As we are all well aware the 2006 housing market crash has wiped thousands of dollars of the value off of millions of homes across America. There are currently over 16 million American’s facing negative equity with their homes; i.e. the value of their home is now less than their mortgage. Since 2006 there have been a record 7 million foreclosures with a further 2 million expected in 2012. If real estate such a high risk you may be wondering why we’re saying you should invest.

Whilst the property market has been crashing so has the number of people taking home loans; in fact so few people are applying for mortgages that the rates have been dropping rapidly. If we consider the following facts we can begin to see why investing in real estate is now such a good option.

- House prices have dropped on average 27%
- The 30 year fixed rate mortgage interest rate has dropped below 4% for the first time in history
- The number of people buying properties has fallen drastically
- The number of people renting properties continues to rise
- The Apartment Property Price Index has seen an increase of 15.2%. in the last year

If we consider this objectively we can see that the investment market in real estate is looking incredibly tempting. Prices are unlikely to decline further in terms of the value of the property itself and rental prices look set to increase as fewer and fewer people invest in property. This means that the potential return on investment (ROI) from a property is now significantly higher than many other investment vehicles.

Investment case study

To look at this more closely we’ll take a case study. Let’s say an apartment cost $100,000 in 2006. If that property has declined in value by 20% then it will now cost $80,000. Secondly then let’s say that the rental price of that property in 2006 was $500 and is now $560. As an investor we decided to take out a 30 year $20,000 home loan at 3.5%. When we then calculate our ROI the mortgage will cost us a further 21,000 over the 30 years. However if we rent the property we will receive $201,600 in rent over the same period; providing prices stayed stable for 30 years. Clearly then the ROI for people who can afford small home loans is huge. With prices increasing in the apartment sector the value of the property itself is also likely to increase.

Cautions

It is always prudent to be slightly cautious with investment options so we thought it would be necessary to briefly examine the problems with real estate investment. Firstly, we have the potential that you won’t maintain tenants on a regular basis – decreasing your ROI significantly. Secondly the property may need maintenance or refurbishment which will have to come out of your returns; meaning a less fixed income. Finally the income from second properties is taxable so (depending on local taxes) you will lose between 5 and 15% of your income. You should factor in these extra charges when calculating your mortgage and ROI and use a home loan calculator to ensure that you understand the interest rates you will pay.

Conclusions

Nevertheless it seems evident that real estate investment is at the moment a very lucrative investment opportunity and that by carefully choosing property for rental purposes we can see a significantly higher ROI than we can from other investment vehicles.