Capitalizing on Opportunities in Residential Real Estate
A Unique Opportunity in Today’s Market
Opportunities are generally available in any market, at any time, but skilled investing requires an understanding of timing – and how to maximize it to your personal advantage. That’s why it’s important to keep tabs on changing real estate industry trends and frequently evaluate the opportunities that have emerged for investment within this sector.
Shifting market fundamentals in recent years are now swinging in favor of real estate investors. Home prices have generally become more affordable, potentially making properties a better investment value than they were in the height of the real estate boom. And financing has become more affordable than ever. Today’s rates are at historic lows, allowing investors to leverage their capital effectively, even in properties with moderate rates of return.
With overall costs of ownership at all-time lows, it’s not surprising that many would prefer to buy. Yet, strict mortgage financing qualification standards have left many would-be buyers unable to purchase. The result: a large pool of individuals who can’t qualify to purchase a home are then left with renting as their only option. This creates a win-win situation for investors – a combination of more affordable properties and property financing, coupled with increasing demand for rental homes, which presents a unique opportunity with strong potential profits.
Why Real Estate Investing?
For many investors, one of the most appealing aspects of investing in residential real estate is diversification. These properties offer investors the opportunity to invest in an asset class that is relatively uncorrelated to the performance of equity markets, such as the S&P 500 or the Dow Jones Industrial Average. This is a major benefit for individuals interested in limiting their concentration to a singular asset class during the inevitable market downturns that characterize any major investment class.
Residential real estate also offers investors the benefit of sizable cash flows on a regular basis. Unlike other investment types, residential real estate investments potentially pay monthly, in the form of rent checks. Over time, those revenues can become sizable as mortgages are paid off or as rental income gradually exceeds fixed financing costs. Many residential real estate investors savor the day when their investments will fund their retirement lifestyles with monthly checks. The steady cash flows provided by these investments offer a compelling counter-balance to other classes of investments that rely on periodic sales and disinvestment to get cash back out.
There are a number of tax advantages in real estate investing – most notably, the ability to depreciate the value of the property and any capital improvements. Real estate investors also typically benefit from the ability to carry passive losses and can take advantage of many valuable deductions related to costs incurred through the management of their properties. For those who qualify as a Real Estate Professional under Internal Revenue Service guidelines, the tax benefits are even greater.* In general, the after-tax performance of many real estate investments can be compelling when compared to other asset classes with less-advantageous tax treatment.
Rapid Growth in Investment Property Sales
Potential investors have clearly taken notice of the promise for investing in today’s real estate market. The past two years have been marked by a dramatic increase in residential real estate investing, according to the National Association of Realtors. With 27 percent of all home purchases made primarily as investments, residential real estate investing has grown beyond a niche investment for those who want to own and manage property – it’s a multi-billion dollar specialized investment class. From 2010 to 2011, sales of investment properties increased 64.7 percent, with 1.2 million investment properties purchased in 2011.** Preliminary 2012 statistics also show strong performance in sales to investors across many major metropolitan markets, with some markets even experiencing shortages in inventory due to massive demand from investors.
International investors from around the globe are also clamoring to get their seat at the investment table, along with major institutional investors, like insurance companies, pension funds, and private equity firms. These groups are purchasing hundreds of millions of dollars in residential real estate in markets across the United States, with many targeting investments within the Mid-Atlantic region. Private equity firms, in particular, are exploring ways to invest in residential real estate in major metropolitan areas across the country, as they recognize those unique factors that make today the perfect time to invest.
Managing Made Simple
Traditionally, individual real estate investing required a “hands-on approach.” In other words, individual investors would have to spend considerable time, energy, and effort to find, research, purchase, and manage their investment properties. The process of finding properties and then managing them – including finding tenants, making repairs, and performing routine maintenance – were all essential steps of investing in residential real estate. And not surprisingly, these massive investments in time and “headaches” weren’t for everyone. As a result, many would-be investors simply stayed away.
Today, investors have more options for investing available at their fingertips, which enable the luxury of less personal time and effort. The growth within the real estate investment sector has resulted in a proliferation of alternatives that weren’t widely available even a few years ago. Professional property management firms, like Long & Foster Property Management, are growing quickly – allowing investors real options to invest, without having to manage the day-to-day activities of their properties. With professional leasing services, comprehensive maintenance services, specialized investor-targeted warranty coverage options, and simplified, prepared tax documentation, individual real estate investing is no longer just the domain of those with the time and willingness to self-manage.
Considering Jumping In?
If you’re considering investing in residential real estate, there are a number of steps you can take to ensure your experience is both positive and profitable. Most importantly, be sure to select an experienced real estate agent who has worked with investors and knows how to find opportunities in the market that will help you meet your personal investment goals. An experienced agent will be able to guide you through the process with an eye on the bottom line – giving you access to the best investment opportunities available and helping you avoid potential risks. They will help you understand the transaction process clearly, and will provide a knowledgeable perspective on the long-term potential, rental market appeal, and potential risk factors you need to evaluate to make a sound investment decision.
When choosing a company to manage your investment property, select a property management firm that has experience, ample resources, and a large team of professionals on staff. In 2012, Long & Foster’s property management team was responsible for a portfolio of over 5,500 properties representing more than $1.4 billion in homes under management – including single family, townhome, and condominium rental units – for investors and owners throughout the Mid-Atlantic and Northeast regions.
Larger, more professional firms, like Long & Foster Property Management, are typically able to offer investors better service, because they can keep better abreast of changing regulatory environments, have invested more in infrastructure, and have in-house legal counsel. Larger firms also typically have larger cash reserves, ensuring that investors won’t be “left holding the bag” if something goes wrong with the management of their property. The majority of property management firms are small sole proprietors or small teams – and they simply can’t do it all, and do it well. It makes sound sense to pick a management firm that will best protect your assets.
Interested in learning more? Take advantage of today’s opportunities. Market fundamentals are signaling that today is a historic opportunity for investors interested in diversifying their portfolios with strategic investments within the sector. Contact an experienced Long & Foster agent for more details on how you can jump into investing in the residential real estate market.
About the author
Jeffrey S. Detwiler is president and chief operating officer of The Long & Foster® Companies, parent company to Long & Foster Real Estate, Inc., the largest independent real estate company in the U.S., and Prosperity Mortgage, a joint venture with Wells Fargo. From extensive, neighborhood-level market information to Long & Foster’s core services companies—providing mortgage, settlement, insurance and property management services in a streamlined manner—Long & Foster offers the services necessary to make today’s real estate transactions manageable for owners and investors.
* Contact a professional tax advisor for more details on the tax benefits of investing in residential real estate and specific qualifications.
** Source: 2012 National Association of Realtors Vacation and Investment Homebuyers Survey