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The Window on the Decade's Greatest Income Opportunity Is Closing FastBy
Friday, July 20, 2012
Since we launched my Palm Beach Letter service, I've been telling readers to get in on one of the decade's greatest income opportunities.
I'm putting my own money into it. And earning annual yields as high as 17%... on top of capital gains. And you don't have to be a millionaire to get started with this. As I showed DailyWealth readers earlier this year, it's a real retirement plan, even for the "unwealthy."
I'm talking about rental real estate. And the opportunity is still great. But it won't be for long...
In 2008, you could have bought a single-family home in my neck of the woods (South Florida) for as cheap as four times yearly rentals.
A house whose rental income was $1,250 per month, or $15,000 per year, could be bought for as little as $60,000. In 2010, the price of that same house had increased to about $90,000. That equates to six times yearly rentals.
Today, it is very hard to acquire the same kind of property for that multiple. The deals I'm looking at are up to seven times yearly rentals. In other words, the same house you could have bought for $60,000 in 2008 and $90,000 in 2010 would cost you $105,000 today.
That's an increase of about 15% in two years. About five of those percentage points occurred in 2010, and another 10 occurred in 2011.
It comes down to supply and demand...
The supply of single-family, three-bedroom, two-bath homes for sale since 2008 has not been overwhelming. That's because banks have been releasing them into the market slowly. Another reason is that many honest homeowners continue to make their mortgage payments, even though they are underwater.
This could change. There are still millions of "underwater" properties across the U.S. In theory, banks could release these in droves. That would drive housing prices down. Some of my investment-writer friends who look at the world from a "big picture" perspective worry about this.
I don't think that is going to happen.
Why? Because flooding the market with houses right now would crash the real estate market again. That would be a major problem for banks and government officials. These people, effectively, control the spigot. They are going to continue to do what they've been doing for the last four years: letting out these underwater properties gradually.
So I don't expect prices to crash. Instead, I believe that real estate prices will continue to edge upward this year and next year.
This is all because of three actual events taking place right now...
First, I've noticed something with employees of banks, mortgage brokerages, and local municipalities. They are (often illegally) teaming up to purchase the choicest properties in their localities. This makes demand higher for the honest, rational, big/small investors. These are people who have been willing to pay increasingly higher multiples, since, at seven times yearly rentals, these investments are still very good.
A second factor that is contributing to higher housing prices is somewhat surprising. Large banks normally don't like to be in the real estate business. But now, some are opening up divisions that hold onto the foreclosures and rent them to the dispossessed owners. (They tell the newspapers that they are doing this to "give back" to the community.)
And third, I recently read that at least one major REIT has set up funds to buy single-family homes in bulk. This is astonishing. As far as I know, this is the first time this has ever happened.
This is why the competition for rental real-estate housing in my area (and many parts of the country) is so strong. This is why prices have been rising.
If this trend continues – and I don't see why it would not – it is possible that in 12-24 months, the house that costs $105,000 today could cost $120,000 or even as much as $135,000.
What does that mean?
Here's the math: At $120,000, you would be getting an eight times multiple on the $15,000 yearly rent. At $135,000, it would be a nine times multiple.
A multiple of eight to nine times rent is not terrible, but it's hardly attractive. It means that after paying for expenses (including a mortgage), you are not likely to get much, if any, positive cash flow from the investment.
When you get no net cash flow from rental real estate, it means you are investing purely for appreciation. Investing for appreciation is not something that I like to do. In my book, it is closer to speculation than to investing. So when house prices get to that point, I'll no longer be an investor. (And I'll be advising you to look elsewhere for your secondary income.)
The real estate window is closing. And that is why I've been pushing my real estate partners to buy everything they can for us.
It's not too late for you. Prices are still relatively cheap. And mortgage rates are at record lows. Because of the Great Recession, the cost of managing properties is down. And property taxes are down, also.
In other words, the economics of investing in rental real estate are still very good. But they may not be for long. The time to invest is now!
Regards,
Mark Ford
Further Reading:
"For many people, the very idea of buying real estate is anathema," Mark says. "You may feel this way. If you were suckered into the real estate Ponzi scheme that burst in 2008, you may have sworn off real estate investing for good. But that would be a great mistake..." See why Mark thinks real estate is a real opportunity today here and here.
If you're still not convinced this is a time for extraordinary deals in real estate right now, Steve Sjuggerud offers proof...
Market NotesUGLY PRICE ACTION IN CHINA An update on the China debate: the bears made their case stronger this week.
Regular readers know how China is the center of a great financial debate. Some world-class analysts, including Jim Chanos, say the country is a powder keg of government malinvestment... which will cause a huge economic slowdown. On the other hand, you have many "China bulls," who say the bearish arguments are overblown and overhyped. Since China is a key cog in the global financial engine, what happens here is extraordinarily important to your investments.
We often check in on this debate with the "Dow Industrials of China," the Shanghai Composite Index. This index tracks the biggest, most important companies in China.
As you can see from the chart below, Chinese stocks have been hammered since 2010. Early this year, the Shanghai Composite established a bottom at 2,148. It then tried to rally, only to fail. And just in the past week, the index barely broke below the recent low (to close at 2,147.96). In other words, things continue to get worse for China... and better for the China bears.
– Brian Hunt
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