That was the headline for a recent article by Jed Kolko, the chief economist for Trulia, the real estate research firm.  In his piece, Kolko points out that real estate "...price are still low relative to fundamentals and are far below bubble levels."  The following chart shows how far real estate prices are from bubble territory.

housing rebound - not a 'bubble'

Even with that bullish news from a highly respected industry source, investors can still lose money very easily when buying real estate.   To profit from the attractive fundamentals and what appears to be even more gains ahead, investors should always take a passive approach with a long term outlook  in real estate.  A major reason for this is that it is very easy for an investor to lose money, even if the property sells for more than it costs.  Take a house costing $100,000.00.  If an investor were to put $20,000 into fixing it up and then sold it for $130,000 two months later, that would appear to be a nice, tidy profit of  almost 10%.  Done six times a year, that is a very nice yield.


The investor taking this active, short term approach would lose money and go bankrupt very quickly.  First of all, there are selling costs that should be accounted for at a rate of 10% in real estate.  That is needed to pay the commission for the real estate agent and closing costs such as transfer taxes and other expenses.  It is prudent to budget 10% for those needs as there is no way to avoid these expenses.

Taxes also come into play.  For short term capital gains, taxes can be over 25%.  There can be actions taken, such as utilizing a 1031 Starker Exchange to buy another property to lower the tax hit.  But there are strict requirements in order to qualify for that tax break.  By contrast, holding a property for over a year before selling will greatly reduce the tax burden.

If you sell right away you also miss out on rising rental income.  A key consideration in buying a property should be its ability to be rented out to cover the mortgage in case it does not sell.  Investors should always practice risk management, which is basically preparing for a worst case scenario.  Increasing rental income is one of the most rewarding aspects of owning real estate.  Even during The Great Recession, as the prices for stocks and bonds fell, rental income rose in the United States.  Historically, rental income rises about 5% annually in the United States, doubling in less than 15 years.  Only by holding real estate for the long term will you be able to profit from that increase.

Passive, long term investing puts time on the side of the real estate buyer.  Flipping certainly has its appeal, but going for short term profits never works out over the long term for any asset, be it a house or a stock.  As an example, studies consistently find that more than 80% of day traders in stocks end up losing money.  It works out that way too for those looking to profit by flipping houses, but end up losing money instead.

"Trulia does great work, and there is certainly no doubt that the real estate market is rebounding," noted Jerry Cohen, President and Founder of EquityBuild, a real estate investment.  "But there are many road bumps and potholes, and I have hit them all in my decades of experience.  Having been a principal in more than one thousand real estate transactions over the decades, I can tell you that for the great majority of investors, a passive, long term approach buying and holding turnkey rental properties is the best way to profit.  It allows real estate investors to learn from my mistakes and prosper as a result of my experience."