Although mortgage rates have recently risen slightly from their all-time lows, the recovery of the housing market is not a reality in many areas of the United States. This means that houses in several different states cost less than they have in years and rates are still low enough to make investing in real estate a popular consideration for many investors. But is this really a good time to be investing in property that you won't be living in? After all, there are many things to consider beyond the opportunistic aspects of the decision. (To learn more about investing in property, check out Valuing A Real Estate Investment Property)
TUTORIAL: Exploring Real Estate Investments
Carrying costs for an empty property meant for resale don't just include the monthly mortgage payment. They also include insurance costs, property taxes, upkeep and repair expenses. Even if you plan on renting the property before it is sold, you still need to have adequate cash reserves to pay all of these expenses because the rent you are able to charge in your area might not be enough to provide adequate resources. Finally, consider how long you may need to cover these costs. When the housing market was booming and houses were easily flipped, carrying costs might not have been a concern; but now, when houses can sit on the market for months or years, they are.
Risk and Return
The discussion above about carrying costs gives an indication of the amount of risk you might be taking on when you invest in real estate. Conventional investing wisdom says that real estate is an investment that will grow over time, but recent years have shown that this growth may not be as straight forward as an investor might want. Additionally, after paying the mortgage interest, insurance, property taxes and maintenance expenses for a number of years, the return made when you sell the property for more than you purchased it for could be much less than you anticipated because your cost basis is comprised of more expenses than just purchase price and interest. (Can investing in real estate help your portfolio? read Can Real Estate Stabilize Your Portfolio?)
Real estate is not generally considered a liquid investment because it is not easily sold for cash, and in a restrictive financial environment, real estate is even more illiquid. Even if you just need to pull some equity out for an emergency, assuming you have any equity,the restrictive lending environment could mean that you have difficulty accessing any cash.
Your personal investing goals and timeline will have a lot of bearing on whether or not real estate is a good investment for you right now. If you are within a few years of retirement, investing in real estate could actually push your retirement back until a later date, especially if you tap into your retirement savings for the down payment. In addition, if you have to carry the property for a great deal of time, it could reduce the amount of money you can save and your subsequent earnings on those savings. If you have a longer-term saving plan, then you might have more flexibility to add something as unpredictable as real estate to your financial plan. (For more way to invest in real estate, check out Simple Ways To Invest In Real Estate)
The Bottom Line
Often, a "good time to buy" for one investor may not be for another. Sure, opportunities for return abound, but if it isn't actually a good time for you to invest then the opportunities that you see will not be something that you can trust to provide an opportunity to you. Instead, they may turn into financial mistakes and burdens that you have trouble keeping up with. When evaluating the potential of investing in real estate, don't just think about home prices and interest rates; take the time to consider your personal financial situation and whether or not you can afford the long-term commitment a real estate investment might entail. (To increase your chances of success in real estate, read 10 Habits Of Highly Effective Real Estate Investors)