I was eying my terrible returns on my 401K, and wondering if real estate investments would provide a better return. I can think of quite afew “pros”, also a few “cons”:
PRO:
home prices have fallen, by as much as 70% in some markets. History has shown that home prices do recover, once the economy does
the USA still has positive population growth-the dpressed housing market will recover as populations grow
housing can be rented, it will provide some level of income
CON:
housing prices have not hit bottom-it is possible that some areas will witness another 10-25% declines
higher gasoline prices will make many suburbs impossible to commute to. Some suburbs (like the “inland empire” in So. California) are actually being abandoned
the “McMansions” put up in the 1990’s are almost unsaleable-they are cheaply built and are energy hogs
if interest rates rise, many high-end houses will be unsaleable
My big fear-Obama’s “stimulus” fiat money will provoke a hyperinflation. i see real estate as the best hedge against this, with the added benefit that hyperinflation will make y mortgage payments decrease.
What do you think?
I think these three assumptions are not necessarily true… it all depends on what location you are talking about. There are entire streets full of empty houses in Detroit that aren’t going to appreciate or attract renters. The rental market in Vegas is saturated, and people are trying to unload investment properties with mortgage rates higher than prevailing rental rates. As always, with real estate, I think the only way to make money is to know the location very well.
I think if you can afford to yes, now would be a good time to invest. You have to be careful where you invest, but I think in some areas where people are still in their homes by and large, not leaving and there are a few houses on the market that are having trouble being sold, you can probably make a pretty good profit on them if you rent them out for a couple of years and sell in a few.
I don’t think the time has come yet, but soon. Check out the S&P Case-Schiller index. To me it looks like there is still a bit to fall, but the bottom is close. I have been thinking of investing in real estate also, especially with inflation likely to pick up later this year.
There is some evidence to suggest that residential housing is actually a rather poor investment. For instance, one analysis by Robert Shiller (one of the developers of the Case-Shiller index) finds that home prices basically rise at the rate of inflation, yielding very little in the way of real returns over the long-run. (see here, warning: MS Excel file). Case-Shiller seeks to measure average US home prices so it’s certainly possible to find some deals, but you have to do your homework.
Each market is different. I just bought a house in March. The market in the $250,000 to $300,000 range for San Jose has bottomed out and is increasing. But the market for Las Vegas is still going down.
If your are going to buy look at the market.
1st how much will the house you are going to buy cost and how much can you rent it for? My guide line has always been if a 20% down will not neutral cash flow to small positive cash flow the price is to high or rents to low.
If prices on my rental unit go up I will make some serious profit, I am leveraged at 5:1.
If prices go down then I will hold on to the property and cash flow by renting. My payment is $1060/ month + tax and insurance. I caqn rent it for $1800/mo or more.
I would advise against short term purchases in todays market. And be prepaired for things to go down, because they can.
Are you looking at selling your 401k investments and buying real estate with that money? Seems like a bad idea to me, since you’ve already lost the value on the 401K money. Buying high, selling low.
Are you looking at stopping your 401k investment, and buying real estate instead? Not quite as bad.
Or are you looking to suppliment your 401k investment?
I have a self-dircted 401K. wastinking of setting up a realty trust, and convert my assests into cash, to finance my property purhases.
Complex perhaps, but doable.