It is my belief that 2012 is going to go down as one of the best years in modern history to invest in real estate. I know that is an incredibly bold statement, but before you start laughing let me explain why I feel that way. Most people are still sour on real estate because of the real estate market crash—along with the broader economic recession—but that is exactly why I’m so high on real estate. The thing is, real estate has been beaten down so much, that today buyers can take advantage of fantastic deals.
I’m by no means the only investor out there who sees this. Big time investors like Warren Buffet and major investment funds are doing everything they can to get their hands on real estate. There is a reason why the rich continue to get richer in this country—they can spot opportunities like this. While the mainstream population talks about how horrible the real estate market is, these investors are buying up properties left and right, and preparing to make another fortune in the process. Still don’t believe me? Well let’s dive in a little deeper.
Remember basic economics back in high school? When supply exceeds demand, prices tend to fall. Well if you look back a few years—before the real estate market crash—you see that homebuilders went nuts trying to take advantage of high prices, and severely overbuilt in the process. With an oversupply of housing (supply exceeding demand), it was a natural occurrence to see prices start to fall. Now there were other factors involved in the real estate crash which amplified the destruction, but even if those factors did not exist the oversupply of housing would have caused prices to fall.
Let’s fast forward now to the mid-crash years. Real estate prices were falling dramatically, and inventory was at all time highs—basically no one could sell their homes. Most homebuilders had already stopped building new homes by this point, and many were even going bankrupt. No homebuilders in their right mind were thinking about starting new housing projects, and many had even ceased building on their existing projects.
Okay, now we are back in present time. Homebuilders haven’t been building new homes in several years, and as a result inventory levels have been shrinking. All the sudden homebuyers in some markets are having trouble finding homes, and that trend is spreading. As the economy continues down the path to recovery, more people are looking to buy homes (demand is increasing), but supply has been steadily falling. When demand exceeds supply, prices will start to increase—again this is already happening in some markets.
One of the keys to demand for real estate is affordability. If it is cheaper to buy a home than to rent one, naturally more people are going to be prone to buy a house. Pre-crash, real estate prices had risen to a point where it was much cheaper to rent than it was to buy (in most markets)—the opposite is true today. Prices have been beaten down so much that buying a home is now cheaper than renting in most places across the country. When you combine that with increasing levels of consumer confidence and decreasing un-employment, you have a recipe for increasing demand.
If you were in the market for a new car and you found out that the dealership was willing to sell you the car you want for 30% less than they paid for it (assuming you knew there was nothing wrong with the car), you would think you were getting the deal of the century. I’m here to tell you that real estate today is a better deal—even if that car deal actually existed. Right now you can buy new properties at 30% below replacement costs in some markets—I know because I’m doing it. That means that you can get a 30% discount off what it would cost you to build the same home yourself. Now how is that better than the car deal? It is better because a new car depreciates around 20% the moment you drive it off the lot. In the markets I’m buying in right now, my properties are increasing in value. Now they aren’t increasing at the pre-crash levels we all enjoyed, but they are steadily increasing.
In today’s market I typically tell investors not to look at appreciation anyway—that should just be a bonus. The real value here is that these properties are able to generate huge cash flows as rentals. A few years ago investors were happy to get a 6-7% cap rate on investment property. Today you can easily find properties with a cap rate of 10% or more. Who cares if a property ever appreciates when you can bring in significant cash flow every month?
As I brought up in the beginning of the article, I’m by no means the only investor buying into the market right now. Some of the biggest and best investors in the world are buying real estate. Warren Buffett came out a few months back and said, “If I had a way of buying a couple hundred thousand single-family homes I would load up on them.” Because Buffett’s company (Berkshire Hathaway) can’t really buy single-family homes, he has been investing indirectly in the market through acquisitions of companies like mortgage servicer Residential Capital.
Traditionally investing in single family homes has been looked at as more trouble than it is worth for big investors like hedge funds—managing thousands of individual homes represents a huge burden for these companies. Instead investment funds typically choose to invest in the housing market through stock in home builders, or companies in the mortgage lending and servicing industry. But due to the perceived value in today’s market, these same companies have decided the income potential far outweighs the added burden. Investment funds all across the country are buying up single family homes today.
2012 is going to go down as one of the best times in our lives to invest in real estate. 20 years from now those people who had the fortitude to ignore the mainstream media and identify this opportunity will be incredibly wealthy. Those who didn’t…well, they’ll be waiting for the next once in a lifetime opportunity.
Imagine buying these unbelievable properties, well below replacement cost, in your IRA…tax-free or tax differed. My firm specializes in buying developments in bulk, finishing them out, and then selling the units off to investors via Self-Directed Retirement Accounts. You can view our available inventory at www.hanovercompanies.com.