Can Real Estate Still Be a Good Investment?

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That's a question we are all asking today. Why? Because of the many stock market investors who speculated in real estate, the problems surrounding sub-prime loans with the resulting foreclosures and bank failures, and falling home prices.

If the late Dr. David Schumacher, my mentor for the past 10 years and author of the now-famous book, The Buy and Hold Strategies of Real Estate, were still around, I know what he would say because he said it during the last downturn in 1990-1995. He would tell us not to worry. This is only temporary and part of the normal cycle of real estate.

It creates bargains that can benefit you. This cycle has been happening since Montgomery Ward began offering homes for $1,500 through its catalogs. As sure as the sun rises and the seasons come and go, real estate will make those who own it rich over a period of time. He would add that now is the best time to get great deals in real estate.

The Real Estate Cycle

Real estate is still the best investment possible. It always has and always will do well in the long run. This is the fourth real estate cycle I have been through and none of the downturns were fun. However, if you have patience and look at the long term, your real estate will go up in value more than any other investment. Do not treat real estate as you might treat the stock market, worrying about the ups and down.

Since 1929, real estate has gone up an average of five percent a year; if you stay away from the obvious non-appreciating areas like Detroit, it is more like seven percent a year. At that rate, properties will double in value over 10 years with compounding. Add a federal tax benefit of 28 percent plus state tax deductions, the depreciation write-off for rental property, and the eventual pay-down of the loan and you have a strategy rich people have always used to accumulate wealth.

Flippers

Over the past 30 years I have watched many flippers who buy, fix up, and sell. I do not know many who have much net worth or are wealthy because of flipping. It is simply a very risky way to make money.

Those who have prospered are the ones who are in it for the long haul and patiently watch their properties increase in value over time. This past downturn was created by speculators who all flipped at the same time, putting too many properties on the market for sale and rental. I guarantee that over the long haul, you will always regret selling any property you have every owned.

Buy and Hold

Since time passes by anyway, the buy-and-hold strategy is a great way to become rich. Dr. Schumacher experienced at least five real estate cycles and did extremely well, acquiring an eventual net worth of over $50 million.

You just can't go wrong in purchasing an inexpensive condo, townhouse, or single-family home in a good location where there are jobs. Make sure you have a fixed-rate loan, make sure it cash flows, hold on to it for 10 to 20 years, and you have a property that has doubled or even quadrupled in value. When you need to retire, simply do a cash-out refinance to live on or to supplement your retirement pension.

For example, the first property I purchased for $75,000, a townhome in Lake Arrowhead, CA, is now worth $650,000. My first oceanfront condo, which I purchased in Long Beach, CA, in 1982 for $112,000 and used as my residence, is now worth $500,000. One-bedroom condos I purchased in Maui, HI, in the late 1990s for $80,000 are now worth $400,000. Homes I bought around the same time in Phoenix, AZ, for $75,000 are now worth twice that. I could go on and on and on.

What are your Options?

What are your options to building wealth today? The options are to buy real estate and build wealth or to not purchase property at all, to struggle a lot and have nothing to show for it.

1. You could do nothing. The 25 percent who do not own a home end up with no assets when they retire. They have a car loan and owe an average of $9,000 on their credit cards. Those who do not purchase rental property may be forced to work past age 65 to supplement their meager retirement income.

2. You can try to depend upon your retirement. The above chart shows that you should not depend on your retirement income alone to support you, because it won't. Those on Social Security or most retirement programs end up living below the poverty line and are forced to work until they drop, so that is not a solution. Other investment options are not doing so well, either.

3. Invest in the stock market. We are definitely in a slowdown (I refuse to believe we will have a recession), so the stock market is not going to do well for several more years.

4. Invest in gold and silver. They have already made their run; it is doubtful they will do much better. Gold and silver are used as a hedge against inflation and a weak dollar. It looks like oil prices are headed down and the dollar is strengthening.

5. Invest in real estate. Those who invest in real estate almost always do well. The following graph shows how the top one percent in income have acquired their wealth. As you can see, the vast majority have invested in real estate.

Don't Think Short-Term

Real estate is not designed to be considered short-term. Right now, real estate is going down in value in many cities, but it is going up in many others. It is a terrible time to sell and pull out any equity. Only about five percent of the properties are for sale. Most homeowners and investors are simply holding on to their real estate and are waiting for the next upward appreciation cycle.

The Four Greatest MISTAKES People Make in Real Estate

Real estate always does well when purchased correctly. It is people's choices and sometimes greed that mess up an almost perfect investment.

MISTAKE #1. Purchasing Property That is More Than One Can Afford

Often individuals are attracted to and purchase a home they cannot afford. They struggle their entire lives just to make the payments. Then if they have an illness, job loss, or divorce, they are in big trouble.

MISTAKE #2. Buying Properties That Don't have Cash Flow

When rental properties are going up rapidly, everything seems desirable and people purchase rental properties that don't cash flow. Often that can lead to disaster with large, negative cash flows when the market softens. Properties that cash flow are a no-brainer. They are great no matter what happens. These are the ones you want to buy and hold. Eventually they will be paid off.

MISTAKE #3. Refying Too Much Out

When prices are going up, one is tempted to take out the maximum amount allowed on an equity line on one,s home or do a cash-out refi on a rental property. That is dangerous if one cannot make the payments or support the negative. It is like abusing one's credit cards, which often ends in bankruptcy. It is especially discouraging when values drop below the loan amount, as is happening with many homeowners right now. One should not get discouraged, they will eventually return to their original value and then surpass that, usually within 2½ to 4 years.

MISTAKE #4. Getting the Wrong Loans

We have all seen the problems with sub prime loans. Those with low incomes were not the only parties using these loans. Some bought million-dollar homes in a gamble that they would up in value. Five-year Option ARMS also became popular, but they caused major problems to the investor when they reset. Loans like these should be refinanced as soon as possible. The same is true for adjustable-rate mortgages. Fixed-rate loans are the only suitable loan type for anyone who plans to hold on to his properties.


Conclusion

It is never fun to be in a down cycle and see the equity in your home and rental property slip away. However, do not be discouraged, this is just part of the cycle of real estate.These down cycles are always good times to pick up more property at great prices, but be sure you keep a reserve for unforeseen problems (such as illness or job loss) so you can still make your payments. Make sure you purchase good properties in good locations, priced below the median price for the area, in markets that have good job growth.Properties will return to their 7-plus percent appreciation and then you can watch your wealth build once again. So, don't worry. Real Estate is still the best long-term investment.