In the same way that individual stock investors have likely seen the last of the “buy and hold” strategy for a long, long time, it appears that the very same approach to investing has become the only option for folks looking to make money from the direct purchase of real estate here in the U.S. While the alternative to “buy and hold” in real estate has never been frenetic, exchange-based trading, real estate’s closest cousin to that, flipping, is something that is now largely a thing of the past, even with the great bargains available nowadays. This leaves the investor seeking to make a larger asset allocation to directly-owned real property with some serious considerations. While the real estate market has presented a bunch of opportunities to investors, they are not the “no-brainer” opportunities of so many years past, and at the very least, demand the investor serve as landlord, with all of the trappings that go with that position, for many years to come in order to see a worthwhile resolution to the initial transaction.
By all accounts now, not only is the market currently flooded with a number of properties that will keep values in the doldrums for the foreseeable future, but that number will absolutely continue to grow; while many dispute the likelihood of the broad economy entering a second recessionary dip, that eventuality is all but certain within the real estate market itself. Prices are expected to drop another 5 percent over the next year and a half, and even if they stayed flat, they certainly wouldn’t be going up.
According to the National Association of Realtors (NAR), only 4 percent of real estate transactions this summer are for homes with title seasoning (i.e., owned) of less than a year. In other words, the process of short-cycled buying and subsequent selling is now so rare that it’s practically statistically insignificant. In our opinion, anyone seeking to enter a real estate transaction on that basis would have to be, well, out of his mind.
Complicating matters are the infectious problems associated with the meltdown that have made the buying process infinitely more difficult, even for investors with a lot of cash. The vastly-tightened underwriting standards, particularly for Non-Owner Occupied (NOO) residences, have become all but prohibitive for the vast majority of borrowers out there right now, even for those with a pile of cash to put down. Banks, despite what we have all been told and supposedly “know,” seem just fine with vastly-growing Real Estate Owned departments. Even title issues, once regarded as incidental to the buying process, have become major factors in transactions; many investors are finding that, other than in the case of an all-cash deal, lenders will not touch properties with title seasoning of less than a year.
So where does this leave the prospective real estate investor? In a good position, or in a bad one? Well, it depends. For the RE investor with a pile of cash on hand to make the lender happy (or preclude the need for a lender outright), as well as to put into the property in an effort to add value, along with a willingness to deal with people (renters) in the way we need not when trading stocks, it is a fine time to consider the portfolio addition. For those on behalf of whom that profile does not fit? Stay away.
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Bob Yetman, Editor-at-Large at Christian Money.com (www.christianmoney.com), is an author of a variety of materials on personal finance and investing, as well as on topics of fitness and self defense, to include the recently-released book Investor's Passport to Hedge Fund Profits (John Wiley & Sons, Inc; www.investorspassport.com) and the new unarmed combat training DVD Thunderstrikes – How to Develop One Shot, One Kill Striking Power (Paladin Press; www.mikereevesonline.com).