Uhh, these are THE rules not new ones. When you invest in a property, it must make a monthly profit - every one. That is called "cash flow positive" and the fact that people have totally lost site of this basic principle is why housing is so overpriced today and why the future looks bleak for a lot of investors.
The end of 2006 brings a few articles that reflect the changing view of housing investments
New Rules for Real Estate
Boom Over, Investors Focus On Fundamentals, New Areas; Rental Properties in Kansas City
December 23, 2006;
Wall Street Journal
Another major shift: Most investors are focusing on the fundamentals that guided the market before the housing boom, especially cash flow -- the ability to actually make money from, say, rentals, rather than from quickly selling the property. They are sticking with properties that turn a profit (or at least break even) after factoring in interest payments, taxes and other expenses.
That is a change from the past few years, when speculators were willing to lose money each month in hopes of selling for a big gain.
"Making a minimum of $50 to $125 monthly on each house is what we're shooting for," says Wendy Kallberg, a recent investor in Newport News, Va., who has purchased four single-family homes and condos over the past year at prices ranging from $67,000 to $140,000.
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With home prices softening in many markets, some advisers are counseling clients to focus on multifamily and commercial properties. Homes and condos are "not the place for a person who wants to make good, solid real-estate investments," says Jim Lumley, a broker in Amherst, Mass., who has written about real-estate investing.
Small apartment buildings and commercial properties are "more stable" investments, he says. "You've got a number of people paying rent."
Anthony Reed, an agent with Long Realty Co. in Tucson, is seeing increased interest in commercial properties because asking prices for many residential properties "are unrealistic." Investors "expect the property to at least pay the mortgage with a 20% or 25% down payment," he says.
Yields on commercial properties have fallen over the past four years, but rent growth is strong as vacancy levels decline, says Youguo Liang, a managing director for Prudential Real Estate Investors, a unit of Prudential Financial Inc. "If you balance the two factors, it's not the best time and it's not the worst time," he says, adding that conditions "slightly favor investors."
The situation is bleaker for those buying homes and condos as an investment, says Mr. Liang. "They should have very limited expectations on appreciation going forward -- probably 0% to 3% annually for the next five years," he says.
Many speculators who bought property during the boom may now be facing a tough choice. They can either lose a moderate amount of money each month while they wait for the market to rebound, or they can sell and take the pain all at once. Refinancing the mortgage could help under certain circumstances, such as when a borrower has an adjustable-rate mortgage that has reset to a higher interest rate. But for those who took out exotic mortgages with low monthly payments, refinancing may bring no relief.
Some investors keep their eyes out for special situations, such as properties being unloaded by people who took on too much debt or invested unwisely during the housing boom.
Housing is an eco-system where the supply of first-time buyers is just as important as those that are upgrading. If you kill the supply of folks entering the marketing, expect famine higher up the foodchain.
The ratios here are very interesting. If I am reading these right, it is twice as expensive to buy a house in Seattle than it is to rent one. Ouch.
As people have gone cuckoo over single family homes, the cost of a SFH versus renting has gone way up. The smart money rents and invests their money elsewhere while waiting for the deals from
First-Timers Begin Looking At Houses Again
Lower Prices, Mortgage Rates Lure Buyers Off the Sidelines; Special Offers in Tampa, Fla.
December 13, 2006
Wall Street Journal
High home prices have helped drive many first-time buyers out of the housing market. Now, with prices falling in many areas, there are some signs that buyers are beginning to drift back.
The share of first-time home buyers dropped earlier this year to its lowest level since 1987, according to the National Association of Realtors. First-time home buyers now account for 36% of home purchases, according to a study released last month by the Realtors group, down from 40% in the three previous years.
First-time buyers play a key role in the housing market. They provide a source of new demand for homes, and they also make it possible for owners of entry-level properties to trade up, creating a ripple effect that affects higher-priced sectors of the market. Declining affordability has made it difficult for first-time buyers to buy homes in many parts of the country, an important factor in the recent housing downturn.
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In much of the country, renting remains a bargain compared with owning, according to an analysis prepared for The Wall Street Journal by Torto Wheaton Research, a unit of CB Richard Ellis Group Inc. In markets such as Las Vegas, San Diego and Washington, the monthly cost of renting the average apartment is roughly half what it would cost to own the median-price home in the third quarter. "Renting is only marginally less of a bargain" even with the latest decreases in home prices, says Torto Wheaton senior economist Gleb Nechayev.
