That is a question we all ask ourselves today. Because? Due to the many stock market investors who speculated in real estate, the problems surrounding subprime lending with the resulting foreclosures and bank failures, and falling home prices.
If the late Dr. David Schumacher, my mentor for the last 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 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 rich over a period of time. I would add that now is the best time to get great deals on real estate.
The Real Estate Cycle
Real estate is still the best possible investment. It always has and always will do well in the long run.
This is the fourth real estate cycle I’ve been through and none of the downturns were fun. However, if you are patient and look to the long term, your real estate property will increase in value more than any other investment. Don’t treat real estate like you would the stock market, worrying about the ups and downs.
Since 1929, real estate has risen an average of five percent a year; if you stay away from the obvious unappreciative areas like Detroit, it’s more like seven percent a year. At that rate, the properties will double in value in 10 years with compounding. Add in a 28 percent federal tax break plus state tax deductions, write-off of rental property depreciation, and eventual loan repayment, and you have a strategy rich people have always used to accumulate wealth.
pinball machines
In the last 30 years I have seen many pinball machines being bought, repaired and sold. I don’t know many who have a lot of net worth or are rich due to investing. It is simply a very risky way of making money.
The ones that have prospered are the ones who are in it for the long haul and patiently watch their property values rise over time. This past recession was created by speculators who switched 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 ever owned.
buy and hold
Since time passes anyway, the buy and hold strategy is a great way to get rich. Dr. Schumacher has experienced at least five real estate cycles and has done extremely well, acquiring a final net worth of over $50 million.
You simply cannot go wrong buying an affordable condo, townhome or single-family home in a good location where there is work. Make sure you have a fixed rate loan, make sure the cash is flowing, keep it for 10-20 years, and have a property that has doubled or even quadrupled in value. When you need to retire, simply refinance with cash out to live on or to supplement your retirement pension.
For example, the first property I bought for $75,000, a townhome in Lake Arrowhead, CA, is now worth $650,000. My first oceanfront condo, which I bought in Long Beach, CA, 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. Houses I bought around the same time in Phoenix, AZ for $75,000 are now worth double. I could go on and on and on.
What are your options?
What are your options for creating wealth today? The options are to buy real estate and build wealth or buy no property at all, struggle hard and have nothing to show for it.
1. You couldn’t do anything. The 25 percent who don’t 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 buy rental properties may be forced to work after age 65 to supplement their meager retirement income.
2. You can try to depend on your retirement. The graph above shows that you shouldn’t rely solely on your retirement income to support yourself, because you 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 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 that we are going to 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 made their career; it is doubtful that they do much better. Gold and silver are used as hedges against inflation and a weak dollar. It looks like oil prices are going down and the dollar is getting stronger.
5. Invest in real estate. Those who invest in real estate almost always do well. The graph below shows how the top one percent of income earners 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 in the short term. Right now, real estate values are going down in many cities, but going up in many others. It’s a terrible time to sell and pull out any capital. Only about five percent of the properties are for sale. Most homeowners and investors are simply holding on to their real estate and waiting for the next upward appreciation cycle.
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 spoil an almost perfect investment.
MISTAKE #1. Buying a property that is more than one can afford
Often people are lured away and buy a house that they cannot afford. They struggle all their lives just to make the payments. So if they have an illness, job loss, or divorce, they’re in big trouble.
MISTAKE #2. Buying properties that do not generate cash flow
When rental properties are rising rapidly, everything looks desirable and people buy rental properties that do not generate cash flow. That can often lead to disaster with large negative cash flows when the market weakens. Cash-flowing properties are a no-brainer. They are great no matter what. These are
the ones you want to buy and hold. Eventually they will be paid.
MISTAKE #3. Refying too much off
When prices are rising, one is tempted to take out the maximum amount allowed on an equity line on one’s home or do a cash refinance on a rental property. That’s dangerous if you can’t make the payments or support the negative. It’s like abusing credit cards, which often ends in bankruptcy.
It’s especially disheartening 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. Get the wrong loans
We’ve all seen the problems with subprime loans. Those with low incomes were not the only ones who used these loans. Some bought million-dollar houses on a bet that they would increase in value. Five-year ARMS options also became popular, but they caused big problems for investors when they were reset. Loans like these need to be refinanced as soon as possible. The same is true for adjustable rate mortgages. Fixed rate loans are the only type of loan suitable for anyone who plans to keep their property.
The second quarter of 2008 shows good news
Sales increased in 13 states, especially in the hardest-hit states (California 25.8%, Nevada 25%, Arizona 20.5% and Florida 10%), a strong sign that the market has bottomed out and it’s getting back to normal.
Additionally, 35 US cities show an increase in prices from the first to the second quarter. Yakima, WA, pink 9.9%; Binghamton, NY, pink 8.7%; and Amarillo, TX, was up 7.2% over the prior year.
Conclusion
It’s never fun to be in a down cycle and watch the equity in your home and rental property fade away. Don’t be discouraged though, this is just part of the real estate cycle.
These low cycles are always a good 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. Be sure to buy good properties in good locations, priced below area median, in markets with good job growth.
Properties will return to their appreciation of more than 7 percent and then you can watch your wealth accumulate once again.
Then do not worry. Real estate is still the best long-term investment.