Real Estate Investments Depend on Host of Variables

"For Sale" signs have become one of the more common sights in neighborhoods across the country over the last year. As the economy struggled, many homeowners found themselves facing foreclosure or looking to sell homes they could no longer afford.

Some people, however, have taken advantage of the sagging real estate market and chosen to buy low, with the idea that the property value will be restored once the economy is restored. While that's a sound investment strategy, there's more to consider when investing in real estate in the current economy, especially for those who are new to the real estate investment game.

What is the Area Like Now and What Will It Be Like Years From Now?

Many neighborhoods have undergone an overhaul in recent years, and where investors choose to invest their real estate dollars is a major consideration. A change in neighborhood can make or break a property, which can make or break an investor. Consider the following scenario: an investor purchases a home with the intention of renting it out. With maintenance and property taxes, that investor won't reap any immediate financial benefits.This shouldn't come as a surprise, as the home and property's value rests in its re-sale value down the road.

This is where forecasting a neighborhood's future comes into play. Because of the sagging economy, many areas are becoming less attractive. When layoffs occur and industry leaves town, the surrounding communities become less attractive to prospective homeowners, as people tend to live where the work is. Investing in real estate in a community that has suffered heavy layoffs or declining industry is probably a bad investment, as there's no guarantee industry will ever return, and therefore the property will be hard to sell and likely lose significant value.

When investing in real estate, investors should keep in mind they're also investing in the community. If a community's industry is sagging, it's probably best to avoid real estate in that community, regardless of how good a deal can be had on a given property.

Can I Get Tenants?

This economy has also made things more difficult on the nation's landlords. That's because finding reliable tenants is no small task in an economy where so many people are living under the specter of layoffs.

Purchasing real estate as an investment is essentially a partnership wherein the partners are a big unknown. Those partners are tenants, who have become harder to find in an economy where many people are losing their jobs. Even the nation's younger workers, who often make up the majority of renters, have increasingly turned to their parents for housing in an economic climate in which they are often the first to be victimized by layoffs.

That said, investors hoping to rent out a property should be certain they'll be able to do just that. Before purchasing a property, speak with local real estate agents who specialize in placing renters with apartments. Ask them about the real estate market, particularly how local landlords are doing in light of the country's economic woes and whether or not rents have increased, decreased or remained steady since the economy took a turn for the worse.

What Are the Interest Rates?

Real estate investments aren't just about property value and location. Interest rates should also play a strong role in a person's decision to invest in real estate or not.

Low-rate mortgages might be too good to be true, as many victims of foreclosure found out in the last couple of years. Interest rates fluctuate, and anyone investing in real estate needs to be prepared. For example, if you borrowed $100,000 on an interest-only 4-percent loan, you'll pay $4,000 per year. With an adjustable-rate mortgage, however, your interest rate might climb to 10 percent, meaning you're now on the hook for $10,000 per year. That's an additional $6,000 per year you might not have planned on spending. Many real estate investors found it difficult to scratch together that extra interest, as it's nearly impossible to pass it on to tenants, especially in an economy in which reliable tenants are a valuable commodity.

While real estate is often looked at as a high reward investment, for those considering making the investment, let it be known it's also high-risk, one that requires deep pockets to begin with.

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