by The KCM Crew on July 8, 2010
More millionaires were created as a result of the Great Depression than at any time in the nation’s history. Noted rich-guy John D. Rockefeller has said, “The way to make money is to BUY when blood is in the streets.” Another noted rich-guy, Warren Buffet, believes you should “be fearful when others are greedy and to be greedy only when others are fearful.” Huge success comes to those who see confusion as an opportunity. Today, there is a significant opportunity.
With interest rates at historic lows and home values where they are (the Housing Affordability Index is as favorable as it has ever been) I have one question… “Why hasn’t everyone jumped into the market?” Housing is still one of the most basic of needs (food, clothing, and SHELTER).
But moreover, real estate is the way to building a financial fortune. Today, rents collected can cover mortgage payments, often creating a positive cash flow. That is a critical determinant to the strategy; buy something, have the rent make the payment, and wait for the market to improve. Ten years from now you will be glad you did. This is no “get rich quick” scheme. It is a long term commitment.
I truly believe that to eat up all this inventory we are going to have to entice more than the people who want to own their own slice of the American Dream into the market. We need to bring back the entrepreneur to real estate… the investor who wants to “buy and hold” real estate for a long-term investment. Investors often buy multiple units/homes and find long term returns that outpace the stock market.
What is holding people back?
- Fear of further declination of home values (better known as greed). The “Why buy now if prices are going lower?” mentality will hurt today’s buyer the same way as the “Why sell now when prices continue to climb?” mentality hurt sellers 5 years ago. Pigs get slaughtered… Don’t be a Pig. By the way, who cares if prices decline in the short run, you have a positive cash flow, remember? And, you’re not selling this home for 10 years. It’s like losing your first bet in the casino. It doesn’t matter until you leave the building before you determine if it was a good day.
- Limited Financing Options. For competitive rates, most lenders require 25-30% as a down payment (while there are limited programs with 20% down at higher rates). When mortgage programs constricted, investor loan products were among the first to go because people are more likely “not to pay” the mortgage on the house they don’t live in. But with conservative loan-to-values and A+ borrowers being the only people being approved for these loans, there is reason to believe that the tightening may be loosened a bit.
- Being a landlord. Many people don’t want to be bothered collecting rents or getting the phone calls in the middle of the night that the boiler doesn’t work. I see this as an opportunity for more real estate agents to become Property Managers, where they take on these headaches for the investors (for a fee). Agents are best positioned to identify property, find a tenant, and manage rent collection and home improvement/maintenance issues.
There are real estate speculators (who buy low, fix up, and hope to sell high), but that is a full time job that should be left in the hands of the experienced professional. Today, we discussed a long term investor who is bullish on the long term value of real estate in America.
Let’s Look at an Example
Buy a home for $200,000, expend $50,000 for down payment and closing costs, and have your monthly carrying costs covered by rent. If you sell the property in 15 years for $400,000, you did not double your money, you had a 400% return on your money (because you only used $50,000 cash to get your $2000,000 profit). The fact that you can leverage real estate is how fortunes are made. If you could cover your expenses through rent payments received, and leverage your cash invested at a 3:1 ratio, WHY WOULDN’T YOU EXPLORE THIS STRATEGY TO BUILD YOUR FUTURE NEST EGG FOR RETIREMENT???