Real Estate Investing In The Face Of a Double-Dip

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Like a potato chip-wielding George Costanza hovering over a bowl onion dip, real estate seems poised for a double-dip. After bouncing off recent lows, many markets are showing signs of heading down again. Some areas that have experienced extreme declines, such as Detroit and Las Vegas, may not see a significant falloff simply because they have already fallen so far. However, they could experience a slowdown in sales.

Even with mortgage rates at historic lows sales activity has slowed in most areas. The recently expired tax credits are certainly a big factor. But the unemployment crisis is also weighing down the market. It doesn’t matter how low mortgage rates are if people can’t make the payments. Many municipalities are in serious trouble as well which doesn’t help the situation.

An Investor’s Dilemma

One thing investors hate more than anything is uncertainty. That’s true of any market, not just real estate. Whether investing in stocks, bonds, commodities, or real estate, an investor wants to know which way the wind is blowing. There’s a saying on Wall Street that “the trend is your friend.” If you know the market direction you can make your investment decisions accordingly. But which way is the real estate weather vane pointing now?

Is the market simply readjusting to life after the tax credit? Is it a temporary blip that will soon disappear? There are those who say that real estate is about to plummet and another school of thought that claims it is simple hysteria and the market will soon head up. What if it is a prolonged flat-spot? Are we simply in for a “lost decade” in real estate? Everyone has an opinion but the truth is that nobody really knows.

To invest or not to invest?  That is the question. If you do nothing you may miss the best investment opportunity in recent memory. If you jump in only to watch things head further south you’ll wish you had waited. That is the dilemma – an investor’s sword of Damocles.    

Prudent Strategy

So what now, Batman? First, face the fact that any investment entails a certain degree of risk. It can’t be avoided or eliminated, but it can be managed. What kind of investment would you want to own if the market did decline? For many the answer is one that can sustain itself. Rental properties are one such animal. If the income is sufficient to cover all expenses and provide an acceptable profit, does it matter if the value goes up or down? Of course it does when it’s time to sell, but if you are forced to hold on to a property that generates a profit it’s not such a bad thing. You won’t go broke making a profit but you might if you are banking on appreciation that never arrives.

Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years. – Warren Buffett

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6 Comments

  1. Kristopher Angstadt on

    I fully agree with your post, all of us as investors need to be cautious, but optimistic. You must do your homework and make educated decisions based on your local market. There are many markets that have finally hit the bottom and are starting to stabalize. If this does not describe your market try and find one that fits this mold, it will let you get back to knowing how to buy again and make a profit!

  2. Solid advice. Even here in Canada I often hear people talking about real estate being a “sure thing”. It’s the old “there’s only so much land in the world so it will keep going up” story. Anyone who’s been up in an airplane over Canada or US will see that there is still PLENTY of land left. 🙂

    When I buy my real estate I “estimate” the value to go up between 4-6% per year over 10 YEAR period, with expected dips in between. If it doesn’t, the deal has to still make sense. This type of conservative thinking helps me profit on each deal, even in markets where everyone thinks that 10-20% year year growth is to be “expected” because that’s what happened in the last few years.

    -Paul

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