Currently, most of the financial news we hear seems to be bad news. The markets are down and most investments are not giving decent returns.
Talk of double or triple recessions is more common than Kim Kardashian’s per view appearances in Las Vegas.
The cause of our double-dip recessionary situation, as most know, was greed. The greedy main street was tricked into taking loans that the greedy mortgage brokers knew they couldn’t pay. This debt was then sold as a rundown used car for a huge profit. In the end, the little one is the one who lost the most.
However, among the pessimism there is a hidden gold mine. A unique set of circumstances makes real estate an attractive option for any investor seeking a fixed, secure and sustainable return. Those circumstances are: low interest rates, a price gap, a record foreclosure inventory, and a high demand for affordable housing.
Briefly, we will discuss each element and why it adds to the attraction of real estate as an investment.
low rates:
With pressure on the Federal Reserve to help keep inflation in check, Bernake and company have declared their intention to keep rates as low as possible. Starting today, it’s not hard to have a 4.5% rate (if you have a FICO score of 620 or higher).
Foreclosure Registry:
Due to the massive bursting of the bubble, banks are foreclosing on toxic loans at an aggressive rate. As inventory builds, prices fall. Falling prices help perpetuate the price gap.
price gap:
Historically, fall and winter see a slowdown in the real estate market. With fewer buyers, the ability to have highly favorable terms helps keep acquisition costs low. Banks and private sellers pay closing costs on behalf of buyers. However, not all deals will have all costs paid by buyers with a little diligence; You can find sellers who will pay up to 4% of buyers’ closing costs. For the right property, this means that the buyer will not have to pay any money out of pocket for their own costs.
High return on investment:
You can buy a property for a large fraction (in some cases 50%) of what it was a few years ago. If you look hard enough, right now, you can buy a property with little or no down payment and make a decent profit.
The demand for affordable housing:
For every home that is foreclosed, there is a need to find a replacement home. Because you can’t get a new loan for 2-3 years with a foreclosure on your credit report, the replacement home must be a rental. Buying a property with a tenant is already always the best. Occupied properties will have data that you can use to determine what your ROI will be. Plus, with an occupied property, you don’t need to worry about vacancy issues.
For example:
Currently in San Diego, you can purchase a 1-bedroom condo for a lump sum payment of $615.71 per month that rents for $850.00 per month. This is buying the condo using a conventional 30-year fixed contract with a 20% down payment at a 4.5% rate (today’s prime price is lower). This generates a profit of $234.29 per month or a 17.1% ROI on an investment that is less than a used Scion or Mercedes. This is not a bad return by anyone’s metric.
In contrast, if you are an active duty military stationed in San Diego, you can purchase the same 1-bedroom condo for a total payment of $698.81 per month. Eventually, you’ll leave the service, need a bigger house, etc. When you move out of this house, you can lease that condo for the current market rent of $850.00 per month. For this example, we will assume that the rent amount will not increase for the next 3 years and that you move within that time period. Purchasing this condo with a 30-year fixed VA loan with no down payment at a rate of 4.5% (today’s prime price is lower), yields a profit of $151.19 per month or a 275% ROI on an investment of $450 (the cost of a VA assessment). A 275% return is something you will never be offered on most legitimate investment accounts.
On a long enough timeline, real estate historically appreciates. Once the real estate markets rise again, another level of profit comes from the ability to sell the property and; defer taxes on gains through a 1031 exchange, seize the proceeds or occupy the property, and use the $250,000/$500,000 capital gains exclusion.
Due to the yields offered, the recent bubble has created great investment opportunities for anyone looking for an alternative to volatile and undervalued stocks.