4 ways to profit from real estate

October 21, 2005

You know about Wall Street, but there are plenty of other streets paved with potential gold.

Fervor. Froth. Bubble. Burst. Boom. All are words that have been used in reference to the white-hot real estate market of the past few years. Like the tech-stock chatter that dominated water coolers and cocktail parties in the '90s, the buzz these days is all about home values. And there's certainly no disputing it: You don't have to look any farther than your own backyard to turn straw into gold.

"Home equity alone exceeds stock and bond wealth for 80 percent of Americans," says David Lereah, chief economist of the National Association of Realtors and author of Are You Missing the Real Estate Boom? (Currency, 2005). According to federal statistics, house prices have jumped an average of more than 50 percent over the five years ending in March of 2005.

But the million-dollar question is whether the housing bubble is going to pop-and if so, when? Of course, no one really knows. Some economists feel the housing market is overvalued in certain areas of the country and are concerned about the increase in alternative types of financing (adjustable-rate mortgages, no-money-down loans, interest-only mortgages, etc.), which is typically a hint that buyers may be overextending themselves.

Although certain areas, especially along the coasts, are fiery, there are plenty of markets (such as Denver, Dallas, and Houston) where there's an almost palpable chill. Still, as the old saying goes, all real estate is local. So, with such a wide variation in local markets, a nationwide bust is very unlikely.

"From an investment standpoint," Lereah stresses, "you don't need to sustain record-breaking rates of real estate appreciation in order to surpass the return of stocks and bonds. An historical 5 percent annual price appreciation is more than enough to give you an excellent return." He offers the following example: You buy a property for $200,000, putting down 10 percent, or $20,000. In the first year, you'll earn 50 percent on your down payment (5 percent multiplied by $200,000 equals $10,000). If you own the house for five years, even after factoring in closing costs and a broker's sales commission, at that rate you'll have reaped a stellar return on your investment.

So how can you turn a profit on real estate? We examined four timeless ways.

1. Leverage the value of your home

Making money in real estate can be as simple as trading up to a larger home that you can still afford, Lereah says. "By assuming a larger mortgage, you're in effect creating a forced savings plan that allows you to build greater equity than you would have if you'd owned a less expensive home. Plus, of course, the more costly the house, the greater the amount of its price appreciation."

If you're too fond of your current abode to relocate, though, he recommends adding value to your home by putting on an addition, renovating the kitchen and bathrooms, etc. Apparently, lots of homeowners agree that upgrading their houses is money well spent: According to the National Association of the Remodeling Industry, more than 1 million homes per year undergo major renovation or remodeling, and the market is projected to total $230 billion in 2005.