These days, with home sales still booming and home prices still rising in many parts of the country, it seems like paradise to real estate investors. But there may be trouble in paradise.
One way that many are hoping to cash in on the boom is by buying homes and renting them out while waiting for them to appreciate in value. Sounds good, right? You spend, say, $200,000 on a house and collect, say, $1,000 per month on it. You then wait a few years, aiming to sell it for, perhaps, $300,000. You're counting on a lot of things to work out the way you want, though, and they might not all happen as desired. One example: Home prices may level off or (gasp!) drop in the next few years.
Here's another interesting scenario. Note that you're not the only one buying and planning to rent. More and more people are doing so these days. And as they do, the supply of houses available to rent goes up. This will tend to bring down the average price for which you can rent your house. Uh-oh. If the price of homes starts falling, then not only will you have trouble making a profit on the house you bought, but also some of those renters will decide that they'd rather buy their own homes than rent. All of a sudden, the supply of renters may drop, putting further pressure on rental rates.
One possible upside: If home prices continue to rise, more and more people may be unable or unwilling to buy, and they will opt to rent. But this, too, has a downside: These people won't be bidding on your house when you decide to sell it.
In The Christian Science Monitor, Ron Scherer recently wrote that rents are down 10% to 20% in some parts of New Jersey, while in the Phoenix area, it's taking from six to nine months to rent out some homes. Scherer added, "Robert Fowler, who runs the website RentList.com and HomeRentalAds.com, says he has watched rental rates fall, but thinks they have stabilized at the moment. One reason for the leveling-off may be an increase in the number of people signing 'lease-purchase' agreements. These are rental arrangements with a landlord who agrees to sell at a future date. 'It indicates people would like to buy, but they can't afford it right now,' Fowler says."
Real estate can be very profitable, but it isn't as easy as it appears. Learn more in these articles:
- So You Want to Be a Landlord?
- Make Money as a Landlord
- Don't Bet on Real Estate
- I'm Buying This One for Me
- Buying a House Is Easy!
- 10 Things to Know About Mortgages
Another way to invest in real estate is via stocks. For example, Mike Cianciolo recently wrote admiringly about luxury home builder Toll Brothers
Finally, consider real estate investment trusts (REITs). Learn more in "Should You Bank on This REIT?" You can see which REITs (and hefty-dividend-paying stocks) we recommend by taking advantage of a free trial of our Motley Fool Income Investor newsletter.
For lots of money-saving tips on buying and selling homes. and even some special mortgage rates, click over to our Home Center.
Longtime Fool contributor Selena Maranjian owns shares of Home Depot. The Motley Fool has a strict disclosure policy.