What does investing in Hemet real estate look like in 2008? There have been a lot of changes in the last several months. Some of those changes are good and some are bad. Is it time to buy investment properties in Hemet and the surrounding areas? Let's look at some of those changes so you can make a decision that's right for you.

During the recent real estate boom, spurred on by their own increasing equity, television programming like "Flip this House", and the fear of missing out, many people who had no experience in investing in real estate bought homes in Hemet, Murietta, Temecula, San Jacinto, Riverside County and the surrounding areas of California.

Unfortunately, many of these (most?) didn't understand the difference between investing and speculating. To simplify, speculating is more often focused on a short-term increase in the value of the home...flipping. Investing in real estate is more often focused around a long-term strategy to build your wealth.

The vast majority of people who bought and sold real estate in Hemet, the Inland Empire and all of California on speculation got stuck when the market turned. They were left with homes that had no positive cash flow, decreasing market values that put them in ugly equity positions (being upside down, for instance), and adjustable mortgages that they couldn't afford.

And where were the investors? Many were saving their money until the a time like this. Some took advantage of the high equity of their homes to refinance, get cash out and put it in liquid accounts until housing prices dropped.

That time is now.

The tipping point in the Hemet real estate market was August of 2006. I actually know one smart-money type that sold his home in Murietta around that time, kept the proceeds in a liquid account and rented a home. His intention? To buy this year.

Some investors are sitting on the fence still, hoping that prices will drop lower. This is a form of reverse speculation. How do we know when home prices will tip the other way?

In the meantime, for the first time in many years, there are homes for sale in Hemet and San Jacinto that you can rent out for more than your expenses. Especially bank-owned properties. Because of all the speculation, there are plenty of REO ("real estate owned", meaning bank repos) that are priced 20-50% off of their price a couple of years ago. And resale home prices are dropping to compete.

Buy and hold...that's the real estate investment strategy that works. It's called building your wealth with other people's money. If you have positive cash flow on a rental property, you have a long-term investment worth having.

Financing...good and bad.

The good news about mortgage loans (if you can call it that), is that because of the instability of the stock and bond markets, interest rates are as low now as they were four years ago. I thought I'd never see it. Today's 30yr fixed is around 5.625%.

And if you're an investor who can handle a little risk, Patrion Mortgage has 3/1, 5/1 and 7/1 ARMs in the 4.5% range: that's a full percent below the market right now. Why would someone get an ARM? Typically the real estate cycle of appreciation is about seven  years. If you have 20% down on a property that's already 20% off of it's high price, there's a good chance that you'll be in a good or better equity position in five years. (This strategy doesn't work for the average person in this market...go for the 30yr fixed. However, seasoned investors have the reserves and other investments to weather the risk an adjustment in their interest rate in order to increase their positive cash flow on the rental property. Talk to your mortgage advisor.)

The bad news is that all the large mortgage loan investors follow Freddie Mac and Fannie Mae guidelines...who have added some costs and restrictions because of the declining market values in California. Here are some things to look out for.

Adverse Market Fees. There's an extra .25 point fee (or a higher rate to cover it) for any mortgage loan in a declining market...which, according to investors means just about anywhere in Riverside or San Bernardino Counties.

Non-Owner Occupied fees. Up until last year, the extra cost for a non-owner occupied home in Hemet was 1.5 points (or a higher interest rate to cover the cost), even if you put as little as 10% down. Now you have to put down 25% or more to have the fees that low. Less than 25% down will cost 1.75-2.5 points (talk to your mortgage advisor).

Lower LTVs. LTV means loan-to-value ratio. One year ago, you could buy investment property with a 90% ltv (or 10% down). Today, because of adverse market conditions, it's 85% (or 15% down). 4/25/08 UPDATE: Mortgage insurance companies no longer insure investment properties, so the minimum down is 20%

No cash-out refi on investment properties. This one is new as of this week. You can only do a rate/term refinance on non-owner occupied or rental properties. That means that until the real estate market stabilizes, the strategy of taking money out of your other investment properties to buy more are limited. You can still, if you have good equity in your primary residence, get a cash-out refinance.

Credit fees. In short, keep your credit score about 680 and you'll get the best rate and fees. Drop below there and it can cost anywhere from .50 to 2.50 points. (Again, you can always take a higher interest rate instead of paying the up-front fees...but that would cut into your positive cash flow.)

Today's forecast for buying investment real estate in Hemet, San Jacinto, Murietta, Temecula and Riverside County is good. The ideal situation is for you to have a score over 680, 25% down on a home that is 20-30% off of it's high price two years ago and will bring in more rent money than it costs to make your mortgage payment and other expenses (insurance, taxes, property management, repairs, etc).

Joey Aszterbaum is the Hemet Home Loan Guy and a member of the Active Rain social network of real estate professionals. To buy or refinance real estate in Hemet, Riverside County or California visit www.HemetHomeLoans.com or call 951.285.1012