As much as Americans clamor for a UNITED states and ONE nation under (pick the deity or political leader of your choice)…
From a financial perspective, and in particular in terms of real estate, America is anything but uniform.
And that’s GREAT NEWS!
This is why real estate is such an effective investment vehicle… and why so many financial professionals don’t understand it.
Real estate is NOT an asset class or a market like financial pros are used to.
Properties aren’t uniform. They don’t trade in bundles on highly efficient high-speed electronic exchanges.
Every property is different. The inefficiencies of real estate ARE the opportunity.
Ironically, the headline which triggered today’s topic comes from none other than Money:
The opening paragraph says it all…
“Forget a tale of two cities: Extreme housing market fragmentation is now creating different experiences for home buyers and sellers in a wide range of locations and segments.”
News flash… it’s been like that forever. And it’s what geographically diverse investors THRIVE on.
But here’s an interesting observation from the article, which reinforces important lessons… some of which we’ve been commenting on for some time:
“Small homes have seen a much sharper price growth than larger ones…”
With both nominal and real wage growth fairly soft, healthcare costs on the rise, and many workers still burdened with student debt… even with crazy low interest rates, it’s hard to buy the bigger home.
So although those are largely economic negatives, the consequences don’t hit housing equally.
That’s because less prosperity lessens demand for HIGH priced properties, while simultaneously INCREASING demand for affordable properties (and markets).
Just like the 2008 financial crisis created a BOOM for landlords. It was primarily the housing speculators who got crushed.
When people lost their jobs and homes, they rented smaller homes and apartments, found new (often lesser paying jobs), and though America become poorer in the aggregate… landlords of the right properties in the right markets became wealthier.
So bad times for the masses doesn’t necessarily mean bad times for YOU.
The bottom line is we don’t know what the future will bring.
Maybe Trump’s policies will make America great again. Maybe they’ll crash the economy.
Maybe Peter Schiff is right (he was right about 2008), and no matter what Trump does… or if Hillary overthrows the vote and claims the Presidency… or if Obama declares himself emperor and refuses to leave… the amount of debt, deficits and promises will eventually overwhelm the economy and we’ll get the MOTHER of all crashes.
Just remember… real estate has survived depressions, recessions, high interest rates, currency collapses (yes, 1971 was a collapse), stock market crashes; Presidential assassinations, attempted assassinations and impeachments; hanging chads; AIDS, Ebola, Zirka; civil unrest, Reefer Madness and disco.
You get the idea.
Real estate isn’t going anywhere short of a revocation of private property rights or a life-ending collision with an asteroid.
The key is whether YOU and YOUR portfolio will survive.
We’d argue the fat spot in the middle is a safer bet… even though many say the middle class is being wiped out.
True. But that’s only financially.
So instead of owning a big home in the suburbs in a pricey state, the no-longer middle class might need to rent a smaller home in a more affordable market.
And if YOU build a great boots-on-the-ground team in those more affordable, low tax, strong infrastructure markets… you’ll be there to meet their needs.
Sure, you could make more money faster playing at the margin… IF you get it right. And maybe there’s some high risk room in your portfolio to play there.
It’s REALLY exciting when you buy a property for $500,000 and sell it a year later for $650,000.
But back to our article…
“Inventory has also risen at the higher end of the market, climbing almost 8% for homes in the $500,000 to $750,000 range.”
Sure, that’s just a data point on a curve. But it’s a trend worth noting. It says the higher end of the market is slowing down.
We got lots of lessons in 2008. Many the hard way. But we got them.
Speculators… people buying at a high price in a hot market hoping to sell quickly to the next guy or pull out free equity with cheap financing… got stuck with underwater properties and negative cash flow.
So we think it’s really smart right now to be hyper-attentive to YOUR market selection, team, property, financing structure, CASH FLOW… and maintain some liquid reserves both inside and outside the banking system.
Then pay attention.
If times are good, the mega wave of Millennials, lower-middle class folks, immigrants attracted by opportunity (assuming we let them in), will all push up into the middle markets and price points.
But… you’ll have to work harder to find good deals.
This is where a GREAT local team who LOVES you is awesome. They’ll help you exploit micro-inefficiencies and find great deals at the street level.
And if times are bad… even really bad… then all the folks who are riding high on today’s bubbles in the stock market, or have high paying jobs in debt-driven industries, might see the music stop.
They’ll move DOWN from the top… into more affordable markets and product types.
But good deals will be plentiful during the transition… just like in the wake of 2008.
Back then, those who had soundly structured portfolios, even if they were underwater, could hold on through the down trough.
And those who were both soundly structured AND liquid could go shopping to ADD to their portfolios at below-replacement cost prices. Ah, the good old days!
As investors, we’re thankful the market isn’t level. The schisms are where all the opportunity is.
Best of all, it’s guilt free profit.
Because the only way you really succeed in income property investing is by collecting a portfolio of properties you’re committed to maintaining, and collecting a portfolio of tenants you’re committed to serving.
In other words, you do well by doing good…and we hope you do.
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