Should You Invest in a House or Mortgage Note?

Since early 2005, I have advised friends, colleagues, and anyone else who would listen not to buy real estate.  While I make no claims to uncommon brilliance or being able to foretell the future, I am somewhat of an information junkie.  When I looked past all of the happy-talk headlines and examined the real data, I surmised that there was no way that property values could go anywhere but down.  Nobody could know exactly the timing or the size of the collapse, but I knew that it would be big.  Unfortunately, the level of incompetence among regulators and greed among bankers made the crash worse than most anyone expected.

For people with money to invest, these are tough times.  The stock market has been incredibly volatile and recently declining, so buying stocks feels like wagering in Vegas.  Bank accounts, CD’s, and other safe interest-bearing accounts pay next to nothing for holding your money.  Actions from the Fed show that they want to keep rates low, and to heck with those who save money.

What about buying a house either to live in or as a rental?  For the former, the financial part is only part of the question, as you’ll of course want to consider neighborhood quality, school district, access to interesting places and shopping, etc.  On the plus side for buying a house is that housing prices are much cheaper than they were five years ago and that interest rates are at record lows.  The negatives for house buying are that prices in most areas will continue to decline (in my opinion) and that the economy is rapidly becoming a train wreck.

People considering buying a house as an investment face some of the same issues.  One big plus though is that rents are slowly rising and vacancies declining in many markets.  With banks keeping lending tight and thus fewer Americans qualifying for loans, this would logically lead to a greater need for apartments.

There are other ways to buy real estate, with my favorite being mortgage notes.  I’ve written numerous articles and blogs in the past about how to buy a mortgage note (a.k.a. real estate note).  Note buyers like myself have always been careful to diligently check documents, property condition, payer credit, etc. before buying a note.  Now, we have to make educated guesses about where the real estate market is headed and what government regulations and policies will creep into the mix.  Being a mortgage note buyer has never been more difficult.

For investments in real estate and elsewhere, these are such dangerous times that you have to understand your down-side risk.  If the value of your investment declined, you need to still be able to pay your bills and keep food on the table.  My research and gut instincts tell me that these rocky times will be with us for several years, so plan carefully.

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