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Have You Considered This Way to Play Real Estate?

By Dr. Steve Sjuggerud
Monday, March 28, 2011

"Did your house ever sell?" I asked a friend over dinner last week.
"Yes, in a short sale," he told me.
STEVE: Did the bank forgive your debts?
FRIEND: Yes – a couple hundred thousand dollars' worth.
STEVE: Wow... You're not responsible for any of it? How did that work?
FRIEND: At first, the bank wouldn't even consider any offers on my house, because I was paying my mortgage on time. That went on for a year. So I sought out some advice, and I was told to stop paying my mortgage. I'm a responsible person. I didn't want to do that. But I was told that the bank wouldn't do anything until I was delinquent.
STEVE: So how did the bank finally accept the short sale?
FRIEND: Well I finally took the advice... I stopped paying my mortgage for three months... I became 90 days delinquent. Once I became delinquent, the bank took the offer. After a long wait with the bank pushing paper, the short sale went through.
STEVE: What happens next?
FRIEND: Well the bad news is, my credit is now screwed up for seven years. The good news is, the bank took the full hit. I'm not sure if I can buy a house for another seven years. I might be renting for a while.
I hadn't thought much about this idea before: We have a new generation of renters out there.
A couple days after that dinner, I got an email from a longtime friend of DailyWealth – Justin Ford of Pax Properties. He's actively involved in the residential rental market in South Florida. He said the rental market is "strong."
He explained why:
1) Millions have walked away from their homes or lost them to foreclosure, so they are now renters. [Like my friend.]
2) When houses were soaring, most people thought it was a great time to buy. Now that prices have been plunging, they think housing is a bad investment.
3) Many of the few who do recognize the compelling values still will have to rent for a while because they've had a recent foreclosure or credit problems and won't be able to qualify for a mortgage for a while.
The facts about the rental market go along with what Justin is seeing from the front lines. Justin also forwarded over a Wall Street Journal article, which said:
Average U.S. apartment vacancy rates dropped to 6.6% last year from 8%, according to property-research firm REIS, while rents rose 2.3%... Occupied apartments rose by about 58,000 in the fourth quarter, the biggest increase for that period in 10 years, according to REIS.
The article also quoted Green Street Advisors, my favorite real estate investment advisory firm, saying rental demand "will far outstrip supply" through 2015.
Until last week, I hadn't thought much about this potential in the rental market. But all these ideas make sense to me...
This could be the decade of renters, whether it's families that are now out of their homes, like my friend... or first-time homebuyers who now choose to rent instead of buy.
There might be an opportunity in here for you...
You might rent out a property you own instead of selling it... Or you might find an investment in rental properties for income and some potential capital gains, like shares of a real estate investment trust (REIT) or a local opportunity.
In short, chances are good we'll have a decade of renters. It makes sense to size up your own situation for any opportunities. There could be one right in front of you...
Good investing,

Further Reading:

For more of Steve's real estate ideas, be sure to read these:
Bank Insider Shares Housing Market Secrets: "If you want a 30-year mortgage with a low interest rate – you'd better act soon."
Billionaire Warren Buffett's Third-Best Investment: "All things considered, the third-best investment I ever made was the purchase of my home."
The Best Time in History to Buy a House: "Homes are now more affordable than ever."
When the Housing Bust Will End: "The market has fallen from ridiculously overpriced to now reasonably priced."
Oceanfront Florida Lot Just Sold for $164,000: "It's a classic rule for success in investing: You want to buy when nobody else is buying... and when sentiment can't get any worse."

Market Notes

Gold and silver – we told you so... over and over
CARBO Ceramics (CRR)... FRAC IT, BABY!
EV Energy Partners (EVEP)... S&A Resource Report winner
Hugoton Royalty Trust (HGT)... S&A Resource Report winner
Pfizer (PFE)... Big Pharma
Domino's Pizza (DPZ)... Big Pizza
Hershey Foods (HSY)... Big Chocolate
Devon Energy (DVN)... oil & gas
Baidu (BIDU)... the "Google of China"
Tejon Ranch (TRC)... California land holding co.
Whole Foods (WFMI)... expensive groceries
First Majestic Silver (AG)... silver company
Bucyrus (BUCY)... heavy equipment... "picks and shovels"
Caterpillar (CAT)... heavy equipment... "picks and shovels"
Dorchester Minerals (DMLP)... natural gas royalty trust
Baker Hughes (BHI)... oil services
Flotek Industries (FTK)... oil services
Bronco Drilling (BRNC)... oil services
Global Industries (GLBL)... oil services
Basic Energy Services (BAS)... oil services

Allied Irish Banks (AIB)... Irish banking crisis
Barnes & Noble (BKS)... book stores
Best Buy (BBY)... electronics
China Life (LFC)... world's largest insurance company

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