Real Estate May be Generation X's Pension Plan.
By Michele Derus

Milwaukee Journal Sentinel.

RISMEDIA, March 7 – (KRT) – Nearly one in four home sales last year -- 1.8 million -- were to investors, the National Association of Realtors reported last week. Some of these transactions reflect a new breed of buyers -- 20- to 30-somethings seeking their fortunes through smart property investments.

"To afford the things we want in life, we can't invest in the stock market, can't expect our company's 401K will make it for us," said Brett McPherson, a 30-year-old realty sales associate. "So we're doing it ourselves."

Two years ago, McPherson bought a water-damaged three-story home for $140,000 on Milwaukee's east side, "a neighborhood I couldn't otherwise afford." He's been rehabbing it ever since. Its current value: $400,000, he said.

"It's probably taken 80 percent of my disposable income, and has meant no expensive vacations or $9 martinis, but I won't have to struggle ever again to buy a house," McPherson said. "Real estate makes sense. You know exactly where your dollars are, and it's not a matter of fluctuating value."

It sure isn't. Average U.S. home prices have outpaced inflation for more than a decade and have soared 50 percent in the past five years, the Federal Deposit Insurance Corp. reported last month.

Gen X property investors, born from roughly 1965 to 1982, typically gravitate to what Milwaukee Realtor Dave Schmidt Jr. calls "the cheaper end of the spectrum" -- properties well under $150,000.

"They live in the place a few years, fix it up, then use the equity to buy another place," said Schmidt, who runs Dave Schmidt Realty, 4314 W. Forest Home Ave.

These younger buyers aren't entranced with traditional investments, having seen stocks plummet and bonds languish. "Real estate is their investment," Schmidt said, "and low interest rates have made buying easier."

Low interest rates -- which have remained below 6 percent on a 30-year fixed-rate mortgage for the better part of two years now -- and "a deal that fell into our lap" got Julie Lange, a 38-year-old actress, said her husband Joe, a mechanical engineer, into the market. They built enough equity in three years on a south side Milwaukee duplex to finance a single-family home purchase last fall -- and keep the duplex as an investment..

"The trick is finding what neighborhood will be on the upswing in the next 5 to 10 years," Lange said. "Then, if you can get it a property cheap, you can get a really good return."

She and her husband already are contemplating their next deal. "I've lived in different pockets of the country -- Manhattan, Fort Lauderdale -- and it seems wherever I go, people have found investment properties a very good business. It has ended up supporting them later in life. And now, we have a foothold," she said.

Today's younger home buyers are willing, unlike those 5 or 10 years ago, "to put a little sweat equity into their properties," said Terry Donahue, president and co-owner of Prudential Absolute Realtors in Oconomowoc.

"They're truly buying it for the investment, even though they're living in it. Live in a place two years and you get the capital gains tax exclusion -- $250,000 if you're single, $500,000 if you're married. So they stay two years, sell and take the appreciation, then roll over to the next deal," she said.

McPherson, who works for Donahue, said several of his peers scout for bargain properties. The problem is, bargains are getting few and far between.

"Look at Waukesha County -- 42 homes for sale under $200,000, compared to 300 or 400 two years ago," he said. "Many look for a house as bad as they can find, fix it up and in two years, sell it to someone who wants move-in condition."

Young bargain-hunters aren't the only market speculators driving up home sale volumes, however.

"Here in the (Waukesha County) lake country, sales have been very strong," said Donahue. "With appreciation at 8 percent to 10 percent a year, people know if they put cash in, it's good. Lake properties are never going to be soft."

Bill Malkasian, president of Wisconsin Realtors Association, said speculators are active in the downtown Madison and Milwaukee markets too. "They figure pricing is going up so fast that they'll buy something with the idea of renting it out for a while, or they'll move in for a while and then sell it," he said. "You've got to watch out with condos, though. Many associations don't allow renters."