I have been meaning to write another post for about two months now, but I kept putting it off. Lazy? Well, maybe a little. Truthfully, I have been really busy. Mostly, however, I’ve just been plain scared about the residential real estate market and wanted to write a post that express my fears to you and could also help you buy properties more wisely.

Now just to set the record straight, I am still very, very positive on the wealth and cash flow that can be accumulated over time by a properly run landlording business…

But, here are some of my shorter term fears:

• The number of interest only mortgages are said to be at record highs. Why? Well mortgage companies are pushing them as a way for consumers to afford that unaffordable house. But, I don’t think consumers understand how these loans could really bite them in a bad economy or housing market.
• Adjustable rate mortgages are also reported to be at record levels for many of the same reasons, and I have many of the same fears about this type of loan too.
• The number of home sales last year was extremely robust, in large part due to the fact that approximately 20% of these sales involved investors! That means 1 out of every 5 homes was bought by an investor… if that’s not enough to scare the bejeepers out of you then I will continue on…
• An ever growing number of home equity loans are being taken out by people who are looking to invest in real estate, many for the “first time.” So that means that a growing number of new investors are putting their primary residence at risk to buy rental properties. I suspect that many of these new landlords do not know much about evaluating cash flow OR managing properties!
• Investment “Bubbles” often burst when everyone thinks that prices are actually justified. In 1999, conservative elderly were cashing in their CDs to buy internet companies. In 2005, it seems like every other average “Joe on the street” is talking about buying a property to “flip.” In New Jersey, where properties “down the shore” have been going up by 1.5% per MONTH in many areas (yes, in many cases properties have more than doubled in the last four years), people are jumping in because they don’t want to miss the chance to cash in on the opportunity! Golly, prices have already doubled in 4 years folks, do you think it might be a little risky NOW?
• Homeownership is great BUT, the fact is that it’s not for everyone. There is a certain (large) percentage of the population that should not own a home. They SHOULD be renters. Their job instability, shaky family situation, cavalier lifestyle, inability to care for a house, ineptness at their finances, etc. all warrant that renting is better than buying. Yet this is some of the lastest demographic that has recently been lured to buying their first (and maybe last) home by a mortgage market promising 0% downpayments and low “starter rate” loans. And unfortunately, it’s this group that could be hurt the worse when inflation takes hold and housing prices fall…

  Want my prediction? Of course I don’t have a crystal ball and I am no prophet, but here is what I think could happen:

When interest rates rise moderately, expect an increase in defaults, foreclosures, and at least a moderate decrease in housing prices (especially in the areas where they have risen the most). Yes, people who may actually have to sell their house within a short time (a few years, for example) after purchasing it may take a loss.

Investors who have bought properties to flip may wish they hadn’t done so now that their properties are sitting on the market longer and now put them possibly at a loss on their “can’t lose” investment.

Landlords who aren’t buying with significant cash flow may find themselves “squeezed” between a bad rental market, increasing mortgage rates, and retreating housing prices. This is especially true if they have bought adjustable rate or interest only loans.

Still want to buy rental properties or “flips”? Here are some pointers to have the best chance of surviving and thriving:

First, know your business. Run the numbers and make sure the property works. Want to “flip” a property? Then make sure it has a VERY large profit potential. Could you still make money if it sits on the market for 9 months or a year? What if rates go up by 2% during that time, or area prices for similar houses go down by 7%?

If you want to be a rental property owner and landlord, then make sure that you can get good, respectable cash flow out of the property even with fairly conservative rents. If you plan on keeping the property for a considerable length of time and build equity, try to lock in at today’s historically low rates rather than adjustable rate or interest only loans (which I would almost NEVER consider). My book, How To Buy Your First Rental Property and Beyond discusses how to evaluate rental properties in detail and provides some very easy to use, practical formulas to help you determine potential profitability, cash flow, and much more!

Owning real estate directly can be a phenomenal way to own a business and reach your goals. Done right, you can buy in an up market, down market or sideways market and still make money. Just BE CAREFUL. The CURRENT residential real estate market IS pretty scary. Do your homework, treat it like a real business (because it is!). Read and learn as much as you can. Think creatively, but don’t do things that don’t seem to make good business sense or risk too much for your own financial situation.

I wish you all the best! Please feel free to visit http://howtobuyrentalproperty.com and read more about the book or browse the resources that I have assembled for landlords and rental property owners. Also, please feel free to email me with any questions, comments (or jokes)!

Regards,

Steven

Steven A. Boorstein
Author of How To Buy Your First Rental Property and Beyond
http://www.howtobuyrentalproperty.com/