Remember when your real estate investment grew 12% every year? That was so much fun the banks wanted in on the profits. They handed their mortgage customers blank checks and said write yourself a loan up to 90% of your equity. About the time there was no equity left, the economy took a dive and jobs disappeared. Real Estate not only stopped appreciating it incredibly began to lose value. Unemployed or underemployed homeowners couldn’t make the big payments on their mortgage and equity loans so they walked away, leaving the banks holding the bag. We are still dealing with the tail end of a tidal wave of foreclosures.
The banks were inundated with foreclosures and some people got a good deal buying up distressed properties. However, the banks sold most foreclosed homes without taking an actual loss. Then the banks closed in on themselves and stopped lending money to consumers. Instead they invested their money overseas. If a real estate buyer had 20% cash down payment and perfect credit they could get a mortgage but those buyers were scarce. The whole scenario was a boon for owners of rental properties. Tenets were forced to pay inflated rent because they could not buy a home. With rents doubling and tripling, saving an average $30,000 down payment is difficult.
Should people even strive to buy real estate today? We say yes. Clearly, income property is a profit maker. Even if you buy a two-flat so you can live in one and rent the other, it’s possible the rental income will cover most of the mortgage. A spacious 3 bedroom townhome in a safe area may rent between $1800 and $2500 per month. Buy that same townhome for $175,000 with 20% down and a 4% mortgage and your total monthly payment will be less than $1000 for a 30 year fixed loan. That is about half the cost of rent and your money is being invested in an asset that will increase in value. Plus you have a place to live. That is a deal worth sacrificing to achieve.
For those that can’t afford the down payment on an expensive home in great condition consider putting your money in a fixer upper. If you have building skills you will save even more money on refurbishment. The hope is that homeownership will once again be affordable and lenders will loosen the purse strings. That becomes more likely as the stock of foreclosures depletes to a normal level. We may never see 12% appreciation and no-money-down mortgages again but real estate is still a worthy investment.
In fact those halcyon days were never normal. Sacrificing to save a down payment, managing your credit spending and living on a budget has always been a safer way to investment in real estate. Our grandparents knew that. They bought a house they could afford and stayed in it through retirement. A mortgage free house provides comfort and security through our retirement years. Real Estate is still the best for those looking for a long term investment. While it increases in value providing security it also gives you a place to live.