How to invest wisely: Investing pros and cons

As many real estate investors found out recently, nothing is a sure thing and timing is everything! For over a decade, big money was being made in the real estate market as property values soared upward at astronomical rates. Buyers could invest in a property, hold it for a minimum of time, then flip it for a huge profit. As the song goes, “What goes up, must come down.” For those investors late to the party, there were devastating consequences. The real estate market topped and then began to fall; the result was a flood of foreclosures that made headlines all across the country.

Suddenly, in the summer of 2007, the real estate boom came to a screeching halt. Both speculators and homeowners who had bought at the peak of the market, found themselves “upside-down” in their loans; in other words, they owed more on their loan than the property was actually worth.

To make matters worse, those who had taken out risky loans with the promise that property values would continue to climb, had a rude awakening when they found that capital had dried up and refinancing was impossible. These individuals who had counted on stable economic conditions found that they were stuck in loans with interest rates that jumped tremendously high after the first few months. Real estate profits were so alluring that investors went blindly into loan packages with the idea that they would “simply refinance when the introductory rate rose.”

Talk about bad timing! What happened to the old adage of buying low and selling high? What also happened to buying and investing within your means and not taking on more debt than you can reasonably afford?

As I write this, crossing the wire is a report by the Mortgage Bankers Association that mortgage applications had yet another bad week; the fourth out of five weeks in decline, and is now at its lowest pace since December of 2000. To complicate matters, although the Fed has been easing the interest rates, the actual rate a borrower would pay is three-quarters of a point higher than it was in March. What does all of this mean? Several things come immediately to mind:

1. The vicious circle continues; interest rates should be dropping but money is tight for loans, so supply and demand keeps rates artificially high.

2. As long as this continues, tight money and high rates will keep the market flooded with property for sale, so again, supply and demand will keep pushing property values lower until it all evens out.

3. The Fed now fears inflation so they may actually need to RAISE interest rates, which will perpetuate the problem and possibly force us into a further economic slowdown.

Is there any light at the end of this long, dark tunnel? Of course! Wake up and see opportunity knocking! Although it is generally thought that property values may still have more downside before they stabilize, in so many parts of the country, real estate prices haven’t been this attractive in years. There are a few catches, however. Be prepared to have your credit scrutinized closely since lending agencies are being much more choosey these days about to whom they are willing to lend.

In addition to working to pull your credit act together, cash is king again in a big way. If you have cash to invest, bargains in real estate will soon be there for the pickings for a savvy investor. In some parts of the country, the bargains are already in evidence.

Which types of investments overall are the place to be right now depends on a number of factors. There is never a blanket answer for every investor because everyone has a different set of needs and circumstances. For instance, a risky real estate investment might be appropriate for a younger investor with a high-risk tolerance, whereas an older investor close to retirement should consider income-producing investments such as bonds. Doesn’t real estate produce regular income? Yes, if it is rental property and the vacancy factor in your area is low. However, to advise a senior who is unsure how well set they are for retirement to invest in income property, makes no sense at all.

Tax-free bonds are attractive for the investor in a high tax bracket at almost any time. The value of the Municipal Bond could fall if interest rates rise, but the coupon, or annual percentage rate will continue to pay until the maturity date is reached as long as the underlying agency is viable. Building a laddered portfolio of muni bonds will help protect against interest rate risk as the Bond Market fluctuates.

Be sure to ask questions about the quality of the bond and the bond rating. This doesn’t mean that you need buy only AAA rated bonds; it does mean that you need feel secure about the underlying agency’s ability to pay off the debt. In all cases, hire a knowledgeable Municipal Bond Broker or be prepared to do lots of your own homework.

What about the stock market? It has taken quite a pounding of late, isn’t it time to jump in with both feet? If you are already invested in the market, especially in a 401(k) or other retirement plan, then staying the course and adding to your positions when the market settles, sounds reasonable.

When is the stock market likely to settle down? That is the bizillion dollar question! Most experts agree that if oil prices fall, the market will rebound. The credit crunch is another factor weighing on the market. And just when you think the stock market can’t go any lower, it just might. Does anyone remember 2000?

If you plan to park money in the stock market right now, look for sectors less affected by a slowing economy. The problem here is that good names in those sectors such as consumer staples and health care, are already inflated so waiting for a pullback to take advantage of lower entry points into the market would be a reasonable plan. Also, companies with strong balance sheets that pay good dividends look attractive. Even if the stock doesn’t move much, a dividend check always helps soothe the nerves.

There are always foreign, developing markets to consider. Just remember that no country operates in a vacuum any longer; having been in a world-wide expansion, we can now expect that as the U.S. economy slows, so will third-world countries who will be affected by a slow-down of the U.S. consumer who is no longer buying at the same rate as in the past few years. There is already evidence of slowing in China. Factories have closed because the American consumer doesn’t have the same appetite for Chinese goods as we had two years ago.

So, where do you think the best place is to be invested? For the younger, more aggressive investor with a solid income and some cash on hand, “kid in a candy store” might be the way to describe the real estate market in the near future. One couple I know, has been buying single-family homes on the outskirts of the San Francisco bay area on foreclosure. This strategy may not be for everyone; she has an eye for the basic remodel and decorating so that their rentals are always snapped-up by qualified investors who can’t afford to buy in the pricey bay area.

The other half of this property-powerhouse duo is handy at helping with the basic remodel tasks. But the result is that they picked up property for pennies on the dollar, FOR CASH; and they earn a nice return on their investment by collecting rent in an expensive rental market.

They do not need to sell the properties in order to see a profit; this couple is in for the long haul or when the real estate prices rise again and are too attractive to pass up! They are experienced real estate investors who understand that when investing in property, be sure YOU, not a loan agency is in the driver’s seat. Even if you do float a loan, be sure that you can afford the payment in case your property is vacant for a number of months. Plan for the unexpected and be prepared to handle it.

At the end of an economic pullback or recession there is, historically, money to be made for the investor with an eye for opportunity and the nerve to jump into the fray while everyone else is ducking and covering. For those who want big returns with a long-term outlook, we are most certainly nearing one of those eras that people will talk about in the future as one of those times that “I woulda, coulda, shoulda made a move but I didn’t realize the opportunities right in front of me.”