The Phoenix residential real estate market represents a great opportunity to individuals, families, and investors who are weary about the stock market and are realizing that their investment portfolios are too exposed to fluctuations in Wall Street. By now, the reality has sunk in with most people - the stock market’s decline has hit 401K and other retirement investments hard. As a result, this is a critical time to for individuals, families, and investors to rethink diversification of their portfolios again. Portfolios need to be more highly diversified than ever before.
And it’s time to rethink real estate as one component of your diversification in the future in addition to stocks, bonds, commodities, international investment, and low-risk savings instruments, to name a few.
Wall Street, Main Street, and My Street, and Real Estate
There is no doubt that the goings-on in the real estate industry are intermingled with the market challenges that Wall Street is facing, which in turn impacts Main Street and “My Street." But the issues with real estate largely emanated from the many corporations that make up Wall Street combined with lack of government oversight and inaction. Lack of personal discretion also contributed to the problem.
Having said that, here is why real estate should be a component in your investment portfolio once again, and why the Phoenix real estate market is an excellent choice for investment to help you diversify that portfolio.
First, due to the wave of foreclosure-related properties, prices have declined to 2004 and even 2003 pricing levels. This is pricing that is pre-run up. Though there is a risk that prices may drop further, the extent of a further decline may be limited in the short term while the long term outlook gradually gets stronger.
Second, real estate can prove to be a more reliable investment in a normal market environment. Prior to the run-up in home valuations in the second half of 2004 through 2005, annual home appreciation in the Phoenix residential real estate market averaged 5%-6% . Playing the long game as investors should, holding a property for 5-20 years could yield a solid return.
Long term is key here. The investor has to be committed to a lower but steady return on their investment when it comes to real estate. The Phoenix housing market will not likely experience a meteoric rise in valuations like it did again. That’s not to say that there won’t be some opportunities to turn properties fast (whether through acquisition at a foreclosure auction or wholesale, or a flip), but this model will have the high risk that most investors will and should shy away from.
One note here. At least in the Phoenix area, investors have to weigh the merits of investments in homes and real estate by several components to get a true picture of the return on a property. These factors are growth in appreciation, rental income and offsets, tax benefits, and equity paydown and buildup.
Third, real estate is real. You can see it. You can touch it. You can check up on it (if you buy locally). And it will always hold some intrinsic value no matter what happens. If you have a home in Chandler, it is easy to get across the Phoenix area, to check up on an investment property in Glendale. Or, perhaps the investment property you choose is right next door to your home in Tempe.
Fourth, under certain circumstances, real estate taxation on capital gains growth can be minimal. The same cannot be said of many other investment vehicles.
Fifth, an investor has much more control in determining the value of the property. Smart improvements and renovations combined with effective property management can increase the value of the property substantially.
Sixth, the Phoenix area continues to grow. The Valley saw a 2.8% increase in the number of residents here last year. This trend will continue as Phoenix and surrounding areas are perceived as a stable, optimum climate to live and to work. With the decline in real estate prices, this perception will also be reinforced by a sense that Phoenix and surrounding areas are once again affordable.
Finally, real estate can serve a dual investment/personal objective. For instance, an investment in real estate can serve as a later gift for children. Or, it can be utilized as a sort of savings plan for children’s college tuition as a complement to 529s and Coverdell plans. The investment could be a retirement property for later in life. Real estate investments can also be used to create income streams to live off of (when rents and equity buildup eventually turn the property cash-flow positive).
There are numerous reasons to invest in real estate even beyond this list.
Real Estate Has A Role to Play in Your Investment Portfolio
The difficult truth about the stock market is that over the past eight years, the U.S. economy has seen two major disruptions or recessions that were severe enough to have rippling effects for all Americans as seen by the decline in 401K and other retirement savings values. As a result, further diversification of investment portfolios is needed across many different asset classes with a regional focus as well. Real estate should be one of those classes.
