Thursday, June 28, 2007
So again, when your confident in your position to invest, go ahead and invest. Before someone else does.
You know that guy, everyone knows someone like that, someone who just can’t pull the trigger on anything. He thinks about it, over analyzes it, but can’t get out of his own way long enough to do it. He suffers from Paralysis of Analysis. We struggle watching that person knowing that no matter how much we help he’ll never do anything. Maybe this is what Phil Knight, CEO of Nike was thinking when he brought us the great “Just do It” campaign. He knew that guy too, and wanted to give him a little encouragement … if not a swift kick.
Investment is action. You are taking action today making the most informed decision you can, in an effort to get a greater return tomorrow. We see this every single day, people making smart decisions and taking action on those decisions. What do they know that everyone else doesn’t? Nothing. They chose to take action. If you are currently an owner of a property you have already chosen to act once. Was it scary? Or was it one of the better decisions you’ve made? Do you wish you could buy more? Did you buy more? If it was someone’s first property then maybe they realized that they would learn far more by owning a property than they ever would from a book with a pretty cover. Put down the latte, get out of the book shop, and get out into the market.
Investment is about the time value of money. Real estate today is, comparatively, cheaper than it ever will be in the future because the present day dollar is stronger than the future dollar. Have you ever driven by a home, or a property, and thought “If only I had bought that home then when it was worth $, its worth $$$ now and that’s so much.” Guess what, that home that was worth $, and now is worth $$$, is probably going to be worth $$$$$ down the road. It’s still cheaper now, than it will be then.
There are few other niches in which you can use your “Sweat equity” to build long term wealth, and additional income streams. Let’s put this in real sweat equity terms. You purchase a duplex for $200,000. You put down 10%, or $20,000, and finance it for 30 years. Let’s say that you run it revenue neutral for the life of the property, you never make anything but your mortgage payment is covered and all repairs to the property are covered by the rent you receive. Assuming zero appreciation on that home, in 30 years you will have a property worth $200,000 paid for with $20,000, and a little sweat equity. I’ll take it. Now lets assume your $200,000 duplex is paid for and the $2,500 a month coming in from rents is all yours to play with. When your financial planner asks you the famous question “When you retire, from where will your next check come?” Give him the address of your duplex.
Now, how many duplex incomes do you need to retire and how soon could you get there?
Working in real estate on a daily basis, and seeing all that I do, the best piece of advice I can possibly give is: Act.
Monday, June 25, 2007
Saturday, June 23, 2007
We have said it before and we will say it again, "rents are going up." While the forecast has been positive for investors in the Triangle area over the past year, the numbers suggest the rental market has actually begun to emerge from its slump. This isn't some claim that everyone is getting rich quick; after all, investing in apartments will always be a long-term game. However, in your average neighborhoods, rents that were in the mid $600's just a few months ago are now turning over for tenants willing to pay $700/month.
This income increase can be attributed to the declining vacancy rates that have fallen below 8%. In fact, a local owner-operator we work closely with sent over 100 rent increase letters out to his tenants last month once he realized he had less than 1% vacancy in over 800 units. Not only are vacancies going down and rents going up but this movement is coming with a higher caliber tenant wanting (or needing) to rent.
With mortgage rates gradually climbing and even spiking over the last few weeks, people who were qualified to buy homes just six months ago are now being forced to rent just a little bit longer. This means higher income families are renting and the overall supply of renters in the area is increasing. We all know the law of supply and demand in a free marketplace and right now it is playing into the hands of investors. Who said you never use what you learned in school.
Don't believe us? Well, you might take some direction from Crosland, one the areas largest developers who planned to break ground on a downtown condo project in the coming months. However, just last week they announced they were refunding over 80 deposits and shifting the project to high-end apartments. So, if you have been thinking about investing in multi-family, you might want to think hard about jumping in now.
Wednesday, June 6, 2007
At a recent apartment market economic conference presented by the Triangle Apartment Association, a financial professional with Wharton, Gladden & Co. LLC. said that many investment professionals now consider real estate one of the four main investment assets that every healthy investment portfolio should include. The others are stocks, bonds and commodities.
At Deaton, we've always discussed the commoditization of real estate. In other words, how can we get people to consider real estate as a "must have" in a portfolio? Do we start with the financial professionals who advise personal investment strategies? Or, with so many people overseeing their own financial futures these days, focus on the individual investor? We certainly don't believe you should place all your money in real estate. After all, if there is one common denominator among all investment strategies, it's the concept of diversity. High risk. Low risk. Domestic stocks. Foreign stocks. IRAs. On and on.
When valuing real estate as an investment, remember to compare it to other investments. For example, if you have $10k burning a hole in your pocket and you're thinking about a CD, for example, that will return 5%/year. Then, someone from a local multi-family property brokerage (ahem!) reminds you that 10k can be leveraged into an available rental property. So, you "run the numbers" (we don't like that term all that much) and see that on the surface, the property will also return 5%. After factoring in management, collecting rents, etc., you decide the CD is a better option.
I would encourage you to look again.
Let's talk about real return for a moment: Are you considering the debt reduction on the property as return? You should. How about annual depreciation? Or better yet, the rental income? And, best of all, you also get to factor in the property's appreciation over a number of years.
Remember too, that there are several ways to analyze a real estate investment, and not everyone's method will return the same level of performance. Find one that works for you and stick with it. Remember that real estate valuation is not a math problem.
Now back to your CD: How is it keeping up with inflation? Oh, and those pesky taxes will cost you as well. Any fees involved in buying it? For how long will it work for you?
So, any other thoughts on how to best invest $10,000?
In summation, even though we are in no way certified financial planners, we always encourage clients to use real estate as one component of a diverse, long-term investment strategy. What are you doing about your future?