Is Now a Good Time to Invest?

The housing market may have slowed, but being a real estate investor can still be profitable — if you readjust your strategies.

March 1, 2007

High prices, rising inventories, and skittish buyers have driven several speculators from the marketplace. But some investors aren’t going anywhere. Only if you’ve been listening to policymakers such as Federal Reserve Chief Ben Bernanke and David Berson, chief economist for Fannie Mae, you might be hearing otherwise. They predict that investor involvement in housing will continue to recede, causing the housing market to soften further.

True, it's no longer possible in most of today’s markets to flip a home to another buyer at a substantial premium, but investors can still make money in real estate. For investors who love the challenge, you’re in luck — it can still be a good time to buy a home, improve it, and sell it at a profit.

The reasons for my optimism?

  • Homes in move-in shape are always in demand by home buyers who wish to take advantage of tax benefits, neighborhood amenities, and the other joys of owning their home.
  • Investors can target their investments in burgeoning, up-and-coming markets such as Austin, Texas, which could be the next Silicon Valley.
  • While the outlook for existing-home sales, new-home sales, and housing starts will likely fall slightly this year, a gradual rebound is expected and the market looks promising in 2008, according to NAR statistics.

Investor Market Conditions

Investors, as defined by the NATIONAL ASSOCIATION OF REALTORS®, are nonoccupying home buyers; they represented as much as 20 percent of home buyers in 2005, the biggest sales year on record. In fact, in 2005, investor demand for housing was at a premium, largely because rising home values in many parts of the country all but guaranteed a return on investment. In some areas, investors purchased as many as 40 percent of the homes for sale. A sobering one-third of homes nationwide were purchased by non-occupying home owners, either as second homes or as investment properties.

That alone almost guaranteed a recession in housing would be just around the corner, as those properties came flooding onto the market for a cash-out.

However, sales in 2006 were still the third best on record. Sure, the precipitous 17.3 percent drop in volume from the all-time high achieved in 2005 represented the largest decline since 1990. And price gains in 2006 were anemic, rising 1.1 percent to $222,000, from a median price of $219,600 in 2005, so investors no longer were looking for quick equity gains.

But investors evidently haven’t fled the market, since housing sales are still in recent-record territory, although they may be changing to a longer term strategy.

Adjusting Strategies

As long as investors have financial staying power, they’ll be around. So as the market rebounds over the next few months, investors can:

  • Take advantage of tax benefits. A slowing market allows investors to become occupying home owners, so they can take advantage of tax benefits themselves. The Tax Relief Act of 1997 allows anyone to buy a home, occupy it for at least two years as a homestead, rent it for three years, and sell it tax-free up to a ceiling of $500,000 gains for married couples and $250,000 for singles. Under those provisions, investors can purchase with conforming loans, which have a lower interest rate and more generous down payment terms than the stricter investor-oriented loans. It's the slower route to wealth, but it will get you there.
  • Snatch up good deals. In fact, investors stand to gain in markets where other sellers are panicking. They can pick up choice properties at better prices.
  • Buy and hold. What's missing for investors, at least temporarily, is the momentum of price appreciation, which allowed investors and speculators quick capital gains that they weren't seeing in other forms of investment. Therefore, investors in the current market are moving from flipping homes to buying and holding. The strategy is to take advantage of high inventories, choose wisely, and hold longer term. Then, cash-in at the next seller's market.

The only problem for statisticians is distinguishing which home buyers are investors in homesteaders clothing and which aren't.

(c) Copyright 2007 Realty Times. Reprinted with permission.

Blanche Evans is a writer/editor and CEO of evansEmedia. Formerly, she was a senior editor with Realty Times, where she was named by REALTOR® Magazine as one of the most influential people in the real estate industry.