Investors weary of the wobbly stock market and slim returns from certificates of deposit might take a cue from attorney and business coach LeTonya Moore. She's investing in real estate.
This summer, she bought a town house in Tampa, Fla., for $37,000 in a foreclosure sale. She'll live there for one to two years and then rent it while shopping for more properties in the area. Overall, she plans to make three real estate investments a year over the next four years so she can achieve her goal of financial independence.
"Real estate is as good, if not better, a long-term investment than the stock market," she says.
The housing downturn is creating what looks to be a new wave of real estate investors, who are snapping up homes at distressed sale prices. But this time, instead of flipping homes, they plan on holding them for the long term and renting them out. This combination of a steady income stream and the potential for future price appreciation looks like a better, more comfortable, bet to many people than investing in stocks or bonds. Record-low interest rates combined with still declining home prices has made homes so affordable that existing-home sales edged up again in November and now stand at 34 percent above the housing market's cyclical low point in mid-2010, the National Association of Realtors (NAR) reported Wednesday.
"People see an opportunity to earn returns at a time when job prospects and returns from traditional investments are dismal," says Jeff Ball, president and chief executive officer of Econohomes, an Austin, Texas, firm that buys distressed residential properties in volume and resells them. "It's steering them in a new direction with their investment dollars."
These moves are helping to provide a little stability to a housing market still struggling with falling prices. Investors bought 19 percent of the homes sold in November, a little above their 17 percent share in 2009 and 2010, according to the NAR, based in Chicago. Last year, 51 percent of buyers of investment properties planned to rent them to others, the association said.
Of course, some landlords have been buying homes and renting them out for years. Now, they're being joined by a new slate of investors. In a survey this summer, 51 percent of brokers and sales associates of ERA Real Estate said they were seeing more first-time housing investors in their markets. In a survey by Econohomes late last year, 39 percent of those who had bought – or wanted to buy – distressed properties selling for under $50,000 were new to the market.
Since 2009, Janet Talboys of Birmingham, Mich., has purchased five homes to rent in the Detroit area – all with cash, all sold as foreclosures, and all under $10,000. "My goal is to own 10 houses as investments," says the homemaker, who embraced real estate investing after a stock market swoon sent her retirement savings plummeting. Thanks to her property investments, Mrs. Talboys says she's been able to recoup her stock market losses.
Initially, Talboys bought the real estate by using assets from closed-out mutual funds that she had placed in a savings account. Now, she taps her retirement savings through a self-directed-style IRA. Unlike a regular individual retirement account, a self-directed IRA is held by a trustee or custodian for the investor and can contain a much broader array of assets – including investments in real estate.
"By using a self-directed IRA, I can direct my custodian to purchase properties more quickly than if I had to get a mortgage," she says.
This strategy of investing in residential real estate via self-directed IRAs is gaining steam, says Kevin Kaczmarek, founder and chief executive officer of Capital Blueprints, an asset management and educational firm in Carmel, Ind., that specializes in self-directed IRAs. "It gives people an opportunity to enter a market that might otherwise be financially inaccessible. More people are realizing that residential real estate investments are a good alternative to what they'd traditionally been doing with their retirement accounts. This allows them to diversify their portfolios beyond the traditional investments."
What kind of returns can they expect?
"We're averaging about 9 to 10 percent annual returns from renting the four investment properties we own," says Stacy Bruno Migale, who owns a bakery in Petaluma, Calif. (The return rate is calculated by dividing a house's purchase price by the annual net rental income.) She and her husband, a commercial painting contractor, have had two of their housing investments for some time. Two years ago, they bought a condo for $155,000, which was $160,000 less than the previous owner had paid for the property. Earlier this year, they added a 1,000-square-foot single-family house for $228,000, which was roughly half of the prior owner's purchase price, says Ms. Migale.
Of course, housing investments carry risks. Home prices could easily slide further. Tenants might be in short supply. Unexpected maintenance costs could cut sharply into profits. Also, investors should find out if their property taxes would rise if they rent out their homes and no longer live in them.
Investors who can pay for houses with cash may be in a better competitive position than those who can't. That's because cash buyers often can close a deal faster than those who have to wade through the mortgage-approval process, experts explain.
Plunging into residential property investing can be "scary," says Moore of Tampa. But it's also "empowering, because I am implementing a plan I've been thinking about for the last four years.
Now is the perfect time," she believes, to put it in motion.