This is NOT a post trying to pump-you-up, trying to get you to buy real estate even though the market is really “bad”. This blog is about “how to create wealth despite the economic collapse”, so investing is obviously something I still believe in. It’s also evident I’m arguing that the significance and magnitude of this downturn should not be underestimated. I’ve been accused of being very negative about the economy. It’s also been pointed out to me that I’m inordinately upbeat about the opportunities that lie ahead for us considering my dire outlook on the economy. I plead guilty to both. So here’s the bottom line: I think the downturn in real estate and the economy in general is just beginning. We’ll continue to see significant numbers of foreclosures, decreases in sales of existing homes and especially in new homes. Prices in markets like mine…Lafayette, Indiana will continue to see somewhat stable prices, but overly inflated markets like Vegas, San Francisco, Miami, etc will all continue to see notable price decreases. We have a long way to go.
Learn to Look at Real Estate Differently
While markets like mine (Lafayette, IN) in the Midwest will likely see much less acute price declines, we would be remiss to neglect considering that if the dollar declines in purchasing power, as many expect it will, than while prices may be solid, actual value will be declining. In other words, if your home is worth $200k and the dollar loses 10% of it’s purchasing power, your home would have to go up to $220k to be worth the same. Does that make sense?
So with all this horribly negative news, how can investing in real estate possibly be a good idea? I have a couple things to say about that:
- First, it’s NOT “horribly negative news.” The rules are simply changing. It happens. When the game changes, it doesn’t mean no one can win. It means you need to play by different rules. That’s all. There’s no such thing as a “bad” market. Conversely, there’s really no such thing as a “good” market either. There is just the market, the rules, winners and losers. If you learn the rules and play to win, you have a chance to create wealth…in ANY market.
- No matter what happens around us, there is opportunity. We can create value and build wealth today. That is a fact. But it’s true that the days of easy money are over. I’m no guru or futurist, but as of yet I see no reason why easy money and the ability to use your home as a bottomless ATM should ever come back within our lifetimes. So if that is your definition of wealth, I’m sorry to say that rough times are ahead. Very rough. But there’s a strong argument that all of this wealth we’re losing right now wasn’t real to begin with, that we’re literally not losing that much. That may be a bitter pill to swallow, seeing as how many of us ARE losing jobs. We ARE losing our homes. But as the argument goes, the jobs we’re losing are jobs that should have never been created to begin with. The homes we’re losing are homes that should never have even been built.
The Payback for Easy Money
This is a painful, disillusioning consequence to having lived in a world for many years where money was way too easy. All you had to do was buy a home (with no money down of course), and you would automatically become a millionaire in just a few years if you played your cards right. And if you lost your job, all you had to do was buy a vacation home (with no money down of course), and live off the appreciation of $100k a year. Sound ridiculous, doesn’t it? Unfortunately, that is literally what we’ve been doing. And it worked, for a little while. But it wasn’t real wealth, and now it’s all evaporating. And after living in a fantasy land for years, who can blame us for being disillusioned now? But disillusionment does not mean opportunity has vanished. But it’s true, if you keep looking in the same places, you are not going to get very far.
Where to Look to Make Money in Real Estate
So, where IS the opportunity right now? I’m a big advocate of rental property right now. Not all rental property everywhere of course, but rental property in certain markets really seems to make sense. We have looked to real estate for appreciation for the last several years, but appreciation is only one of many ways real estate can make you money. Stop looking at appreciation, and instead, look to win in other areas…
Here’s a real world example to illustrate. I wrote an offer on a duplex (this particular one didn’t turn into a deal, but regardless…the numbers are real and will illustrate my point) for $60k. It had about $1200 a month income from rents. I would be putting $12k down. There are deals like this all over my Lafayette, Indiana real estate market and many other Midwest markets right now. As I’ve said, I expect actual values to decline. Appraisals are difficult and credit is tight. Let’s say the value goes down 10%. Does that mean I lose $6k? Only if I buy the property outright. I am only putting down $12k, remember? So, I would lose 10% of that…$1200. Not that I like a loss, but every business has expenses, right? Look at the cash flow…$14,400 a year. The net taxable income, with maintenance and everything ended up looking like about $7200. So I put down $12k and get a return of $7200 a year. Ask me again if I care if the equity goes up or down a little. I’m getting a 60% cash on cash return. I’m not a multimillionaire or anything, but I can’t see how a 60% return in a “bad” economy is going to hurt…and it’s certainly not anything to scoff at! Still think real estate is bad? And guess what…if prices go down next year, do you think I’ll like this market even more? You bet I will! I tell you, since when is affordable housing a bad thing?
We’ve been addicted to rising home prices for way too long. I argue in any market there are winners and losers. But in the bubble, we had homeowners paying $500-600k for a crappy house. How…tell me how is that a good thing?
Hey NAR, Are You Listening?
I’d like to use this opportunity to say that while I see a lot of opportunity in real estate these days, I unfortunately think the National Association of Realtors (NAR) has lost a ton of credibility in recent years. Especially their chief economist Lawrence Yun, who is perpetually saying that a recovery is just around the corner. Realtors, I hope, will learn that a recovery is NOT just around the corner and it is in fact not our job to predict the future and simply feed off high home prices. It is our job to provide a valuable service and work in the best interest of our clients, even if that means holding off on a sale or purchase.
I’m calling for an overhaul of our industry, where Realtors stop focusing on “closing deals” and start focusing on helping clients. The idea that your personal home is an asset you can use to build wealth is a weak and faulty sales pitch. It’s not true, and it’s never been true. A home is a necessary and worthwhile expense for many people, but it is NOT a wealth building machine. The myth needs to end, and I challenge NAR to be a part of spreading the word. I encourage them to fire Yun (or at least give him a new set of scripts to spout when he’s in front of a camera). As Realtors, we have an opportunity to offer a tremendously valuable service to home buyers and sellers, OR we can continue just trying to slam deals together no matter what it takes. For me, I’m focusing on service, and I encourage all Realtors and the NAR to do this also.