A new real estate boom appears to be taking root and spreading across the U.S., but is this really the investment opportunity of a lifetime or are we being set up for another exploding bubble?

What Would Warren Buffett Do?

Legendary investor Warren Buffett has been known to dominate the headlines and even made the cover of Time Magazine, so what’s he talking about? Buffett’s recent crusade has been focused on selling the benefits of real estate investing and pointing out an array of indicators which suggest a new, extended period of growth. This is a view being echoed around the country from veteran real estate agents who say, in certain markets, a seller’s market is definitely here again.

The New Gold Rush is On …

Those who can afford it are bidding on packages of 500 rental properties being offered by Fannie Mae, while others are racing to foreclosure auctions or bidding on as many short sales as they can.

Prices are as close to bottom as most can predict, and the fear is that soaring home prices (due to shrinking inventories), the potential evaporation of REO and short sale opportunities in the near future, and a potential rise in mortgage rates will cause the best opportunities to fade quickly.

In principal the strategy appears to be sound. After all, banks are now paying selected homeowners up to $35,000 to complete short sales and get out, making cutting deals a breeze for investors.  But are we getting set up for another great fall?

Over-Confidence Breeds Dangerous Speculation: Are You Being Fooled?

It truly is a great time to invest in real estate for those who buy wisely, buy low and have the finances to do so. Unfortunately, the contagion of overconfidence already seems to be infecting the masses, luring novices into acquiring properties they believe they can flip like the investors on a reality TV show.

­Stories are emerging of buyers overpaying for homes and multifamily apartment buildings and even a surge in investing in the junk subprime securities which were supposedly to blame for the whole housing crash six years ago. It seems some people will never learn or just enjoy gambling.

How to Invest Wisely in the New Rebound

When utilized wisely as part of a diverse portfolio, real estate investment can be the best move for most Americans to build wealth and subsidize their incomes in retirement. Between passive cash flow, appreciation as a hedge against inflation, and depreciation to offset taxes, it is incredibly attractive. However, there are a few rules which must be followed:

1. Define Your Goals

Before acquiring any property, ensure that you have defined your financial and personal goals and that your investment decisions are aligned with them.

2. Is Your Home the Worst Investment You can Make?

For many, purchasing a home can create forced savings and eventually become the best investment they ever make. However, your own residence and home equity should never be something to gamble with. It’s where you live; your investments are for paying for that. Don’t confuse the two.

3. Don’t Invest in Real Estate Until You Are Financially Ready

Real estate is somewhere to put your money to work for you. No money down real estate investing is possible, and it can be a way to make money, but if you bite off more than you can chew and don’t have any savings or reserves, you are asking for bankruptcy.

Make sure you are prepared for the worst, have separate personal savings which are sufficient to carry you through for several months, and have an exit strategy before you get in as well as a plan B and C.

Don’t Believe the Hype!

There are many ways to invest in real estate and even more silver-tongued professional sales people to pitch them. Choose a solid strategy and be wary of distractions that can lead you into investing in all types of exotic locations and structures you don’t really understand.

Note investing, construction, commercial properties and starting property management companies can all be exciting and profitable, but just as with stocks, it may be safer to invest in what you know.

Protecting Yourself Against Market Fluctuations

The most important thing for anyone considering real estate investment is to get educated. Don’t worry, this doesn’t mean having to go back to school or picking between tacky late-night infomercial products. However, it does mean learning more about the potential risks, how to protect against them, real estate cycles and the signs of negative fluctuations to watch for.

Buy-and-hold investing and creating a portfolio of rental properties is hot right now and has the potential to create incredible wealth over the long term. Just realize how long you may have to hold your investment and what the penalties could be if you need to cash out early in less buoyant times.