State of the Real Estate Economy as of October 2009
I’ve had various thoughts for what I’d write this week… Reflecting back I am seeing a consistent theme with those that play in the land of real estate. Uncertainty, Fear, and somewhat worn out against a back drop of Dow 10,000, Real Estate (supposed) Guru’s hyping product, and the drumbeat of economists and politicians claiming the recession is over.
It is certainly a weird paradox of halves and halve not’s that I’m witnessing out there. Between my own rentals, those I participate in via managing them, my own rehabs, and clients of mine through our lending program, I see a very distorted somewhat desperate world. Of course it’s easy to get locked into the doom and gloom; I will say that I see opportunity. No, I won’t hype that for $1995, or even $995, or even if you act now for $395 -I will have the solutions to all your problems (Don’t get me wrong as there are some great programs available out there). I will say that one has to work hard to keep the blinders off, not be overly (but realistically) cautious, and be prepared that a certain amount of risk must be taken playing offense in order to help get ahead and be better positioned for when we at least see stability.
Truthfully I do think it is a good time to buy with the following parameters. For rentals one must be able to secure long term financing (minimum 3-5 years if not 30 depending on your skills and cash flow levels) and buying right primarily cash flow and secondarily for forced appreciation when stability exists. It’s funny (as I’m sure some can relate) as I’ve got a duplex for sale on mls that’s just sitting there with no offers as its priced right and financing is even offered. It’s one of those places that will jump instantly by some $30-50k in value overnight when the kinks and stability are achieved in the dysfunction of our credit and real estate markets occur.
You ask“if it’s such a great deal then why sell it?” Very good question, I will tell you if you’re really in the game of growth through acquisition and also merchandising (short term profiting) of real estate then you had better have the ability to find a stream of well discounted new properties. I will also tell you that you cannot hold onto every deal. I will also say that you will accelerate your growth and thus wealth by selling profitable deals along the road of holding them. Even if you pay taxes, I can map out where growing and weaning back some of a landlord portfolio to then reinvest is a way to accelerate the tremendous compounding of the real way to create wealth: holding rentals for the long term.
I also see a big market in wholesaling and flipping. There is a new breed of investors out there in the market. They are more sophisticated as a whole. They have cash, professionally employed, and willing to get dirty to get a deal to completion. Sure it takes more work today but I challenge a wholesaler who says there are no buyers –I’d say the truth is your trying to push over priced product.
In the world of rehabbing to resale to retail there is also opportunity. One has the ability to buy distressed property, rehab it, and then list it at a lower price than most product on the market. Know I will state that one should stay within an FHA Home Buyers Purchasing Power. For our area, the maximum loan available for FHA is $309k (as it varies by market). In our Charlotte North Carolina region I believe the sweet spot is a retail price of $135k to $225K. In essence you want to target the neighborhoods that first time home buyers are purchasing and a profit can be had.
Understand that I believe in two trains of thought. Rentals are a retirement package unless you can maintain debt levels at a minimum and that one needs another business operation, such as wholesaling, rehabbing, lending, and/or providing any other product/service for deriving an income (not to mention profits to reinvest in your business or additional retirement vehicles).
It’s a daunting world with the State of our Economy not to mention the clamp down we investors have faced with financing challenges. I certainly believe that we are not through this economic morass. I believe we will muddle through this economy for at least 3-5 years (if not 7 to 10). One must plan on going back to old appreciation levels (as a generalization) of property doubling in value every 17 years. There will certainly be pockets of opportunity in many angles of the real estate game; however, as a generalization the headwinds are certainly facing us in the short and medium term. Remember: One must create value and/or provide a (true) solution to others in order to profit consistently.
What does that mean? That means you either have to be adept at finding product at very good discounts, form an efficient distribution model, and/or create improvements to those products. The easy days of just putting any old property under contract and flipping it for easy profits while in your underwear working just an hour a day does not really exist. Believe me –people maybe selling a system that says it does; unfortunately (for the market), the real money they make is from selling the system not from working their program.
So there’s my two cents. I reiterate that it is a challenge out there especially when one’s trying to create volume which maximizes profit. Hang tight, go slow, try new idea’s, and when traction is achieved: grow slowly. There is true opportunity to creating wealth in real estate right now –one just has to work harding at getting from point A to point B. After all, you cannot eat the net worth on your balance sheet as paper won’t sustain you long.