Beat the bubblicious real estate market

Buyer’s traps
Looking for a deal? Avoid buyer's traps, like finding a fixer-upper that isn't worth fixing up. A lot of houses, particularly old summer houses, were built to a minimum standards and don't have “good bones,” says David Groom, president of Groom Construction in Swampscott, Mass. He says many families overinvest in renovations. “Sometimes it just gets silly,” he says. “People buy a house for $800,000 that needs $500,000 of work when even if it's fixed up beautifully, it's only going to be worth $1 million.”

If you venture into a fringe neighborhood, to get more for your money, be sure you plan to be there for a while. “The discounts can be very compelling,” says Lucien Lidji, an associate broker with Prudential Douglas Elliman, in New York. “When a residential neighborhood is really new and not established, that's where you're taking the most amount of risk, even if your reward can ultimately be much greater.”

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Most important for investing in real estate in 2005: Make sure you have a few months worth of emergency funds on hand to carry the property even if your income dips or prices teeter. And don't feel rushed to buy just because mortgage rates are expected to rise this year. Remember, if that happens, it would likely lead to lower real estate prices, offsetting to some extent the higher interest rates. Keeping your cool is an asset.

Get educated
Also, it's understandable that home buyers would hope to enjoy in the future rates of return similar to today's. “Buyers are much more investment conscious,” says Lidji. “That's because they're paying so much and they're taking money out of other investments in order to buy the house they want to live in.” Many are even borrowing from their 401(k) plans to fund that first home purchase, he notes.

Still, if thinking of your home as an investment is practically unavoidable in this real estate market, try to make sure your decisions are sound. “If you start feeling the urge to overinvest in real estate,” says Putnam's Kelly, “stop feeling and start thinking.” As the bull market in residential real estate shows signs of age in 2005, that advice is worth heeding.

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