If you are an investor in houses or rental properties then you will be concerned with the housing market?s performance these days. Despite the much lauded economic recovery that is supposed to be underway, the latest news on the U.S. housing market front will not inspire property investors.
Read on to learn why home prices are still falling and what areas of residential real estate continue to make the most sense for your investment dollars today.
Why Are Housing Prices Still Falling?
New reports in May from two real estate tracking firms Clear Capital and Zillow.com show that the hoped for bottom in the housing market has not yet appeared. In fact, housing prices have entered an official double dip on a national basis. Clear Capital shows that these average national home prices are now below the former Great Recession lows of March 2009.
You might be mystified as to how this could happen. The problem lies with the foreclosed properties and short sales that banks continue to move to sell. Bank owned property sales have reached a shocking 34.5% of the entire housing market. This has caused the nation?s average home price to decline by 4.9% for the quarter and five percent on a year on year basis.
The home prices for the country have actually dropped by 11.5% over the past nine months leading up to May 2011. This rate of decline has not been witnessed since 2008, back in the worst part of the financial meltdown and crisis.
The foreclosed property sales were hard enough on home prices, but now short sales that allow borrowers to sell and walk away from houses on which they are underwater are exerting a larger negative force on the market. Zillow.com reported May 9th that there is now an all time high of homeowners who have negative equity in their property, or who owe more than their property is worth.
Negative Equity Has Risen to 28.4%
This number of negative equity home owners has risen to 28.4% of all single family houses that have a mortgage. If your property is in one of the major metropolitan area?s then the numbers are higher. In Atlanta the negative equity home owners are 55.7%, in Chicago they are about 46%, in Denver they are 41%, in Massachusetts they are 46%, and in Phoenix it is almost 75%.
This information comes with both good news and bad news. The good news is that the foreclosures on new mortgages are significantly lower than on the ones made before the housing and financial crisis. The bad news is that at the rate the banks are going, they will require a good four years more to work through all of the defaulted loans that will go to foreclosure. This means that it will take them longer still to sell the houses on the real estate market.
Another reason that home prices continue to fall is that the availability of mortgages remains scarce. This is particularly the case for middle to lower income borrowers. Consumer confidence in this housing market is already weak. This all leads to a vicious cycle where prices continue to fall and your chances of being underwater on your properties increase.
What Do the Falling Home Prices Mean for Your Investment?
It is clear that lower prices on primary and investment properties are here to stay for a while. You should not count on a higher year end to the value of your investment properties in 2011. Remember that these losses are only on paper unless you have to sell them. In the meanwhile, you can continue or start to rent out your property and have a nice stream of income that comes in to cover the mortgage and provide additional cash flow each month.
Where Should You Invest in Residential Real Estate Now?
While home prices continue to fall, it is dangerous to invest in single family homes and even townhouses. Eventually, you will see a bottom, but it may not be until after your new purchases are underwater. There are other areas of the real estate market where you can invest and still make money, even as prices decline.
Low income apartments are a good investment even in this challenging real estate market. This is because people will always need low cost housing. When you buy or build apartments for low income families, you can expect to receive a good return on your money. These are long term investments that will not cost you so much per unit and will allow you to wait out the price changes in housing.
In the meanwhile, you will have more money come in than the mortgage payment that will allow you to have additional income even while you are paying off the property. This rental income can last for many years if you keep up the maintenance on the apartments.
As an example, you might realize eight hundred dollars in rent on a town house that costs you around $130,000 in a small town. Low income apartments in such a town might cost you around $50,000 per unit but will still rent for five hundred dollars.
Townhouses Versus Rental Apartment Unit
The townhouse is more than two and a half times as much money to buy as the low rental apartment unit, but it does not pay even twice as much rent. Units that cost you so much less upfront return a disproportionate amount of rent for the cost of the property and mortgage payments.
This provides a greater amount of cash flow as you are able to acquire more rental units for the same money as the higher priced properties. They also are lower valued units that will not decline as sharply in value as other more expensive townhouses and single family homes. This is what makes low income apartments such strong investments in this real estate climate and any housing market.
There are also tax advantages that you gain with low income apartments. Most municipalities, states, and even the federal government will provide you with tax credits when you own and rent out low income apartments. You are also able to write off expenses with upkeep and maintenance. Using these credits, the income that you realize on the venture can be almost tax free.
It is true that there can be more work when you own low income apartments. You may have to stay on top of your tenants to get the rent on time, and it may be paid late more often than with a higher end tenant in a more expensive property. You will probably have some small repairs to contend with too. These are all part of the reasons that your rate of rent return is higher on low income apartments than on traditional townhouses and houses.
What Residential Properties Should You Not Invest In?
As you look around for real estate to not get trapped in, there are certain types that you should definitely avoid. Any area, city, and especially neighborhood that features a great number of foreclosures is dangerous. These properties may boast attractive prices, but they are likely to come down further still.
You also want to avoid properties in areas where the unemployment rate is higher than the national average. It will be difficult for property prices to be sustained and recover where the job base is not there to support new home purchases. Is it not better to err on the side of caution where real estate investments are concerned in the double dip housing market that we have entered?
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Source: http://www.wealthbuildingcourse.com/income-apartments-real-estate-investment.html
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