Are We Coming To A Real Estate Investment Fork In The Road?
Posted @ 7:15 pm - Filed under Buying Income Property, Cash Flow, Economy, Financing, Market Correction, RE investment strategies, San Diego Property Owners, Texas
Yeah, I know, there are more than two schools of thought when we start talkin’ about what’s next in the national economy — especially in the context of the oh so important real estate markets. I get that. But the fork I see are two roads really more or less going in the same direction, which I realize is confusing. Hang with me.
This isn’t new ground by any stretch, as many have written endlessly on ‘what’s next’ — to the point we’re all hittin’ the weary wall. Sooner or later though, it’s gonna break one way or the other, something on which there is universal agreement.
The most likely direction I see us taking is on the same sad dirt road on which we found ourselves in the ’70’s and early ’80’s. I was gonna go all linky on ya, but decided it’d be far more instructive to simply begin the discussion.
Inflation followed the ‘74-75 recession. In fact, it was the first time it had ever reached double digits in my lifetime — at least to my knowledge. From ‘76 through fall of ‘79 inflation was an infection and the doctors seemed to have gone fishin’. For example, San Diego real estate went up a more or less steady 2% — a month — for those nearly four years. We’d never seen anything like it.
When it predictably hit the fan, prime rate was over 20%, FHA was about 16.5%, and both were there to be seen, not used by anyone but the most desperate. It’s a very close call in my opinion, but I think we’re maybe about to be headed that way.
The other road on which we may find ourselves sports the above mentioned inflation but without the accompanying robust economy. Seems oxymoronic doesn’t it? But the phrase ‘Stagflation’ was born just about 30 years ago. Inflation was off the charts while recession deepened. Interest rates remained high for so long, I remember celebrating at the local steakhouse when I closed a deal with an interest rate under 12%. Not makin’ that up. When rates finally dropped to single digits we nearly became euphoric.
Here’s the common denominator between the two scenarios: Both will have windows of opportunity (already open) for real estate investors. And no, this isn’t some convoluted NAR message saying “It’s a great time to buy real estate”. 
In either case the entry level home buyer will find themselves shuffled off the stage. Either rates will be way to high, or prices will have left them behind. Meanwhile the supply of rental property, affordable that is, will begin to shrink. Nobody, or in any case very few, will be building. Vacancy rates will tumble as rents find new heights. This is already happening in some regions. Texas is one major example as you may have already guessed.
Those who lock in relatively long term, low interest rates now, will find themselves in the Catbird Seat. My hands-on experience with this came in San Diego of course. Vacancy rates not measured in percentages but rather time — sometimes hours. Really. Owners insisted on month to month rental agreements so they could follow (read: adjust to) the upward trending rents. Folks who’d began with a ‘break even’ property found themselves awash in cash flow a year or two later.
They did this at rates of 7.5-9%! When rates almost doubled shortly thereafter, they found themselves with slowly rising expenses, a fixed cost for borrowed money, and very quickly rising rents. Gimme that combination any time. That combo is in your future, in my humble opinion, no matter what happens.
The key though is to act before the bull’s waste product hits the wildly spinning metal blades. Once the interest rates and/or prices get their death grip on what makes investment sense — your ship will have sailed — whether you’re on it or not.
There’s no ‘being late’ to this particular party. That great deal at 5-7% becomes an easy ‘I’ll pass’ at 8-10%. So if you’re late, the party will go on without you.
I’m very interested in what you have to say — including how long you think this current window of opportunity might last.
If you wanna talk about how you might take advantage yourself, gimme a buzz at 619 889-7100 or email me. Have a good one.
This entry was posted on Tuesday, July 14th, 2009 at 7:15 pm and is filed under Buying Income Property, Cash Flow, Economy, Financing, Market Correction, RE investment strategies, San Diego Property Owners, Texas. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
