The Invaluable Investor
By Anne Randolph, Publisher, LORE Magazine
Illustration by Jurgen MantzkeWhat to do with the money you don’t want to put in the stock market?  Invest in real estate. Right now is the perfect positive storm for investing:

• House prices are low
• Interest rates are still low
• Most homes for rental meet conforming guidelines for mortgages from Fannie MAE and Freddie MAC
• Rents are up in virtually every market
• More people are returning to renting or are limited to renting because they don’t have down payments or can’t afford to get a mortgage. While regularly 1 million people a year return to renting from homeownership due to things like death, divorce, job loss, health issues, etc., this year and for the next several years, that number will be closer to 3 million.  Multi-family apartment development stopped when aggressive mortgage practices pulled apartment dwellers out of renting and put them in homes, so the availability of rentals is insufficient in many places for the demand.

More importantly, what financial planners don’t want you to know is that the returns can definitely be better in real estate.  That’s because you only put a portion of the cost of a property down, when you buy a stock you pay for the entire cost. So, if you bought a $100 stock and it went up $18, you would have an 18% return.  If you bought a house for $100, and put $10 down and it then went up $18, you would have a 80 percent return – a “cash on cash” return. Even better, if you want to avoid paying taxes when you sell the rental property, simply do a 1031 Exchange and put the money into another rental property or properties.

The best purchases are those that good renters want to rent:  good homes in good neighborhoods, and now that more companies want people who are being relocated for a short period of time (2-4 years) to rent versus buy, there is a strong demand, even from people who would normally buy – people who will be good renters.

Think the best investors don’t get this? The Tiger Group which is a group of high net worth investors based on New York, and which now has a group in San Francisco, currently has over 35% of their net worth in real estate.  And, those Hedge Funds that lost so much money – they are buying distressed luxury property at 25-35 cents on the dollar, and they will hold it until the market recovers.

There’s no speculation on how big this market is (over $300 billion).

Real estate investing at the individual level is a large industry that is relatively unstructured, unorganized and underserved. Many people would be surprised to learn that, according to the National Association of Realtors, property purchased purely for investment represented 22 percent of all purchases in 2006. That’s 1.64 million homes and more than $300 billion in sales volume. It only dropped to 21 percent in 2007. The 2005 figures were higher with 28 percent of purchases for investment. The 6 percent difference between 2005 and 2006 can largely be explained by real estate speculation at the top of the market.