As a result, single family home rentals are becoming an attractive option to families who have decided against buying for awhile, or for families or individuals who have lost their ability to own a home after a short sale or foreclosure. Timing for investors, again, is of the essence here to capture the best investment opportunity.

For investors who might be just beginning their journey into the jungle that can be out there with respect to buying real estate, I would recommend interviewing several experienced real estate agents/teams to find a ‘good fit’ for your particular area of interest or investment criteria and then hiring one to counsel and advise you as well as research properties for you. Make sure to ask if the agent has special expertise, education, and experience when it comes to investments or with distressed property sales, if that is the type of investment you’re focusing on.

In summary, I’ll leave you with a quote from savvy investor, Warren Buffett himself:

 “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

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