Is now the right time to Invest in property? Or forever live with your regrets.
Listen to the wealth-building wisdom of Warren Buffett: “Invest when fear,
doubt, and uncertainty grip the mind of the crowd; sell when wild hopes and
speculative fever burn away reason”.
The emotional herding of the crowd allows you and me to buy cheap and sell dear.
Think through that wise advice offered by the Sage of Omaha. What type of
markets offer the best opportunities for future profits? What type of market
alleviates risk? To answer these questions, contrast those boom market
conditions of yesterday with the potential-filled market we experience today:
1. Boom: Builders brought o market more than 2 million housing units a year.
Today: Housing starts have fallen to fewer than 400,000 per year (the lowest
level of building since World War II).
2. Boom: Buyers crowded into open houses and model homes to beg sellers or
builders to accept their above-asking-price bids. Sellers set prices. No matter
how high, buyers willingly paid on the ill-founded assumption that any price
would look cheap compared to 12 months later. Today: A majority of potential
investors and home buyers remain cautious, uncertain, and fearful. Open houses
remain sparsely attended. To attract mere lookers, builders are slashing prices
and doling out buyer concessions and incentives.
3. Boom: Interest rates averaged plus or minus 6 percent. Today: Interest rates
of 4.0 to 5.0 percent prevail (at least for now).
4. Boom: Inflation seemed under control as far into the future as the mind might
imagine. Allan Greenspan, chairman of the Federal Reserve Board, was dubbed “The
Maestro” for this then believed-to-be masterful handling of the money supply and
interest rates. Today: Trillions of dollars of deficits, government borrowings,
and quantitative easing seem likely to push inflation (and interest rates) to
much higher levels within the coming decade.
5. Boom: Properties sell at prices 30 to 100 percent above their replacement
(construction) costs. Today: You can buy properties at 20 to 70 percent below
their cost to rebuild new.
6. Boom: Millions of buyers overborrow to purchase properties they cannot
afford. Liars’ loans proliferate. Appraisers deliver any market value figure
that buyers, loan rep, and sellers want. Today: Tight credit and high
unemployment lead many people to double up (or even triple up) on their housing.
Boomerang highest levels since World War II. Loan reps and appraisers must
comply with strict new regulations that inhibit collusion.
7. Boom: Most sellers can easily demand top dollar. Today: Financial distress
and millions of short sales, foreclosures, and bank REOs (real estate owned)
create a ready supply of desperately motivated sellers (and lenders). Buyers-
not sellers – set prices.
8. Boom: Property prices are propelled far above the amounts that rental income
will justify. Today: Market prices have fallen to the point where rental income
yields form properties substantially exceed the income yields available from
bonds and stocks (that is, interest and dividends). Investors can reasonably
expect to achieve positive cash flows –either immediately or within a few years.
Capitalization rates have increased. Gross rent multipliers have decreased.
Rents are heading up, vacancies down.
9. Boom: Hundreds of thousands of new investors stretched financially and
overpaid for rental properties that they did not know how to manage. Today: Many
of those same starry-eyed investors have sadly awoken to the reality that safe
investing requires reserves of cash and credit, knowledge, though, an effective
operating system, and a tenant-pleasing strategy.
10. Boom: Nearly all soothsaying economists forecast blue sky prosperity without
serious recession. Today: Talk shows and financial news spew out a steady stream
of gloom and doom.
For historical perspective, recall other previous times of economic hardship
such as the early to mid-1970s, the early 1980s, and even as far back as 1937 –
when the hoped-for Depression recovery suffered a discouraging setback (the
stock market again fell more than 30 percent. Or say Texas in the late 1980s and
early 1990s when the RTC (Resolution Trust Corporation) was selling masses of
foreclosures and nearly all of the banks and savings and loans within the state
became insolvent. Or revisiting the severe recession and real estate collapse
that occurred in California during the early 1990s (La Jolla houses at less than
$300,000; Los Angeles condominiums at less than $100,000).
Were those so-called bad times actually good times to invest in property? No
doubt about it. Investors who bought during any of those doom-and-gloom eras
earned extraordinary returns for their insight and foresight. Now’s your sure
opportunity to buy a winning ticket. You can match their gains. History does
repeat itself. You do not need a “back to the future” time machine to return you
to those past golden years.
The real estate market in Florida is really bad? You are mistaken. The Florida
market today represents one of the best property markets that you have ever seen
– anywhere, at any previous time. As an investor. Relative to income and cash
flows, property prices look good. Relative to risk-adjusted potential for
capital gain, property prices look great.
