The Real Estate Market is Hot - Invest Intelligently & You Won’t Get Burned

The real estate market has been heating up nationwide, and it’s only getting hotter. On CNBC.com’s Realty Check, real estate reporter Diana Olick writes, “It’s no secret that investors have been inhaling foreclosed properties at a breakneck pace, trying to cash in on an increasingly hot rental market.”¹

Recently Bloomberg reported that Blackstone Group, the biggest buyer of U.S. commercial real estate, “is turning to residential real estate after a 34 percent plunge in prices since the 2006 peak. The New York-based company is the biggest investor seeking to enter the single-family leasing market as rents climb and the U.S. homeownership rate sits at a 15-year low.”²   

Here in Great Falls, rents are often higher than mortgage payments. In a popular neighborhood like Fox Farm, it would be cheaper for many families to buy a home than rent. The average price of a house for sale in the Fox Farm area is about $200,000. Occasionally you can pick up a Short Sale in the area for $160K or less.  Monthly payments on a VA 30-year mortgage at $200,000 is usually less than $1,200, while rentals are around $1,500 - if you can find one.

Real estate investors have the added advantage of record-low interest rates. According to Freddie Mac’s Weekly Primary Mortgage Market Survey, the 30-year fixed-rate mortgage for the first half of 2012 averaged 3.86%, while the 15-year fixed-rate mortgage averaged 3.12%!³ Even investors who have the cash are locking in these incredible rates.

So who are the buyers making up this heat wave of investing? Surprisingly, the typical real estate investor isn’t wealthy and middle-aged like you might imagine. The reality is that the median income of the real estate investor is $86,100. It’s not much higher than the median income of the primary residence buyer: $72,400. And nearly 40% of investors made less than $75,000 in 2011.⁴ Today’s real estate investor is really just the average American homebuyer.

When you consider today’s market conditions, it’s not surprising that investors are popping up everywhere. But not all discounted properties are good investments, no matter how low the price and interest rate may be. Several factors affect a property’s return on investment, and they all need to be carefully considered. For example, experienced investors know to invest for cash flow—a property’s return on investment in the form of monthly rent. It’s immediate, steady, and can build wealth over time. Many new investors tend to think in terms of appreciation, but intelligent investors know that investing for cash flow helps ensure a profitable investment regardless of appreciation.