Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

12/05/2008
Given the current housing climate, is the real estate market a good investment?
What is your opinion now with the housing market as far as making [real estate] a solid investment? [My husband and I] had been talking probably for the last year about just buying some properties and trying to invest in more real estate so that we would have more of a tax break. But now, yes, you can pick up a house under foreclosure, but the market is not really good. Is that a solid way of trying to recover at this point?
Virginia Clay CFA:
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The short answer is, “It depends.”

The purchase of real estate usually necessitates the use of leverage (debt). The use of leverage increases the magnified size of any potential LOSS as well as increasing potential positive returns. This is one reason the credit crisis is such a problem for consumers and businesses. In the current economic environment, your risks are increased. For example, a tenant may have a very good credit score, yet still become unemployed or have too much debt to make timely rental payments. Of course you will at least hear good stories about real estate investing that are a success, because there are opportunities out there.

However, all asset classes have decreased in value: equities (stocks), fixed-income (bonds), commodities (for example metals) and real-estate.

I think the better question is which investment is a better choice for your situation relative to other asset classes.

If your tax bracket is a consideration, you may want to speak with a tax advisor AND a financial planner. You should know if you’re maximizing the potential benefit of qualified retirement plans, health savings accounts and other tax advantaged plans before you take on the leveraged risk of
real estate that also will require some active management on your part. While this may be an uncomfortable time to buy stocks and bonds, the next 12 to 36 months may be one of the most opportune times to make sure you gain more exposure to other assets classes as well or instead in order to recover.
Susan Garcia:
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Now is a wonderful time to buy as the prices throughout the country are low. Real Estate is and has always been a great investment. You should probably be prepared to keep it for a minimum of 5+ years before selling it, so that you can recoup your return on investment.

About foreclosures: They are great if you recognize that they are sold "as is". This means that they often require a lot of work. If you can do the work yourself or get the work completed inexpensively, then it may be a great investment. I recommend getting a home inspection before making an offer, so you know exactly what you are buying. There may be lots of hidden things that may need to be repaired. Use an experienced and knowledgeable real estate broker. There is no cost to you as a buyer.
DeAnna Klokkenga CFP ® :
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Remember, real estate is an illiquid asset. The cost of financing, taxes, and upkeep is often greater than the incoming rent, creating negative carrying costs. These costs can only be justified if there is enough appreciation to offset these costs. And that's a problem. Investors must realize the past price appreciation was a highly unusual period. Cycles in housing are much longer and deeper than that of the equity markets.

There may still be two chapters left in the U.S. financial crisis that don’t bode well for home buyers, according to an influential analyst, Meredith Whitney at Oppenheimer & Co. She predicted spreading problems from subprime mortgages early last year. The problems in the mortgage and credit markets, Whitney expects, would be caused by an evaporation of liquidity, as banks seek to reduce their risks to consumer loans in an environment of rising unemployment.

The top banks in each of the mortgage and credit markets dominate two-thirds of the total market
share, and they have already decided to pull back their exposure according to Whitney. The main effect would be further decline in housing prices, already down nearly 25% from peak levels. Whitney expects housing prices to take another 20% dive as less money is available for buyers. It will take a long time for the liquidity freeze to work through the system and start stabilizing home prices.
Michael A. Masiello:
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The key in any investment is knowledge and expertise. With real estate, location, location, location and pricing will have an impact. Historically the return on real estate has been ok-- modest by some measures. I wouldn't look at this asset class to recover quicker than the stock market. More than likely [it will be] a slower recovery with real estate. Good luck, Mike.
Gail V. Marquet:
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If the person can pay cash for the property and be prepared to keep it for a number of years (maybe as many as 10), they should be able to profit from the transaction. If they can't pay cash and are hoping to flip the property in a short period of time, this is probably not a good investment at this time.
Bettye J. Banks:
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If I had any money to invest, I would invest it NOW! The market will turn, and panic selling along with foreclosures has driven prices down. That makes it a great time to buy what is still a good investment. Buying now could mean a significant profit in the future, but do not expect a rapid turnaround. It is very hard to time the market, so rely on a trusted investment professional to help you.
Gail Rosen, CPA:
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You can deduct up to $25,000 of losses from your rental real estate activities (even though these are passive) against your earned income, interest, dividends, etc., if you “actively participate” in the activities (requiring less participation than “material participation”) and if your adjusted gross income doesn't exceed $100,000. The $25,000 special loss allowance is reduced by 50% of the amount by which the taxpayers modified adjusted gross income (AGI) exceeds $100,000. Thus, the allowance is reduced to zero when modified AGI reaches $150,000.
Christina Gears:
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Yes, now is the time to invest. You'll be buying twice as many shares, and when the market recovers you'll have a better opportunity to profit. Thank you for asking.