BiggerPockets

Tim, I'm not an experienced investor. I have a few rental houses, but am growing. We do have one thing in common. I, too, pay attention to the herd mentality. Right now people are scared to flip. So that's what I started doing. Almost done with one and looking for more. My strategy is to buy larger SFH's (4-5 bedrooms) at the 2.5-3% rule range. I hope this will allow me to lower my rents to adjust to any economic condition and have a niche market (not a lot of 4-5 bedroom houses in my investing area). Currently I only have one mortgage, so I'm being careful about leverage. I do plan to buy more rentals this year, but will be spending some time on flipping. Good discussion topic!
-Rich

Oh my....I think about that all the time...and I hope it's not the way it'll be...I really hope herd mentality is correct. I have just placed a big chunk of my $$ and hope in an investment that in order to be good.... R.E. has to recover by at least 10% in 3 years. But if it doesn't, it'll just be an OK investment. Only the ones buying right will be able to survive...hence the importance of the purchase price !

Originally posted by Richard Warren

About a year ago I wrote an article for BP on that very topic.

Check it out:

http://www.biggerpockets.com/renewsblog/2009/02/02/real-estate-market-doesnt-recover/

:cool:

Excellent article Richard and you're right. If you want early 2000s real estate appreciation it won't be found in real estate. It will be found in Insurance company stocks and healthcare service startups and the venture capital firms that buy them with big IPOs this year if the health care legislation that forces everyone to become a paid customer of insurance companies goes through. Just be sure to sell those stocks before claims start to get made. Then the money will be made by reinsurance companies (companies that insure insurance companies) for a little while before they go down unless their plan is to make the treasury the reinsurer. That's just speculation on my part.

Another way to look at the mentality is that as prices do go up (and they will) it is more likely to be because of the upcomming inflation. If your home values do not go up more than the inflation then you are loosing money!!!!!!

Many will see this as a recovery because they will compare it to previous years prices and will forget about inflation. No one will actually be giving those home values in After Inflation Values (AIV).

I wonder how long it is before some economists begin stating prices in terms of 2008 dollars.

With oil breaking 80 with no reason for a reversal, and inflation looming due to the fed's printing press, it's a pretty safe assumption that interest rates are going to rise, dramatically as the fed attempts to offset the false growth period of inflation. I would expect that in between 6 and 18 months, the private debt market will be flooded with asset-backed notes. A second round of forclosures in mid-late 2011 once the money becomes more restricted.... Then stabilazation! :) Now, im not an economics professor, and I can't really spell too well... This is just how I see things going.

As far as my personal investment strategy? I intend to leveredge as much as possible, on as many cashflowing properties as possible, with fixed interest low cost debt. I hope to ride the inflationary "value" spike... And sell the lot somewhere before the second round of forclosures.

If all that fails.... I'll be satisfied with cash-flow positive properties, and low-cost fixed rate debt.

Real estate has always been the investment vehicle of choice, and will reasonably so continue to be. The internal need or instinct to be in control of your domocile is not only human nature, but living nature... This unavoidable demand for security and exclusivity will always perpetuate the market foreward.
Population projections are always a good way to feel good about investing in real estate also... It is a fact that during tough economic times, people have more children. In America, we are projected to experience exponential population growth. That makes me feel a little safer in my real estate investing for retirement porposes.

This is just my mid-night rambling, I'll probably wake in the morning to read this and see that I had mae no reasonable sense. :)

dustin

Excellent topic by Tim. Real estate is NOT going to recover, any more than the price of tulip bulbs is going to skyrocket in another tulip bulb craze. The home prices reached during the previous decade were nothing more than a speculative bubble and will not be repeated (in real, inflation adjusted terms) anytime soon. In fact, as we begin to pay the piper for all the government's reckless spending by entering a REAL DEPRESSION, people will not be buying houses, cars, or any other luxuries.

I expect that EVERYONE will suffer in the coming depression, including the owners of rental property. Vacancies are already up nationally because people are moving out of their rentals and moving in with family and friends. During a depression, that will occur in huge numbers, which will drive rents down.

In my opinion, we're in for historic pain and I strongly suggest buying extra canned food, water, guns, ammo, and gold (or silver). This country and its economy is going to collapse. It's absolutely inevitable.

If you believe the Russians, that's going to happen any day. If you believe respected trends forecaster Gerald Celente, it's going to start in 2010. I suspect that it will take longer as the government pulls out all the stops to keep the mother of all ponzi schemes afloat. What's clear is that our country is BROKE, financially and morally. Such a society can not survive. We're in decline and becoming a third rate country.

What is the answer? Continue your real estate business as usual, but BUY ONLY AT A HUGE DISCOUNT and pay down as much debt as possible.

Historically, Real Estate has provided gains pretty much equivalent to pure inflation, though not along the same curve. Given the scarcity and the integrity of the underlying asset involved (land), this will most likely continue forever (in many economist's opinions).

For a long time (the past 50 years or so, inflation adjusted home prices diverged significantly from nominal prices, but in the past 25 years, the curves have started to converge, and are now pretty much aligned:

http://mysite.verizon.net/vzeqrguz/housingbubble/

In my opinion, if you believe inflation is a given over the long-term, then you should assume that real estate will appreciate over the long-term. If you believe deflation will reign over the long-term, then you should assume that real estate will depreciate from here.

As for what I'm doing, I'm just doing whatever is profitable in today's market. Currently, that's a focus on rehabbing and flipping lower-end SFHs to first-time FHA buyers. I also have some cash invested in a couple big apartment complexes, in the case the rental market rebounds. And I'm always looking for good commercial deals. In other words, diversification on a small scale (actually, within a small market space), with a cash and effort focus on the strategies that are working today.

If tomorrow there is a more lucrative investment strategy, I'll move my focus in that direction, while still maintaining some diversification.

Or, if MIkeOH's predictions come true, we'll retire, move the family to another country and sit on a beach until we die or get bored again...

Tim,
I thank you for your advise. I am a person who thinks 10 times generally before making a move..and if the numbers make sence I go for it. But I also very much believe in God and a little good luck...so I'm always going to be hoping...even after my numbers give me an assurance. :)

I hear you Mike. I'm definitely on the focus of getting as much of what I own as free and clear as possible in the next year. Based on what I've seen in life I believe that personal decision are much more important to your financial situation than leader or market decisions. The irony is that what you are suggesting for people as a response to world decisions is a total mindset shift in personal decisions for a fast food, credit happy populace. Even if your predictions don't happen, can you imagine the position of financial strength people would be in by following your suggestions?

If you buy for cash flow the future of the housing market will never severely impact you as people always need a place to live, whether we are in a downswing or an upswing. I was taught years ago that the real estate cycle is generally a 20 yr cycle. If you look back historically we crashed in 1988? and again in 2008. If we never come back up your risk is minimal and your return is minimal until a recovery where you sell or your debts are paid off and cash flow increases dramatically. Flipping can work the same way as long as you invest with your head and are mentally prepared to either carry that house or lease out the house and cover your debts until there is a change - i.e. decision time. No analyst in the world can give a concrete time line prediction of when this will occur. History however tells us it will return.

For every person that profits in real estate there is generally someone that loses. It is still a gamble but a gamble that usually pays off to those that remember the cycle. If you plan for the long-term but take advantage of the short-term advantages when they present themselves I feel you cannot lose. I've watched many very savvy investors through the years buy up like crazy on short term financing hoping to flip for profits only to see them fall. I've also seen several old timers become millionaires by taking the tried and true road.