The effect of the government bailouts will create some opportunities in real estate in the next few years. Here's what my crystal ball says:
We have to fund these bailouts. The money has to come from one or several of these three sources.
1. Print it
2. Borrow it
3. Increase tax revenue
Printing more money devalues the dollar so that is not a good idea. Raising taxes in a depressed economy is not a good idea either. So, the money will be borrowed.
We've had similar situations when the government ran huge deficits. They have to pay higher interest rates than the market to attract money to fund the deficit.
Interest rates will climb. Gov't will then print more money to hold interest rates down, creating inflation. Double whammy! But we have seen this before, at least I have.
Interest rates will increase as demand exceeds supply. Interest rates, now at 5% on home loans, will rise as investors pull their money from the mortgage market and find better yields. In 1979 and 1980 we saw mortgage rates at 20%! I'm not saying that will happen, but as surely as gas will go back to $4-$5 per gallon, mortgage rates will go to 8%-10%.
Real estate is the best investment for several reasons:
1. Inflation helps owners of real estate, if they have a fixed rate loan or no loan at all (increase values).
2. Real estate is one of the few investments that shelters other income (saves taxes). This will become more important as income tax rates are increased.
3. You can leverage real estate (control 100% of investment with only 20% down payment).
4. You can pay back the loan with devalued dollars!
5. You can secure a fixed low rate loan.
Inflation made me money in the 70s and 80s. I bought homes by assuming low fixed rate loans and resold them at a profit, plus I financed them at 12%, making 5%-6% on the bank's money. Everyone won. I made money. The seller got their home sold. The new buyer bought a house. The mortgage companies got paid.
Moral to the story? I believe there is a two year window in which to buy real estate with low interest rates and low home prices. This opportunity will provide good returns and huge tax savings.
HOW DO YOU FIND A GOOD REAL ESTATE INVESTMENT? Read next weeks tip.