Real Estate Investment In A Recession

Have you ever noticed how buyers flock to purchase property in droves when real estate prices areat their peak, yet buyers are relatively scarce when prices are most affordable? Notwithstanding thefact that this occurrence defies the generally accepted investment strategy to buy low and sell high,one cant help but wonder why attending social gatherings during the real estate boom years of 2005and 2006 property for sale would inevitably lead to engaging in a conversation about someones realestate investment and the promise of future profits to be derived from the venture. Its not all thatsurprising that many of those recently boasting about their real estate exploits have softened theirtone while seasoned investors, dormant for the past six or seven years, have begun to once againstart purchasing lucrative investment property. Despite news about the recent real estate andfinancial industry tribulations that the public is seemingly bombarded with every day, the last fewmonths of 2008 provided a relatively quiet, yet dramatic, surge in real estate sales.

The National Association of REALTORS (NAR) has reported that residential home sales haveincreased by an astonishing 115% when the last quarter property for sale in normandy of 2007 iscompared against the same period for 2008. Have the experienced investors purchasing all of thisproperty been ignorant to the steady stream of media reports warning of declines in real estatevalues? The answer is no, they have simply been waiting for the right time to emerge like a smallswarm of locusts to steadily reap houses for sale like crop. In fact, their buying presence has been soprominent that national housing inventories of homes for sale have significantly decreased during2008s final quarter, a reliable sign that demand is beginning to once again catch up with supply.

But how do these brave souls know precisely when they are buying at the bottom of the market? Dothey throw caution to the wind and simply force themselves to muster the courage to purchaseproperty despite the fact that values may continue to decline in the future? The simple answer isthat savvy real estate investors do charlottesville va real estate not purchase property with theexpectation of immediate appreciation in value. Rather, investment real estate should be purchasedbased on the propertys potential for positive cash-flow. Positive cash-flow occurs when a propertysrental income exceeds the owners costs to maintain the property. Consequently, when a propertyprovides a positive cash-flow, a decline in real estate prices is of little concern since the owner cansimply enjoy the income his property generates until the market revives and the property can besold for further profit.

During the real estate boom years our nation became blindly infatuated with the appreciation of realestate prices, which represents the amount of value that a property will gain over time. So calledhouse flippers brazenly leveraged money to buy numerous properties with the expectation that theirvalues would increase, thus enabling them to sell the properties for handsome profits in a shortperiod of time. These novice real estate quasi-moguls, often addicted to HGTV and other televisionshows created to promote the industry like Flipping Out and Flip This House, regularly failed toconsider property cash-flows prior to making their purchases. Why bother when real estate valueswill always continue to appreciate, thereby alleviating the need to hold properties for long? After thehousing bubble burst, many of these speculators realized that they shouldnt have built theirinvestment houses out of sticks, and social gatherings became pleasant once again.

Seasoned investors build their investments out of bricks by carefully and conservatively analyzing apropertys cash flow potential prior to purchasing. The primary reason that these investors have beensitting on the sidelines for many years is that most real estate prices have been far too high togenerate positive cash-flows and a reasonable return on investment. It hasnt been until recently that

both residential and multi-family housing prices have retreated to levels where rental income willcover monthly mortgage payments and other operating costs. Further, with the construction of newhousing and apartments decreasing to a virtual halt, a still rapidly growing local population, andmany families displaced from foreclosed properties, an investment propertys owner is free to choosefrom a tenant base that is now stronger than ever. One can clearly see why a decline in real estatesales prices typically accompanies an increase in monthly rental prices.

No matter what the year 2009 holds in store for real estate investing, it is essential to rememberthat investing in real estate should always be considered over a long term. Although the opportunityfor a quick flip may present itself, the distinguishing benefit to sound real estate investments is theirability to provide income no matter what the economy throws your way.

About the Author:

Brian S. Icenhower, Esq., BS, JD, CRB, CRS, ABR, a California Association of Realtors Director,practicing real estate attorney, a real estate expert witness and litigation consultant, a prosecutionconsultant of Tulare County District Attorney Real Estate Fraud. He may be contacted at[email protected], or www.icenhowerrealestate.com.