(Bloomberg News) David and Michelle Haisley from Fort Wayne, Indiana, weren't happy with the performance of their retirement funds, so they made another investment -- a foreclosed home for $27,000.
Haisley, a heating and air-conditioning technician, said he worked on the house before it went into default and decided to make an offer when he saw it listed at about a third the price of surrounding homes. They've already found tenants for the house and David said they'll buy another foreclosure if they can find the right deal.
"It's an income stream for us, and when it's time, we'll sell it and make more money than we could from our 401K," said Haisley, 49, who rents out the property for $900 a month for an annual return of more than 20 percent, excluding appreciation. "There's nowhere for prices to go but up, so it seemed like a pretty safe bet."
As the housing market recovers from the worst bust since the Great Depression, neophyte investors like the Haisleys are following the lead of private-equity firms like Blackstone Group LP, investing in properties they can pick up cheaply, rent and sell when values rise enough. Home prices rose 4.6 percent from a year earlier in August, the biggest gain since the end of the real estate boom in 2006, according to a CoreLogic Inc. index.
"The typical small-size mom-and-pop investor has two or three properties, looking at it as an income supplement with the possibility of being able to sell at some point when prices rise enough for them," said Lawrence Yun, chief economist of the National Association of Realtors.
Investors are becoming more comfortable with real estate after the six-year housing slump, which brought prices down nationwide by 35 percent, according to the S&P/Case-Shiller index. Many remain skeptical of stocks, even as the Standard & Poor's 500 index has more than doubled since falling to a 12- year low in March 2009.
"I'd rather buy real estate than gamble on the stock market or get almost no return from putting my money in a bank," said Barton Wallace, 60, a real estate investor and broker in Hingham, Massachusetts, who owns four rental properties. "I don't have any problem getting tenants."
Wallace, who turned to real estate four years ago when she couldn't get a full-time job, has one client who cashed out his home's equity to buy his first foreclosed home. Other clients are tapping retirement accounts for the same purpose, transferring their cash into self-directed Individual Retirement Accounts that allow them to make their own investing decisions, with returns going back into the accounts, she said.