There is no “knocking” residential real estate investing. After years of relegation to a speculative investment, residential real estate is taking its rightful place as an investment with real returns, not just price appreciation. It’s the equivalent of a corporate stock becoming a US Treasury bond.

Since about 1980, California residential real estate has not been able to pay a reasonable return on investment from cash flow. Like a stock, there was no income, just the hope that prices would appreciate, and that you could eventually take profits.

Two things have changed to make real estate a golden opportunity.

• Increase in permanent renters
• Decrease in prices

First, the number of former homebuyers who are now “permanent” renters has taken a huge leap. These are people who lost their homes to foreclosure or short-sale, and who will be the last to qualify for loans in the future. We will literally have to return to the sub-prime lending practice for these people to be privileged with a home mortgage. This swells the demand for rentals, and drives up rents, which have not been keeping up with real estate price inflation in many areas.

Second, residential real estate prices have dropped significantly in California. While the increases in rents creates additional revenue for the investor, the decrease in costs (mortgage, taxes ) helps to increase spend-able cash flows. In many cases, newer residential real estate can be purchased at prices below replacement cost. How much less? Prices on some recently-built bank-owned properties are below

$100/sf. “Brick and mortar” single-family construction cost is about $120/sf - without land or local construction fees! By the time land and local fees are added, retail construction cost can be upwards of $180/sf. At some point, residential property purchased today will rise to nearly replacement cost, creating the “upside bonus” that investors look for.

Meanwhile, multifamily real estate prices have been dropping also. Owners who bought multi-family properties with large negative cash-flows and then suffer financial set-backs triggered by other economy-related factors are falling behind. Banks hate owning multifamily properties because management and maintenance not their business. Bank-owned multifamily properties, selling at highly discounted values, are driving prices down to the level where the properties become attractive cash-flow positive investments.

Finally, real estate tends to be in counter-cycle to stocks and financial instruments. The short-term prospects for the financial markets does not appear weighted to the up-side, increasing the likelihood that real estate will again be looked upon with favor.

The volume of real estate transactions is increasing dramatically. By acting now, in the face of uncertainty, investors can secure some outstanding opportunities to secure future income and growth of their net worth. But don’t wait too long. The effects of sub-prime mortgage failures are nearly exhausted. As this source of foreclosures and short-sales diminishes around the end of 2008, prices will stabilize and perhaps increase.

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