There is no question that the U.S. real estate market has taken a turn for the upside. Properties in many of the hardest hit regions like Florida and California have now come back from low points in terms of valuation due to demand. Further fueling the fire, mortgage interest rates jumped from the mid 3.5 percent range to as much as 4.6 percent on a 30-year mortgage. The quick rise triggered a buying surge in consumers believing the time of low financing rates had finally ended. Fortunately, a reprieve is still in place, with rates dropping down to 4.25 percent and the Federal Reserve continuing to keep a financial support of the economy in place for now.

All of the above factors trigger the question of whether investors should get back into the real estate business again or still stay out. The answer seems to be more and more supporting re-entry.

Factors to Consider

First, the fact that the Federal Reserve chose to continue delaying the tapering of mortgage-backed securities purchasing which has helped the economy recovery means that financing rates will continue to stay low (http://www.bloomberg.com/news/2013-10-18/fed-qe-taper-seen-delayed-to-march-as-shutdown-bites.html). Had the Reserve begun the tapering and disconnecting from the U.S. economy, mortgage lending risk would have risen. Lenders in turn would then drive their rates up to offset perceived market risk. This is why the 30-year average jumped to 4.6 percent in a matter of days when the tapering discussion started becoming serious in the summer of 2013.

Second, banks have done a very good job of not flooding the market with inventory (http://realtormag.realtor.org/daily-news/2013/01/24/what-s-behind-falling-housing-inventories). This has allowed regions to purge their glut of foreclosures and short sales. Now that inventory is low, prices have risen. As a result, everyone with a property for sale is seeing greater and greater sale potential. Banks are cognizant of this fact and are leaking inventory onto the market slowly so as not to upset the apple cart. That means property values will continue to rise for the foreseeable future.

Third, ready cash is already coming back into the market first. Banks are still reticent to lend for purchases and are screening applicants, blocking many from buying (http://realtormag.realtor.org/daily-news/2013/01/24/what-s-behind-falling-housing-inventories). That means the majority of purchases are by folks with investment money who need a place to make it grow again. If the trend continues, most of the good investment properties will be snapped up, leaving far more expensive inventory as the remainder.

The same rules still apply, however. Real estate investing is not an automatic profit-maker. Location is a critical factor in whether a property will be a gain or a loss. The condition of the property and its rental clientele are also a big factor as well; low income residents don’t generate as much promise as middle income renters do.

Who Are the Players?

Surprise, Wall Street found somewhere to put all the stock money that disappeared. It wasn’t going to take long for some creative fund managers to figure out real estate is likely to pay more in gains in the next few years than traditional stock choices. A number of firms have been quietly playing the real estate game, buying homes with institutional funds and doing so at bargain pricing (http://dealbook.nytimes.com/2013/06/03/behind-the-rise-in-house-prices-wall-street-buyers/?_r=0). Many homes are rented in the meantime to offset maintenance costs.

Where jobs are coming back, consumer buyers are also looking for homes for their families and to regain a financial footing again. Texas, for example is seeing a significant uptick in home ownership with job increases (http://news.investors.com/economy/110413-677839-texas-real-estate-booms-with-energy-economy.htm).

Long-term buy and hold investors are grabbing the current spots now (http://kentclothier.com/rising-home-prices-and-real-estate-investment). The fast money is likely already into the market, so longer periods of investment are required to see gains at higher prices. As a result, many properties will see pickier competition versus immediate run-up and grab it buyers.

In Summary

Jumping back into residential rental investing will continue to be filled with risk. Investors need to do their homework and make sure they don’t get stuck with a money trap. That said, the overall housing market is improving considerably, with all types of homes seeing valuation increases. Yet the properties in good neighborhoods are generally increasing faster as traditional demand drivers kick in again among buyers.

Investors won’t likely see the astronomical gains they did in 2006 and 2007. However, even a 20 percent gain is huge compared to whatever can be gained in public stock markets and bond investing right now. So overall, 2013-14 is looking to be a good time to get back into residential properties.

About the Author: Brantley Smith