Unless you've been living under a rock for the past few months, you've heard about the "slowdown" in the residential real estate market. Home prices, which had gone up quite a bit over the last several years, stopped going up. And just as with any other bull market, a lot of people who had bet -- one way or another -- that prices would rise forever got a nasty surprise.
In some ways, buying real estate is like making any other investment: The market goes up and down in the near term, but generally trends up over the long term. And to some extent, "buying the dips" -- while prices are falling -- can lead to gains over time.
But even though my value-investing heart looks at the chart and screams "Buy!", investing in residential real estate isn't like buying stocks. The racks at Barnes & Noble may be overflowing with books insisting that real zillionaires make their fortunes in real estate, but the truth is, compared with stocks, real estate is a complex, multidimensional investment, whether you're buying an "investment" property or a new home.
Should you buy now?
I look at it this way: If you need a new home, and you can afford one, it's time to buy -- whether the market is up or down. I've called home ownership "The Best Investment Ever," and when you look at the complete picture, it's true -- there are many tax and financial advantages to owning a home, and homes do tend to appreciate over the long term. And you've gotta live somewhere, right?
But in the sense of, say, your retirement portfolio, home ownership isn't really an investment -- it's a purchase. You may make money in the very long term, but meanwhile there are taxes and interest costs and upkeep and the roof on the addition is leaking again -- you get the idea.
If you're both smart and lucky, you may see a sizable windfall if and when you sell your house and buy something smaller. But the idea of investment returns is -- or should be -- a minor consideration next to the major homebuying drivers -- cost, location, condition, and the big one: Do you really like it?
Investment property: Key considerations
I define investment property as a piece of real estate that generates income -- specifically, more income than it costs to own and maintain the property. Whether we're talking about a beach cottage or an office park, that's the biggest consideration: Income must exceed the cost. The cost includes everything: mortgage payments, taxes, upkeep, and any utilities you agree (or are required) to provide.
When considering a piece of investment property, those are the calculations you've got to make. You'll also need to look at how solid the income is, whether you'll be able to continue to find tenants over the long term (and whether you'll be able to charge future tenants as much as you're charging the current ones), and a host of other factors.
Once again, though, fluctuations in market prices aren't much of a factor in the purchase decision, except to the extent that a change in value has made a property significantly more or less profitable. It may be that a property that was marginally profitable at $300,000 will provide a nice income stream if bought at $250,000 -- assuming interest rates don't rise and eat up too much of the difference, and assuming you don't have to decrease rents in response to sagging demand, and assuming a bunch of other things that don't have to do with the purchase price.
The upshot
In the end, the stock market analogy doesn't really hold. The fact that the real estate market is down is -- or should be -- only a small part of your overall decision to purchase property. If you want to make a stock-market-like investment in real estate, consider investing in REITs (real estate investment trusts) instead -- or better yet, a good real estate mutual fund. T. Rowe Price Real Estate Fund, a Champion Funds recommendation, is a great no-load choice, with strong established management and recent holdings in leading names like Simon Property Group
Want more choices? The Champion Funds team has recommended a couple of other top real estate funds that merit your consideration. Check out the newsletter service with a free 30-day trial. There's absolutely no obligation to subscribe.
Fool contributor John Rosevear does not own any of the stocks or funds mentioned. The Motley Fool has a disclosure policy.
