True real estate investors have not had an easy time in the past few years as the field has been inundated with speculators chasing artificially bloated prices. Hoping to be able to sell at a higher price is not investing, it is speculating. Investing is buying at a price that will not only carry the property, but will also return a profit to the investor, without appreciation. Home prices skyrocketed as the Fed dropped interest rates and bankers flooded the real estate market with cheap, easy money. Investors were priced out. Interest rates giveth and interest rates taketh away! Already inventories of unsold houses are increasing. Properties are taking longer to sell in many formerly hot areas. Appreciation is way down and in some areas prices are dropping. Of course real estate professionals; read realtors and mortgage bankers, say dont worry about it. Investors who have been through these boom and bust cycles before know differently. Speculators who were pouring money into properties while waiting for a bigger fool to buy at higher prices will run out of money. Many home owners barely squeezed into properties they couldnt afford. They gambled with mortgages that in some cases, unbelievably; increased the amount of money owed with each payment! They will walk away from their homes as declining prices put them upside down, owing more than the house is worth. Stocks of home builders are already down by 20-40%, an indication of their future fortunes. Reluctant to drop prices, they are offering all kinds of incentives to new home buyers. They are even ready to sell to investors again. We spoke to one homebuyer who bought a new home in Las Vegas in 2004, planning to relocate from California. When their plans unavoidably changed they figured that they could still make a nice profit by selling the home. They were shocked to find the home builder was now selling new homes for less than they paid for theirs a year earlier. Exploding foreclosures, now running at or near record rates, will put downward pressure on whole neighborhoods. It is estimated that one foreclosure in an area can depress prices on surrounding properties as much as 16%. Eventually, these foreclosures will show up as REOs; bank owned properties, as no takers emerge at the foreclosure auctions. There are few sellers as motivated to get rid of properties as banks. Beside the cost to take properties back, carry the expense and liabilities of owning the properties, banks receive demerits from regulators for non-performing assets on their books. These defaulted mortgages decrease the banks reserves, thereby reducing the amount of money they can lend and can even result in the bank being shut down as were hundreds of Savings and Loans in the 80s. In a real estate down turn in 1975, a bank in Newport, RI Gave my partner and me 2 bank owned homes for the cost of the mortgages, plus they threw in money for renovation! Another investor I know, bought $2 million in mortgages on a strip of properties in downtown Brooklyn from a bank for $400,000 in the real estate bust of the late 80s. Investors, get your cash ready, there will be real estate bargains galore in the next few years! One place you may overlook for cash is your retirement account. The banks and brokerage firms have done a great job in keeping this secret from you. The reason? They do not make money when you take your money out of your IRAs, 401(k)s and 403(b)s to buy real estate. However, it is possible to invest your retirement money in real estate and reap tax free profits! (see http://IRS.gov Publication 590) Check to see if your present custodian will allow you to invest your IRA or retirement funds in real estate. If not, find one who will. Remember, in the coming real estate market, cash will be king! |
