Would a Real Estate Investor WANT a bad economy??

[Redhotman]

If I was someone investing in real estate and then renting it out in a highly competitive state, woudl I want a bad economy to keep interests rates at an all-time low? The rent price would stay the same, and it would be easier to borrow money??

[squiffy]

No. In general you want a strong economy with lots of job growth, lots of new businesses and industries springing up,and lots of new job creation.

I have a rental home. You make money from the rental payments and from increases in the property value/equity of the home and land it sits on.

To ensure you have renters, you want a strong economy that is attracting new workers and executives to the city. If a city is growing and creating new jobs, you will have more and more people moving in and needing a place to stay for a year or two. This means rental income for you.

Even if your renter eventually moves out and buys a home, you want a large pool of new people moving in to drive up demand for rental properties and to drive up rents.

If there is a bad economy, people will leave and rents will go down. Look at San Francisco after the tech bubble burst. Property there is still expensive, but rents and property values have dropped a little.

Same thing with the equity in your home. You want the increase in population and jobs to drive up demand for rental homes and for privately owned homes. This increases the value of your house and lot.

On the other hand, ironically, during an economic downturn at the national level, interest rates tend to drop, making home loans more affordable. So if unemployment is at say 6.5% nationwide, the 93.5% of people who do have jobs will be much more likely to be able to buy homes.

If more people can buy homes, it drives up the price of homes, even though, ironically the rest of the economy is weak.

As the rest of the non-homebuilding economy heats up, you have countervailing forces.

Interest rates will rise as more and more businesses borrow money for investment. And the fed will raise the prime rate to tighten up on easy credit and offset the risk of inflation.

Assuming a huge percentage of people who have jobs and want and can afford homes have already bought them, and assuming interest rates rise and make it harder to borrow money to pay for homes, demand for new homes should gradually (or perhaps rapidly) drop.

Ironically, if fewer people can afford homes, more of the people who would have bought homes will continue to rent.

So if interest rates and property values are high, renters will have trouble buying and are more likely to rent. So if you own a rental home or several rental homes, having a booming economy with tons of job growth, but increasing property values and interest rates, is a good thing.

And even if there is inflation, real estate tends to hold its value. Though inflation hurts stocks.

Also, if you have borrowed money from the bank and need to return it over 30 years, you benefit from inflation in the sense that the money you pay the bank is worth much much less after 25 years than the money you borrowed from the bank in the first place. Since you are paying the bank back in inflated, devalued dollars.

Clearly a dollar today is worth less than a dollar 50 years ago, due to steady inflation. Many years ago you could see movie for .05 or .10, for example or buy a coke or meal for a few cents or a few dollars.

The economy is complicated, though. So you could have a slow economy nationally, but have a strong economy in your state or region or city, at least in theory.

For example, in Fresno, where I live, the unemployment rate is typically 10-12% when the national rate is 6.5%. This is because we have tons of agriculture here and many poor laborers and immigrants, who often go unemployed for long periods.

I have a rental home in Texas and I am thinking about selling it and buying something here in Fresno when the time is right. But I may not ever do it. My great fear is demographics.

There is tons of high tech industry in Dallas and Plano, but not in Fresno. And I think the number of executives who would rent my Texas home is much greater in Dallas than in Fresno.

I may be worrying too much about nothing, because after all, I only need one renter to keep my place occupied.

Still, it's a factor I need to consider. Overall, the percentage of white collar workers and excecutives is probably much higher in Dallas than Fresno. And if you have a middle class or high end rental that is something to consider.

Bottom line. If you have a product or service you want to sell, you want to get top dollar for it. So you want the demand for private homes or rental housing to be high.

Demand for housing will increase if the economy is strong and employers are hiring. If there are jobs, single people can move out of their parents' homes and buy or rent their own place. People from elsewhere in the nation will come to your city to work in their new jobs. They will rent until they decide that their job will be permanent and they like the city enough to buy a home.

And if interest rates are increasing rapidly or are high, and if property values are very very high, it may be hard for them to come up with the money for a down payment, or it may be hard for them to make the monthly payments on a high interest mortgage.

