The Paradox Of Our Current Economy – It’s Heaven On Earth

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First, an apology for not being able to publish what I promised in last week’s post. My travel schedule and workload simply didn’t allow me to do it justice. The long and short of it, is that sometimes I suffer from being the punch line to a good news/bad news joke. The good news? I’m the ‘go to’ guy. The bad news? I’m the ‘go to’ guy. ๐Ÿ™‚ I plan to have it ready for next week. Thank you for being patient.

Let’s review the economy — both its current condition, and what may be next.

Unemployment is just under 10% nationally. ‘Course nobody with eyes to see believes that number, as the formula doesn’t count those who’ve given up lookin’ for a job. Places like Michigan sport economies best described as Dead State Walking. California? Over 12% unemployed, with most objective economists saying it’s really about 18-20%

State and federal debt is off the charts and still growing. Between following the solution templates applied in the 1930’s, while using Japan as an economic role model, a real recovery — described as one that floats all boats — is, in my opinion, a dot on the horizon at best.

Add to all our current woes the real threat of tax increases in both personal and business income taxes, and the outlook becomes even more grim. The good news? We’d much rather follow the path Japan has lived the last 20 years vs a repeat of the 1930’s. What’s for dinner? Your choice is between liver ‘n onions and PB&J on stale bread. Your pick — take your time.

The elephant in the room, in my opinion, is the thick fog of ambiguity causing business to avoid anything requiring them to hire more employees. Will the new healthcare bill increase their operating expenses dramatically, or just be one more irritation. Depends on who we ask. Will business taxes rise? Will the capital gains rate go up? Will there be another round of ‘quantitative easing’, better known as QE2?

If you know the answers to those questions, please tell the rest of us. Until those questions are definitively answered, why would employers implement plans requiring more labor? Why indeed.

So what’s the paradox?

In spite of all the above, the factors governing success for real estate investors haven’t been this good in the 41 years I’ve been licensed. Not even close. Think about it.

There are a few regions in which a serious minded real estate investor can acquire more income producing property — at the lowest fixed interest rates since before Nixon was in office — at price/rent ratios seen only in 1959 real estate investment textbooks.

Furthermore, they can do this with prudently low down payments, allowing for the ability to acquire more properties than ever before.

Buying at relatively low prices is sweet. Buying at price/rent ratios not seen in decades is akin to gettin’ seconds on desert. Being able to do both while borrowing most of the purchase price at interest rates only your parents or grandparents have seen?

That’s what’s known as real estate investment Heaven.

Buy a property or six right, using the historically generous cash on cash return to eliminate debt sooner rather than later, and you’ve rendered potential losses in value irrelevant. You’ve also created a retirement previous generations could only dream of. Oh, and here’s another paradox, while we’re at it.

What if you could buy income property with 20% down, eliminated its debt in 8-15 years, lost 20% of its value, and still had a capital growth rate about which you could credibly boast? $50,000 to get in a $250,000 property. Property is paid off in 12 years. It’s lost 20% of its value, now worth just $200,000. How often would you risk $50,000 if you knew in your heart it’d grow to $200,000 in a dozen years or so, AND would be generating $18-20,000 a year in income once it was debt free?

Now that’s a paradox I can embrace. Enjoying a 12% annual capital growth rate, while losing 20% in value — AND getting all that income? Where do I freakin’ sign up?!

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.

9 Comments

  1. I see so many properties around me right now dumped on as REO’s for about half price.

    To get a duplex (say a standard 2/1) as a buy AND fix for <100,000 that can bring 14-1600/month in rents (whether Section 8 or not)? At best paid off in 15 years. Some I've seen more like 5-7 years.

    Amazing.

  2. WOW!! I absolutely adore your example at the end of the post!! “What if you could buy income property with 20% down, eliminated its debt in 8-15 years, lost 20% of its value, and still had a capital growth rate about which you could credibly boast? $50,000 to get in a $250,000 property. Property is paid off in 12 years. Itโ€™s lost 20% of its value, now worth just $200,000. How often would you risk $50,000 if you knew in your heart itโ€™d grow to $200,000 in a dozen years or so, AND would be generating $18-20,000 a year in income once it was debt free?”

    It’s the beauty of real estate yet so many people stay focused on that 20% value loss potential.

    Great post.

  3. Hey Peter — Thanks, your words are much appreciated.

    I too think it’s more likely than not the ‘flat line’ will dominate the economy for quite some time. Those opportunities, married to excellent strategies, will create some pretty outstanding retirements.

  4. My personal goals currently don’t include holding properties long-term right now. I’m looking to create chunks of cash through wholesaling and renovating. But, I’ve been weighing the option of holding some sweet deals long-term. You may have just pushed me over the edge — in a good way ๐Ÿ™‚

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