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I have friend who owns a house and still owes on it, and also owns a vacant lot which he still owes on. Instead of paying off the lot or paying down his house, he purchased a rental house. Was this really a good move on his part? He's in his early 30s and has plenty of time to pay off the debt but there is quite a bit of debt there.
Others are telling me that if they had the cash, they would be spending it all on real estate. Prices are down and interest rates are low, but won't prices fall further when interest rates start to increase? Is this a normal real estate crash like we had in the early 90s or something bigger that will take decades to recover from?
Because of the uncertainties you mention, purchasing now only makes sense if the property cash flows substantially above and beyond debt service, property taxes and maintenance. In other words, rental income exceeds expenses which compensates for lack of appreciation - or, worst case - continued depreciation in value. Since your friend is young, he has plenty of time to recover from a bad bet but the trick is to properly recognize the trend and time his purchase at the low of the market and sale at the higher end. The cash flow buys him time to wait out the market. In some cases, I think there might be investments worth making now. It depends on the location and other variables peculiar to the particular investor.
Last edited by Ariadne22; 10-14-2010 at 03:49 PM..
Usually people look at what their montly payment will be so even if interest rates rise home prices will most likely go down to balance everything out. The majority won't care if they are paying 4% or 8% if their payment is still X a month. I believe that lower home prices and a higher interest rate are usually better. It is easier to put a 10% or more downpayment on a lower priced home than the same home with a higher price tag but lower interest rate. Plus, when rates are low you don't earn anything to save.
Just like the previous poster said, it really depends. I wouldn't want to overload yourself with real estate unless you have the cash and know what your doing. If your planning on buying thinking than in five years or whatever home prices will go up and you'll be better off...that is a big risk and not one I would place my money on.
thats a fallacy, about home prices drop if rates rise. almost all our biggest appreciation periods are in periods of rising rates. 6-8% being the best historically,..
why? because of two reasons. rising rates are usually indicative of a stronger economy ,better employment and greater wages, and fear of inflation making them even more costly. . second reason is when rates rise people looking to buy start to get the ole we better buy now before rates rise and we can afford even less house.
if rates rise 1% that is the same in monthly costs if the house price jumped by 10%... time and time again rising rates have put upward pressure on home prices...
you cant just make a blanket statement that home prices will fall if rates rise anymore then we should have soaring home prices right now from record low rates. its alot more complex then that...
but non the less just google home price appreciation vs mortgage rates and see what rates are when the greatest appreciations took place.
Last edited by mathjak107; 10-15-2010 at 02:45 AM..
thats a fallacy, about home prices drop if rates rise. almost all our biggest appreciation periods are in periods of rising rates. 6-8% being the best historically,..
why? because of two reasons. rising rates are usually indicative of a stronger economy ,better employment and greater wages, and fear of inflation making them even more costly. . second reason is when rates rise people looking to buy start to get the ole we better buy now before rates rise and we can afford even less house.
if rates rise 1% that is the same in monthly costs if the house price jumped by 10%... time and time again rising rates have put upward pressure on home prices...
you cant just make a blanket statement that home prices will fall if rates rise anymore then we should have soaring home prices right now from record low rates. its alot more complex then that...
but non the less just google home price appreciation vs mortgage rates and see what rates are when the greatest appreciations took place.
Well it seemed logical....when interest rates rise, prices fall, but you make some interesting statements. I will look into
Just like the previous poster said, it really depends. I wouldn't want to overload yourself with real estate unless you have the cash and know what your doing. If your planning on buying thinking than in five years or whatever home prices will go up and you'll be better off...that is a big risk and not one I would place my money on.
True.... I've talked to people who said it was a good time to buy in the 80s/early 90s(?) the last time the real estate market crashed and they say that history is repeating itself. Some made out pretty good at the time. This seems to be a different situation though.
Because of the uncertainties you mention, purchasing now only makes sense if the property cash flows substantially above and beyond debt service, property taxes and maintenance. In other words, rental income exceeds expenses which compensates for lack of appreciation - or, worst case - continued depreciation in value. Since your friend is young, he has plenty of time to recover from a bad bet but the trick is to properly recognize the trend and time his purchase at the low of the market and sale at the higher end. The cash flow buys him time to wait out the market. In some cases, I think there might be investments worth making now. It depends on the location and other variables peculiar to the particular investor.
And that's difficult if you only have 20% down. Dave Ramsey suggests not investing in real estate unless you can pay cash but very few people have the cash to buy real estate.
With many foreclosures being stopped, that will drive prices up in the short term and then expect more downward pressure. I think now is a very bad time to buy actually.
Look at something like the housing affordability index, which considers home prices, interest rates, payments relative to income brackets. It's at relative highs now, pretty good time to buy if you can keep making payments.
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