This is a question we all ask ourselves today. For what? Due to many stock market investors speculating on real estate, problems with subprime lending with subsequent foreclosures and bank failures, and falling real estate prices.
If the late Dr. David Schumacher, my mentor of 10 years and 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 during the last slowdown in 1990-1995. He would tell us not to worry. This is only temporary and part of the normal real estate cycle.
This creates good deals that can benefit you. This cycle has been happening ever since Montgomery Ward started offering homes for $1,500 through its catalogs. As sure as the sun rises and the seasons come and go, real estate will enrich those who own it over a period of time. He would add that now is the best time to do good business in real estate.
The real estate cycle
Real estate remains the best possible investment. It has always done and will always do well in the long run.
This is the fourth real estate cycle I’ve been through and none of the downturns have been fun. However, if you are patient and consider the long term, your property will be worth more than any other investment. Don’t treat real estate like you might treat the stock market, worrying about ups and downs.
Since 1929, real estate has increased by an average of 5% per year; if you stay away from obvious areas that aren’t appreciating like Detroit, it’s more like seven percent a year. At this rate, properties will double in value over 10 years with capitalization. Add in a 28% federal tax benefit plus state tax deductions, rental property depreciation, and eventual loan repayment and you have a strategy the rich have always used to accumulate wealth.
Over the past 30 years I have observed many fins buying, fixing and selling. I don’t know many who have a lot of net worth or are wealthy from flipping. It’s just a very risky way to make money.
Those who have prospered are those who are in it for the long haul and patiently watch their property values increase over time. This past downturn was created by speculators all swinging at once, putting too many properties on the market for sale and rent. I guarantee you that in the long run, you will always regret selling a property you own.
buy and keep
As time goes by anyway, the buy and hold strategy is a great way to get rich. Dr. Schumacher has been through at least five real estate cycles and has been extremely successful, acquiring an eventual net worth of over $50 million.
You can’t go wrong buying a cheap condo, townhouse or single family home in a good location where there are jobs. Make sure you have a fixed rate loan, make sure it cashes in, hold 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 in cash to live on or supplement your retirement pension.
For example, the first property I bought for $75,000, a townhouse in Lake Arrowhead, California, is now worth $650,000. My first beachfront condo, which I bought in Long Beach, California in 1982 for $112,000 and used as a residence, is now worth $500,000. The one bedroom condos I bought in Maui, HI in the late 1990s for $80,000 are now worth $400,000. Homes I bought around the same time in Phoenix, Arizona for $75,000 are now worth double that. I could go 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 buy property at all, struggle a lot and have nothing to show for it.
1. You couldn’t do anything. The 25% who do not own a home find themselves 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 buy 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 it won’t. Those on Social Security or most retirement programs end up living below the poverty line and are forced to work until they drop, so this is not a solution. The other investment options are not doing as well either.
3. Invest in the stock market. We are definitely in a downturn (I refuse to believe we will have a recession), so the stock market is not going to do well for several more years.
4. Invest in gold and silver. They have already run their course; it is doubtful that they will do much better. Gold and silver are used as a hedge against inflation and a weak dollar. It looks like oil prices are falling and the dollar is getting stronger.
5. Invest in real estate. Those who invest in real estate almost always do well. The following chart shows how the top 1% earned 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 viewed in the short term. Right now, real estate values are falling in many cities, but rising in many others. It’s a terrible time to sell and withdraw equity. Only about five percent of properties are for sale. Most owners and investors simply hold 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 does well when purchased 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 individuals are lured in and buy a home that they cannot afford. They struggle all their life just to make the payments. Then if they get sick, lose their job, or get divorced, they’re in big trouble.
MISTAKE #2. Buy properties that do not generate cash
When rental properties are increasing rapidly, everything seems desirable and people buy rental properties that do not generate cash. This can often lead to disaster with large, negative cash flows when the market softens. Properties that generate cash flow are a no-brainer. They are great no matter what. These are
those you want to buy and keep. They will eventually get paid.
MISTAKE #3. Refying Too
When prices go up, one is tempted to withdraw the maximum amount allowed on an equity line on one’s home or do a cash-out refi on a rental property. It is dangerous if one cannot make the payments or bear the negative. It’s like abusing your credit cards, which often results in bankruptcy.
It is especially discouraging when values drop below the loan amount, as is the case for many homeowners today. Do not be discouraged, they will eventually regain their original value and then exceed it, usually in 2½ to 4 years.
MISTAKE #4. Get bad loans
We’ve all seen the problems with subprime loans. Low-income people were not the only ones to use these loans. Some bought million dollar homes betting they would go up in value. The five-year ARMS option also became popular, but it caused major problems for the investor when it was reset. Loans like these should 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 who plans to keep their properties.
The second quarter of 2008 shows good news
Sales are up in 13 states, especially in the hardest hit 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.
In addition, 35 cities across the United States show price increases from the first to the second quarter. Yakima, WA, increased 9.9%; Binghamton, NY, increased 8.7%; and Amarillo, TX, increased 7.2% from a year ago.
It’s never fun to be in a down cycle and watch the equity in your home and rental property slip away. However, don’t be discouraged, this is only part of the real estate cycle.
These down cycles are always good times to buy more goods at bargain prices, but be sure to keep a reserve for unforeseen issues (such as illness or job loss) so you can still make your payments. . Make sure you buy good properties in good locations, at a price below the median price in the area, in markets that have good job growth.
Properties will return to their appreciation of over 7% and then you can see your wealth building up again.
So don’t worry. Real estate remains the best long-term investment.