There are times in our lives when the smart move in the world of investing is to ‘double down’. With real estate valuations at 1999 to 2003 levels, a real estate investor has to seriously consider averaging in and making additional investments. Sure it is a time of uncertainty. You maybe underwater with some or all of your investments already. However, if you’ve got the capacity and cash-flow -it maybe well advised to consider at least one more well placed purchase of a real estate rental investment.
The world of real estate investing is no different then any other arena such as: stocks, bonds, mutual funds, art, collector cars, etc.
The definition of Dollar Cost Averaging is:
investment in a security at regular intervals of a uniform sum regardless of the price level in order to obtain an overall reduction in cost per unit —called also dollar averaging
The idea is that in theory you may have payed $40k for a basic 1000 Sq/ft home in 2000, $45k in 2002, $55k in 2004, $70k in 2006, and now perhaps making a similar type investment today for $40k -again. If your focusing on that $70k purchase as a $30k loss, you maybe missing the overall long-term picture of your investment portfolio. Say the fear of the economy, potential job-loss, and/or that underwater purchase in 06′ and 04′ cause paralysis and you don’t make that new $40k investment. Look at it this way, The purchase of a new investment would lower your average investment price of a rental house to $50k versus $52.5k. Imagine if you averaged in another good 1-5 homes prior to another run up in valuation?
The goal: Focus on cash-flow of your rental investments. One wants to make an acceptable return on investment and be able to comfortably handle debt coverage. If your investment(s) cash flow, short-term (or even perhaps -mid-term) fluctuations in valuation do not matter.
If your over-leveraged (and especially running a negative cash-flow basis), perhaps you should consider reading my article: Reverse Growth Mode; however, if you have adequate capital and/or cash-flow from other investments, businesses, or jobs -it maybe time to divert additional resources while real estate appears to be a good Contrarian Value Investment. Again, focus on the cash flow. Do not expect valuations to reach those peak numbers we saw in the top of the cycle back in 07′ or 08′ anytime soon. However, remember cycles tend to overreact in all directions. With the whiplash we’ve received in both the real estate industry and corresponding financial markets, we will certainly see a rebound in average appreciation rates of 3% annually (or 1% over the average inflation rate) at sometime in the next 3-5 years in both valuation and/or rental income -not to mention the ability to lock in ‘Forced Appreciation’ from a good value play.
Sure we have huge obstacles to overcome! I will not deny that. However, our nation is growing in population every-day and the cost of materials such as: lumber, wire, oil based products (shingles, plastics, etc.), copper, aluminum, are only going to inflate as Emerging Markets (China, India, South America, etc.) continue to transform and provide their populations with the ability to consume through capitalism. Think about that. At some point in the future, your local housing supply glut will be absorbed and the pendulum of a buyers/sellers market will at least reach an equilibrium.
Do you make monthly contributions through a 401k, mutual fund and/or stock reinvestment program, or purchase a series of laddered CD’s or bonds? Then perhaps you should consider doing the same with real estate too.
Remember -risk is the cost of opportunity. If you’ve been following my articles, you know I have made some new real estate investments myself. Don’t worry -there is no rush. I think good buys will exist for at least the next 2-3 years. Educate yourself. Investigate your local real estate market. Focus on old-school investment theories of cash-flow. When the opportunity presents itself: Double Down.