The media coverage of the national real estate market has been overwhelmingly negative. We have less demand and more inventory, because of a reversal in the supply-demand curve. This phenomenon has occurred slowly over the last three years. The resulting drop in home prices has been significant. The banking industry has tightened credit, and far fewer buyers can now purchase a home. This action has further reduced the demand for housing.

 

The picture looks bleak, so why would anyone consider investing in real estate now? The answer is that it is a perfect time to start looking. The inventory of available homes is at a twenty-year high. The affordability factor is the best it has been in eight years.

 

The rules for potential investors has also changed significantly as the demand for higher credit scores and larger down payments has increased and No-Income and Stated-Income loans have been eliminated, thus reducing the competition. The challenging market is certainly a reality for potential sellers, and many have become more realistic about their expectations. A growing inventory of foreclosed homes on the market is also keeping prices down for all potential investors.

 

Investors must consider the question of timing. The conclusion that prices can further erode is a fair one. The expected return on investment is directly tied to the cost of the property. The majority of buyers usually start thinking about purchasing anywhere from nine to twelve months before actually taking the plunge. Professional investors must thoroughly educate themselves on the market they considering. The best advice is to contact a real estate agent now and discuss a strategy. The agent will be an expert in the local market. It is important to discuss the employment market, school system, commuting convenience, public transportation, and many other factors that have an impact for potential resale value. Many online sites offer information that keep the search convenient and easy to track.

 

Investors can tell their real estate agents in what communities they are looking to purchase, what specific type of housing they want, and what price range. The agent can then e-mail the investor every time a property that fits the criteria becomes available. The investor can easily track the trend of real estate asking prices and see if a potential property’s asking price has been reduced.

 

The investor will need to decide to purchase property that can be turned over in a short time or buy for potential rental cash flow. Both strategies have advantages and disadvantages. The strategy of buying a house at a discount and turning it over in a short timeframe is less financially rewarding and more difficult to do, right now. The demand for housing is lower, and the availability of mortgage credit is reserved for stronger borrowers. The key is finding a home that is well under value. The abundance of foreclosed homes appears to provide many possibilities.

 

Don’t fall for the misconception that all foreclosures are a good value. The bank selling the property is not much different from any other seller. The motivation and expectation levels will vary among institutions and specific properties. The process of bidding on a foreclosure can be tricky and costly if the potential buyer is not experienced with these types of properties. The property is bought “as is,” and many times the institution selling the property will not allow certain types of financing or a mortgage contingency clause.

 

Many private sellers are negotiating “short sales” with their current mortgage holder, too. The sellers might be in jeopardy of losing their home and are behind on payments. There can be some good value for a potential purchaser as well, but the bank holding the mortgage will make the ultimate decision on accepting the offer to purchase, not the delinquent home seller. The process can take months and requires the potential purchaser to have an abundance of patience.

 

The normal strategy with real estate acquisition and reselling usually involves longer terms. The ability to acquire and hold is an excellent strategy for long-term appreciation and wealth. An approach consistent with this philosophy is acquiring rental property that can provide additional income and have the potential of substantial appreciation over the long term. The down payment requirements will vary depending on the property type with single-family dwellings and condos having the lowest down payment requirement for investors (10% down). Three-family and four-family housing units will vary between 20% to 30% down. The lender will also require reserves on any type of investment property. The down payment will need to be the customers’ own savings or they can borrow on their equity in their current home. Any property with more than four units is considered a commercial mortgage. The down payment requirements on commercial mortgages start at 25% down and go up from there. Commercial mortgages have higher closing costs and sometimes require environmental reports that can be extremely costly.

 

The lowering of home prices has made buying investment property with a positive cash flow more likely than it was two or three years ago. The interest rates on mortgages have remained somewhat stable, and rents have remained near their highest levels because of a larger pool of renters who cannot buy homes.

 

Rehabilitation mortgages are also available for investors, but understanding the home repair business is strongly recommended. The biggest mistake an investor can make is to over-improve the home and not be able to regain the money invested, the most common and costly error that novice investors make. Often they are unable to sell the home for many years.

 

Consult experienced professionals who are committed to helping you make wise choices. The most common way for Americans to build wealth over the years has been through smart real estate investing. Good timing is important, and the best time is when prices drop, inventory increases, and competition is at its lowest level. We are approaching that time now. Serious investors need to start learning the market.