Real Estate Investors
Is now the right time to Invest in property?
By
Apr 3, 2012, 13:13

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.