That's a great question. Things have obviously slowed down a bit, but did the buyers disappear? Some of them have. But there are still deals being done and many of our more sophisticated clients are taking advantage of the turmoil in the industry to find good, solid value in the real estate market.
As real estate professionals, we always remind our clients that a) real estate can be a sound, solid investment, and b) right now there is significant opportunity in the market.
Real Estate - A Solid Investment
Real estate can be a solid investment for the following reasons:
Income - Bay Area rents increased 9.4% last year, and many markets, like San Jose, have seen even higher increases. With lending standards tight, many first time homebuyers are remaining tenants and those who are losing homes to foreclosure are getting back into the rental market. Many of our investors are choosing to acquire single family homes and apartment buildings to capitalize on the strong rental market.
Leverage and Appreciation - Appreciation won't happen overnight, but with the right property, over the long term, appreciation is a safe bet. Using leverage to acquire the property will magnify the return on investment. Appreciation of 10% on a $1MM property translates into a 50% return on investment with a 20% down payment. Real estate is one of the few investments where investors can use other people's money to magnify their return.
Tax Advantages - With real estate there are tax advantages both while the property is owned and when it is sold. While a property is owned, the property can be depreciated, expenses can be deducted and the interest on the mortgage can be written off. A majority, if not all, of the income a property generates can be sheltered from taxes because of these tax advantages.
When the property is sold, taxes can either by avoided, or deferred. Section 121 of the tax code allows for the avoidance of taxes on a primary residence, and Section 1031 allows for the deferral of taxes on the sale on an investment property. Many sophisticated investors will combine Section 121 and 1031 together for maximum tax advantage. An example would be to convert a rental property into a primary and avoid taxes on the sale.
Right Now There is Significant Opportunity in the Market Turmoil creates opportunity. Right now we have a confluence of events that make the real estate market very attractive:
1. Interest rates are at historic lows, and expected to get even lower.
2. The supply of property is at a very high level and our investors are cherry-picking the best properties in the best locations for their portfolios.
3. Rents for single family homes and apartments remain strong.
4. Prices are down significantly. In many markets (Sacramento) prices are down to year 2000 levels.
Warren Buffet advises "be fearful when others are greedy, and be greedy when others are fearful". We like what Mr. Buffet has to say, and we advise that our clients approach today's market with the same perspective.
*From our friends at Asset Exchange Company, San Francisco, CA
