Perfect timing! Last night's speech by President Obama gives us a chance to evaluate our opportunity for investing in distressed real estate. After listening to the speech and after listening to analysis of President Obama's address, I am certain now is the time to take advantage of the lowest prices in nearly a decade.
"But Mark, why now? Don't you think prices will go lower? Aren't you afraid of loosing equity?"
Will prices go lower? By how much? I wish I could know for certain when the exact bottom of the market is. When evaluating opportunity we also look at our individual investing goals. What is our best exit strategy now and what kind of returns are we expecting to yield?
If I could receive a 10% annualized return before taxes and expenses, renting a property out today, would it matter if the property's value dropped by 5%? What about 10% ? Well let's take a look-at an example to study this further. Suppose you have money in a money market account earning 1% interest. Let's say it's $100,000, making $1,000 per year, about $83 a month.
Now instead find private investors who will invest the same money $100,000 in real estate and get a $1,200 per month return in the form of rent. Would it matter if the property's value went down 5%? That would make it worth $95,000. What's the return? The same as before, no change. What about a 10% decrease? No change, because your rent is still $1200 per month. By the way, that's a 14% annualized return.
Of course this is for a buy and hold strategy not a short term flip. You will probably be holding this for at least 5 years but more likely closer to 10 years. I would much rather be holding real estate in 10 years than holding anything else, especially if I don't have to worry about it. Not worry, why not ? We will have more information about that in a future post, stay tuned.
As you can see by evaluating the opportunity it will make it easier to make an intelligent decision. President Obama directly addressed our real estate crisis last night by declaring he would help those who honestly couldn't pay their mortgages and not help the "speculators" or those who knew they weren't going to be able to pay (how will he know this ?).
In either case the banks now know the properties they own or will own, still have to be sold. The government is not going to buy them, smart, educated people will. Will you?
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