Buy now? Or is it too late?

Lots of people ask "Is this a good time to be getting into real estate?". As always, it depends...

The housing market right now is wildly overpriced -- in some areas. Therefore the first question is simply "Where do you want to buy?" While an extremely important question, it's not the only one worth asking. The second question you need to ask is "Why are you investing?" which is a subject I'd like to pontificate on today.

While some late-night-TV scam artists will try to convince you that you need only to buy a parcel of land and money shall rain upon you like the allegorical felines and canines, there is a little bit of work and research to be done. Money in real estate can be made in some combination of two streams:

• Rental Income
• Appreciation

(While it's true that you can also save some money in tax write offs, no one buys real estate just for the deductions. It'd be a slow and painful route to riches.)

So while you examine your local market, look at multiple things. How much have the houses gone up in your area over the last few years? If it's been in the double digits, then odds are you missed the appreciation train and can't expect tremendous returns through appreciation alone. You can also read up on experts analysis of your area.

According to the sources I linked to, the area Biff and I invest in went up by 27% last year and are currently over valued by 16%. So the outlook of big gains through appreciation over the next year or two look slim, but still possible. Personally I forecast growth of about 6-8% this year, since we lagged behind the rest of the nation in appreciation.

The next important thing to research is rent in your area. Start by simply looking on rent.com or rentclicks.com or some other similar website and compare rental rates in your area. The type of housing you are interested in (condo, townhouse, etc) and size tends to pull down what sort of rent? Have rents been moving up or down? If you are in a market that has rapidly overpriced recently, it's very likely that rents will quickly rise to match. So if you were looking at buying an apartment building this might be the right time to buy, while rents are still relatively low.

Don't be afraid of the numbers. Learn to love them. What sort of mortgage would you have to take out to get a house? 80%, 90%? How much of your mortgage could be covered by rental income at the current level of rent in your area? If houses have gone up, rents will probably follow, would that put you in the black? Could you survive comfortably until then?

The run-up in housings costs have done two things to the investment property market. It's made it more expensive to get into, and it probably guarantees that a run like this one won't happen again for another 5-15 years. But that doesn't mean there aren't good, money-making deals out there. In some market it might make sense to hold off from buying (for the same reason I'm renting), but in many other the opportunities are there. Just bear in mind that the crazy run-ups of the last 5 years are mostly gone. Real estate investing has gone from wild speculation and insane profits back to a simple, effective way to generate a solid cash flow.