Real Estate Investment Returns to Face Cyclical Downturn, According to Author Steve Bergsman.

MESA, Ariz. -- Despite the excellent performance for real estate investments over the past five years, it still remains a cyclical investment and the cycle is beginning to turn, cautions Steve Bergsman, real estate writer and the author of "Maverick Real Estate Investing: The Art of Buying And Selling Real Estate Like Trump, Zell, Simon and the World's Greatest Landowners."

Investors disappointed in the stock and bond markets have been pouring millions of dollars into real estate investments of one sort or another since the end of the last decade when the dot.com bubble burst. It has been a good bet. As the S&P500, for example, has declined almost 9 percent over the past five years, an investment in real estate investment trusts (publicly traded real estate portfolios) averaged a gain of 14.5 percent over the same period of time.

And it is not just real estate funds, investors have been buying individual properties, everything from small shopping centers to summer homes. Again, for good reason. The median price of second homes jumped from $162,000 in 2001 to more than $190,000 in 2004.

However, with so much capital pouring into real estate, the price of individual properties continues to rise. While this has been happening over the past few years, investments were still worthwhile because the cost of money was so cheap. With interest rates rising and cost of capital increasing, many deals will no longer make sense.

Other warning signs include very low cap rates (the rate of return a property will produce on the owner's investment) and that makes deals great for sellers but expensive for buyers.

Also, one of the reasons real estate has done well has been the flight effect. With the stock and bond markets inconsistent, real estate looked like a great alternative. But, a lot of that capital inflow is transient money which will move elsewhere as the stock market picks up steam or the next great investment bubble begins. When the transient money leaves, real estate prices will decline dramatically.

Perhaps the most important trend line to watch is how the major real estate investors are moving their money. Those that have made millions in the market invest against the trend lines. They sit out the periods of ecstatic price increases, wait for the bubble to burst, then come into the market to pick up the pieces -- very cheaply. They buy when real estate is cheap, not when it is expensive.