Real Estate Investing in the Current Market

The state of the real estate market has been hammered in the news for the past couple of years as extremely negative.  Blame was being passed out to nearly everybody and in reality, it was greed, greed, greed.  People were buying outside of their ability to pay, and too many lenders were allowing them to do so.  But, the government was also promoting home ownership and providing ways for everyone to own a home.  Well, we can see the end result, but how does that affect the investors?  Over the past couple of years and projecting into next year, real estate values will have lost approx. 16% of their value from the top of the market in 2007.  At that time, compared to the values in 2000, real estate in Washington gained in excess of 80%, so losing 16% now means your gain is approx. 64%.  Not a bad return for 9 years.  So what about now?  Everyone knows that buying low and selling high has always been the way to make money.  Well, after the market runoff since 2007 and the possible runoff through early 2010, real estate will be at its proverbial low.  Once the economy improves, and it will, real estate will begin climbing again.  Will it be at the same rate as the 2000-2007  period?  Probably not, so investment properties will need to be held a little longer if you’re looking for a specific rate of return.  Now which properties should you concentrate on?  

Single family residences, including condominiums and 1-4 multi-family,  are good buys as you are buying at the low end.  Especially when you throw in the foreclosures.  They can still be financed with lower down payments, usually 10%-15%, with a 30-year fixed rate at historically low rates.  Add to that a soft economy where people can’t purchase a house for a variety of reasons and need to rent.  Therefore, you are paying at the low end of the market, financing at the low end of the investment rate scale, and  in a market where people need to rent rather than purchase.  Where’s the downside?  Really it’s not having enough cash to purchase the houses in the market. 

Conversely, the larger 5+ multi-family complexes are not a good buy at this time.  Not because they haven’t seen a drop in value, but because they are evaluated differently and the loans are extremely difficult for a variety of reasons that I’ll cover later.  Larger complexes are considered commercial and their values are determined by a complex calculation / manipulation of the net operating income.  Since people are renting more now, the net operating incomes are higher, therefore the value of the larger complexes have been generally stable if not increasing.  That being said, the financing of these are “horrible”.  As you are aware, banks are in extremely poor financial condition and the federal government has and is forcing them to shed their real estate loans, even the good ones, to lessen the chance of the banks going under.  So if you can find them, the down payments are running in the 25%-30% level and the incomes have to provide a debt service coverage ratio of at least 1.25 : 1.  Loan terms are also prohibitive as they are running at a maximum of 5 years with a fixed rate but more than likely the banks will want to use a 3 year term with a fixed rate or better yet a fully variable rate.  Sound good?  Not in this market. 

So investors should look to the single family or small multi-family to invest in during the next couple of years.  They will be able to more fully utilize their liquid assets to purchase more properties at better interest rates.  With the upside being, every property the investors are purchasing decreases the inventory of houses for sale and over time will bring the market back into stability.  What happens then is, the real estate market begins to increase in value, so the investors are actually creating the change in the market that benefits themselves.  Pretty good, isn’t it?  For those people that have liquidity, this may be your time to increase the eventual value of your holdings for the least cost.  Good hunting!

Dave Sato, ECP
Realtor
dave@seattlepowersearch.com
425-213-6411