Given real estate has seen real substantial pricing declines over the last three years to levels seen before the run-up period, one has to consider that there are real deals in the marketplace for real estate. Coupled with the right long-term outlook and commitment to investment fundamentals, real estate can have a more effectual, countervailing purpose in investment portfolios that can help Americans better weather substantial market disruptions in the future. For investors looking for specific markets that may be worthwhile to investigate, real estate in the Phoenix area is a compelling choice.
With the current financial crisis pervading stock markets in the global ecomony, real estate once again should be looked at as a serious, long-term investment strategy that can help investors further diversify their investment portfolios in the future. The reality is that the current stock market malaise that has decimated so many long-standing financial institutions and subsequently stock investments and 401Ks is not the only major stock market troubles we have seen in recent times. Arguably, there have been as many as three “bubbles."
The dot-com bubble and decline of the stock market helped push investors into other markets where money was cheap and regulations loose. Because of lax oversight and inaction, the housing bubble was allowed to form. The oil market represents a bubble to many as the cost of a barrel of Brent crude went from $100 per barrel in February 2008, to a high of $145 per barrel by July 2008. Brent crude is now trading under $60 per barrel.
Going forward, there are two very real concerns for investors. First, many may be looking at the performance of stock investments over the past eight years and calculating what their true return from those investments has been. Second, many will be asking if their investments can sustain another severe market imbalance in the future. In effect, they are wondering as to where the ‘Fourth Bubble" will come from.
All of this gives credence again to having an even broader diversification of investment portfolios. As a result, real estate should once again be seriously looked at as part of an investor’s diversification strategy for several reasons.
First, property valuations have fallen considerably from market highs. Prices in some markets have dipped to 2004 levels. In some instances, prices have dipped to 2003 levels.
Second, real estate has intrinsic value. Unlike stocks and financial-related investments that can see depreciation in their worth down to zero, real estate has inherent value down to the land and will not experience a wholesale collapse in its value to zero.
Third, real estate is real. It can be seen and touched, and managed closely by the owner.
Fourth, real estate has certain tax benefits that can contribute to the overall performance of the property as an investment.
Fifth, a successful rental property as an investment presents an opportunity to create a revenue stream and/or create equity in the home as the renter indirectly is contributing to payment of the principal over time. Regardless of the market and whether appreciation or positive-cash flow rental income is preferred by the investor, the principal is being paid down on the property.
Lastly, based on proposals floated by President-elect Obama, we should expect additional legislation that puts guidelines, regulations and accountability in this industry that ensures proper lending practices and reduces the risk for rampant speculation that has battered the markets in recent times.
Of course, there are certainly risks to holding real estate as an investment in your portfolio. For instance, there may be unexpected property repairs, assessments, or other extraordinary costs that the investor has to incur. So, an investor has to look at real estate also as a business with income and regular and extraordinary expenses.
For those investors that are looking for a simpler way to be diversify without the additional headache, a REIT may be a logical avenue to investigate. A Real Estate Investment Trust is a company that invests in income-generating properties to drive returns for its investors. The income-generating properties may be apartment buildings, industrial and commercial properties. REITs allow smaller investors the ability to invest in larger real estate operations that they wouldn’t be able to otherwise. REITs also should be able to show their overall historical performance to investors.
Again, investors are faced with the question of how to protect and grow their assets in the future. The stock market’s high level of volatility in recent years has many investors questioning the percentage concentration of their portfolios in stocks and similar investments. As a result, the pressure to further diversify those portfolios will mean that other asset categories will have increasingly greater appeal and should be considered for investment.
Overall, real estate presents a great opportunity once again for the long-term investor as outlined above. In addition, the incoming administration has put forth numerous proposals to improve transparency, implement sound business and ethical practices to the industry with the singular purpose to eliminate the probability of a similar crisis ever occurring in the future. All of this will work to give investors options once again for a safer, more consistent and calculable return in the coming years.
Alex Gwen Thomson has sinced written about articles on various topics from Home Management, Income Tax Return and Wrinkles. David Lorti is a professional Realtor for RE/MAX Elite in the Phoenix area and helps clients buy and sell homes. He holds a Master of International Management and Bachelor of Arts degrees and his insights have been quoted in several news outlets. He also. Alex Gwen Thomson's top article generates over 673000 views. to your Favourites.