That is a question we all ask ourselves today. Why? Due to the many stock market investors who speculated in real estate, the problems surrounding subprime loans with consequent foreclosures and bank failures, and falling home prices.
If the late Dr. David Schumacher, my mentor for the past 10 years and the author of the now famous book, The Buy and Hold Strategies of Real Estate, were still around, I know what he would say because he said it for the past year. recession in 1990-1995. He would tell us not to worry. This is only temporary and part of the normal real estate cycle.
Create bargains that can benefit you. This cycle has been going on since Montgomery Ward began offering $ 1,500 homes through its catalogs. As sure as the sun rises and the seasons come and go, real estate will make those who own it wealthy over a period of time. I would add that now is the best time to get great deals in real estate.
The real estate cycle
Real estate is still the best possible investment. You always have and it will always be good for you in the long run.
This is the fourth housing cycle I’ve been through and none of the recessions were fun. However, if you are patient and look long-term, your real estate will increase in value more than any other investment. Don’t treat real estate the way the stock market might, worrying about ups and downs.
Since 1929, the real estate sector has grown an average of five percent per year; if you stay away from the obvious areas that don’t appreciate like Detroit, it’s more like seven percent a year. At that rate, properties will double in value in 10 years with compounding. Add in a federal tax benefit of 28 percent plus state tax deductions, amortization of rental property depreciation, and eventual loan repayment and you have a strategy the rich have always used to build wealth.
Pinball machines
Over the past 30 years, I have seen many flippers buying, fixing and selling. I don’t know many who have a lot of net worth or who are rich because of the change. It is simply a very risky way to earn money.
Those who have prospered are the ones who are long-term and patiently watch their properties increase in value over time. This past recession was created by speculators who all changed at the same time, putting too many properties on the market for sale and rent. I guarantee that in the long run, you will always regret selling any property you have owned.
Buy and hold
Since time passes anyway, the buy and hold strategy is a great way to get rich. Dr. Schumacher experienced at least five real estate cycles and did extremely well, acquiring an eventual net worth of more than $ 50 million.
You can’t go wrong buying a low-cost condo, single-family home, or single-family home in a good location where there are jobs. Make sure you have a fixed rate loan, make sure the cash flows, keep it for 10-20 years, and you have a property that has doubled or even quadrupled in value. When you need to retire, simply refinance cash for living or to supplement your retirement pension.
For example, the first property I bought for $ 75,000, a townhouse in Lake Arrowhead, CA, is now worth $ 650,000. My first oceanfront condo, which I purchased in Long Beach, CA, in 1982 for $ 112,000 and used as my residence, is now worth $ 500,000. The one-bedroom condos that I bought in Maui, HI, in the late 1990s for $ 80,000 are now worth $ 400,000. The homes I bought around the same time in Phoenix, AZ, for $ 75,000 are now worth twice as much. I could go on and on and on.
What are your options?
What are your options for building wealth today? The options are to buy real estate and build wealth or not to buy any property, fight hard and have nothing to show for it.
1. You couldn’t do anything. The 25 percent who do not own a home end up without assets when they retire. They have a car loan and owe an average of $ 9,000 on their credit cards. Those who do not purchase rental property may be forced to work after age 65 to supplement their meager retirement income.
2. You can try to depend on your retirement. The chart above shows that you shouldn’t rely solely on your retirement income to support yourself, because you won’t. Those with Social Security or most retirement programs end up living below the poverty line and are forced to work until they drop, so that’s not a solution. Other investment options aren’t doing so well either.
3. Invest in the stock market. We are definitely in a slowdown (I refuse to believe we will have a recession), so the stock market will not do well for several more years.
4. Invest in gold and silver. They have already made their career; it is doubtful that they do much better. Gold and silver are used as hedges against inflation and the weakness of the dollar. It appears that oil prices are falling and the dollar is strengthening.
5. Invest in real estate. Those who invest in real estate almost always do well. The graph below shows how the top 1 percent in income have acquired their wealth. As you can see, the vast majority have invested in real estate.
Don’t think short term
Real estate is not designed to be considered short-term. Right now, the value of real estate is going down in many cities, but it is going up in many others. It is a terrible time to sell and take stocks. Only about five percent of the properties are for sale. Most homeowners and investors just hang on to their real estate and wait for the next cycle of upward appreciation.
The four biggest mistakes people make in real estate
Real estate always works well when bought correctly. It’s people’s choices and sometimes greed that ruins a near-perfect investment.
MISTAKE # 1. Buying a property that is more than you can afford
Often times, people are attracted and buy a house that they cannot afford. They fight their whole lives just to make the payments. So if they have an illness, job loss, or divorce, they are in big trouble.
MISTAKE # 2. Buying properties that have no cash flow
When rental properties increase rapidly, everything seems desirable and people buy rental properties that have no cash flow. That can often lead to disaster with large negative cash flows when the market weakens. Cash flow properties are a no-brainer. They are great no matter what. These are
the ones you want to buy and keep. Eventually they will pay off.
MISTAKE # 3. Rejecting too much
When prices go up, you’re tempted to withdraw the maximum amount allowed on a home equity line or do a cash refinance on a rental property. That is dangerous if one cannot make the payments or endorse the negative. It is like abusing credit cards, which often ends in bankruptcy.
It is especially daunting when values fall below the loan amount, as is happening with many homeowners right now. One should not be discouraged, they will eventually return to their original value and then exceed it, usually within 2½ to 4 years.
MISTAKE # 4. Getting the wrong loans
We have all seen the problems with subprime loans. Those with low incomes weren’t the only ones who used these loans. Some bought million-dollar houses on a bet that they would increase in value. Five-year option ARMSs also became popular, but caused significant investor problems when they were rebooted. Loans like these need to be refinanced as soon as possible. The same goes for adjustable rate mortgages. Fixed rate loans are the only type of loan suitable for anyone planning to keep their property.
The second quarter of 2008 shows good news
Sales have increased in 13 states, especially in the most affected states (California up 25.8%, Nevada up 25%, Arizona up 20.5% and Florida up 10%), a strong sign that the market has bottomed out and is returning to normal.
Additionally, 35 cities in the US show a rise in prices from Q1 to Q2. Yakima, WA, pink 9.9%; Binghamton, NY, 8.7% pink; and Amarillo, TX, were up 7.2% over the prior year.
Conclution
It’s never fun to be on a downward cycle and watch the equity in your home and rental property melt away. Don’t be discouraged though, this is just one part of the real estate cycle.
These down cycles are always a great time to pick up more properties at great prices, but be sure to keep a reserve for unforeseen problems (like illness or job loss) so you can still make your payments. Make sure you buy good properties in good locations, priced below the area median price, in markets with good job growth.
The properties will return to their appreciation of more than 7 percent and then you can watch your wealth accumulate once more.
So do not worry. Real estate remains the best long-term investment.
