For several years I have been intrigued with real estate as an investment.  I can remember watching shows on T.V. (back when I owned one) of people flipping houses that honestly didn’t need much work.  It seemed like a way of making decent money and since I had not found my way to stock market investing (not that I had any money even if I had found my way) real estate offered and investment vehicle in which I felt comfortable with and not intimidated by.  Sure, there are plenty of ways to lose money in real estate just like there is in stocks and the past few years have exposed the folly of those who overextended themselves and made purchases of properties at exaggerated values only to watch the wealth they believed themselves to be creating vanish.

For those who were burned by the turn of events a few short years ago real estate may be a scary prospect and one not even worth considering.  However, for those of looking at the state of affairs a few short years later the landscape looks a little different and the possibility exists to earn a profit from the capital invested.  What follows are my thoughts on why I believe real estate will be a better investment for me building my wealth going forward than could be accomplished remaining invested in the stock market.  I almost liquidated my entire portfolio to purchase the house I’m hoping to close on and do the rehab, I better have some compelling reasons for doing so.

Real Estate as a Home vs. Investment

The other day when I was reading this I wanted to write a post in rebuttal to the writers main premise.  However as I continued reading I realized that although having different experiences we did agree on one thing; it is imperative to know the difference between real estate as a home and real estate as investment.  Digging a little deeper I found more of his thoughts on real estate here.  I highly recommend anyone considering their home or future home as investment read this and run the numbers yourself in for your own situation.  As I read further I found this little nugget of truth on which I rest my claim for real estate having the potential to be a good investment:

BTW, while owning your own house is a lousy investment, investing in rental houses can be a whole other and very profitable thing.  As alluded to above, at one time many years ago I was both a renter and a landlord at the same time.

I can’t say that all residential dwellings make for poor investments; there are too many individual circumstances to say for sure that it is not.  However, if you were to buy a home with 100% financing, larger than you need, and with high holding costs then there is a pretty good chance it’s not a great investment.  I’m not against anyone owning a home, but be sure to know the reasons why you own the home and not confuse your personal dwelling as being an investment, clouding those concepts can be costly over the life of a thirty year mortgage.  If home ownership isn’t the best of investments than what makes real estate a potentially profitable venture?  Just as I chose dividend investing as my niche in the stock market, I believe I have found a niche in the real estate market as well; foreclosures in need of rehab at deep discounts compared to other homes in the area and the bulk of the rehab myself.

Supply and Demand

The collapse of the real estate market a few years a ago flooded the market with homes and foreclosed home tend to need extensive work to get them back in condition to sale at current market prices.  Many areas are experiencing rises in home prices and recently mortgage rates have begun to rise as well.  This is a good sign that certain real estate markets are indeed recovering.  However, many areas are still dealing with a high supply of foreclosed homes that will need to be purchased for surrounding home prices to increase to normal levels.  Notice I said “normal” and not what prices were before the real estate bubble burst.  Purchasing homes before 2008 meant paying a high valuation for what you were getting and it really isn’t much different from over paying for stocks.  If a real intrinsic value isn’t present to support high valuations then any investment vehicle will experience its “reversion to the mean”.  This is what has happened in residential real estate, but now that we are past that phase there are a number of opportunities to buy at deep discounts if you are not afraid of the risks involved.  Those of you who have read this blog for awhile know that I’m all about buying at a discount.  Banks still have a significant number of properties on their books and qualifying for a mortgage isn’t as easy as it once was. Until this supply is dealt with prices will likely remain low before increasing offering an opportunity for both investors and home owners alike.

Don’t Be Afraid To Add a Little Elbow Grease

If the increased supply of residential real estate has helped lower the price of homes then the condition of foreclosed homes add another opportunity for potential investment return.  Since last year when I first seriously started looking at real estate I can tell you that all of the homes I’ve looked at that were foreclosures were in need of significant repairs.  Many people will see a home like this and be instantly turned off, but when I see a house needing some work I see potential $$$ signs.  This is not for everyone and you either need to have the skills to do a rehab project or be willing to learn; I fall into the latter class.  The house I signed a contract on needs electrical work, plumbing, HVAC and shit load of cosmetic work.  Nothing serious, but a lot of little stuff that adds up.  If I were to contract all of this out the return I would make on the sale would hardly be worth it, but the fact that I’m willing to tackle this project on my own means that my odds for earning a return on my money are increased.  Consider it a “margin of safety”.

As I said this isn’t for everyone and if you are looking for a truly passive investment then move along, rehabbing foreclosures is not going to be your cup of tea.  However the nice thing about real estate is just like other forms of investing there are many ways to make money, you just have to decide what you are and are not willing to do.

Saving On Housing Expenses

I’m not sure what the proper accounting principle is for considering the savings gained form a reduction of expenses that an asset affords, but saving on rent is another reason that I see a real estate investment appealing.  My plan is to get a few basic items taken care of first then live in the house while I’m doing renovations.  This might be a huge turn off for some, especially if a family is involved, but for me it will work out nice.  I don’t have a great deal of possessions and I’m the only one who has to deal with the disarray of live in a construction zone.   I may end up hating it, but saving 675.00 a month on rent will most likely sooth any ill feeling I have during the process.

Sure, there will be a few other expenses such as garbage, water, and maintenance to name a few that I don’t currently pay for (or do I??) but I still feel like I will come out ahead versus renting.  By owning my own place I will be able to take the 8100.00 spent in rent and put it towards the renovations of the house.  The capital will be returned back to me with a profit from the value I have created in turning an abandoned house into a desirable home.  Guess what I have to show for the 8100.00 at the end of the year by renting?  NOTHING.

I’ve given all this a great deal of consideration.  If you don’t agree with my plan or see something I may not have considered I would love to hear your thoughts.  Any additional insights from others only benefit me by increasing my understanding of a subject.  I look forward to hearing your thoughts…