My Texas home is 5 bed 3 bath, 2800 sq ft. Bought in 1993 for 183,000. Not sure what it is worth now, but possibly $230 to $250K, more if the Texas economy picks up and as high tech and oil strengthen again.

When I first started renting it out I got about $1700 a month in rent. And that just barely covered the mortgage and taxes. Actually I was a few hundred in the red per month.

Now that interest rates have dropped and I have refinanced, I am in the red. And the rent has increased to $2100 per month.

Mortage is about $830 a month. Property Taxes about $6000 per year or roughly $500 a month. So I have positive cash flow of roughly $770 a month.

My only outlay was roughly putting in a downpayment of $18,000 back in 1993.

So the 18K down payment generates $2100 per month in rent payments and some unknown return due to the property increasing in value.

The amazing thing is that for 18K down, I controlled a $183,000 property and get to keep any rent and any increase in equity, even though I only paid $18 K.

Owning rental property is really an incredible scam. But until you have enough cash for a downpayment, you have to rent and you build no equity.

Bottom line is that my renters are paying for my home. I am not paying a cent toward the mortgage. They pay my rent, my taxes, plus they give me an extra $700 a month over that.

It's bizarre.

But I grew up poor in Hawaii, where real estate has always been hot. My mom was a waitress and my dad was a janitor. So we could not afford to buy anything. And I always swore that if I studied hard and saved up some capital, I would buy as much land as possible.

So real estate and stocks are the way to go.

That was my first home back in 1993, when I was 28 years old.

Now, about 9 years later I bought my second home in Fresno for 200K. But I PUT NOTHING DOWN. ZERO. NOT ONE CENT.

I ONLY SIGNED A PIECE OF PAPER PROMISING TO PAY THE BANK BACK. AMAZING.

The home went up in value about 50K to 80K on paper in ONE YEAR. Except for paying the mortagage and taxes, which I would have to pay anyway if I were renting, all I do is live in it and water the lawn. Easy.

Of course this profit is on paper only. Real estate prices could, in theory, drop 50% next year. But generally real estate prices are not as volatile as stock prices.

And real estate prices usually collapse only when there has been a huge bubble or when an entire industry collapses and people lose their jobs during a bad recession.

For example, I lived in LA for about 10 years. And during the early 1990s during the S&L crisis and during the decline in the aerospace industry, LA real estate prices plummetted. That would have been a beautiful time to buy property. You could easily have turned $1 million into $10 million. And I am not kidding.

But who has $1 million in cash lying around when you need it!!!!


Anyway, trying to be honest and specific so that we can turn this forum into something very useful and helpful to people out there.

By the way, you do have to buy in a solid neighborhood and rent to people with good credit. Renting can be a nightmare if you buy in the wrong neighborhood and rent to jerks who can't or won't pay their rent.

If at all possible, go for upper middle class professionals in an upper middle class neighborhood with great schools and low crime.

[squiffy]

One caveat to my post below. If you have $10 million in cash and own no property, then yes, you want the economy to completely tank and unemployment to soar, hopefully destroying real estate valued in your city.

For example, look at LA during the early 1990s.

Then you swoop in and buy tons of property at rock bottom prices for cash. Just wait 5-10 years and you will have $10 million or more. (But once you buy the land, you want the economy to recover and blossom, creating tons of jobs and driving real estate prices and rental prices up.)

Very simple. But where do you get your first million??? It's easy to make money if you have money. The problem is where do you get the initial capital.

If you are the average American, you have to slave away for a lifetime scrimping and saving to salt away a bit of extra money. Then kids marriage and college suck it all away. It's just not fair.

But if you had a million dollars in cash, how hard would it be to pick a stock that goes up 10% in a year. Heck, you can find stocks that go up 10% in a day. That's 100K, right there. Simple, but not easy. Because it takes money to make money.

[Redhotman]

Thanks for all the effort you put it, I appreciate that.

I am 18 right now and live with my parents while goign to school. Im on pace to make about 40K/yr after taxes (I know this isnt guaranteed, but as of now, Im on that pace).
I dont have many expenses and really dont want to leave thbis money in some checking/savings account. I want the biggest bang for my buck.
I live in Florida, where it is almost imposible to rent a house. When my parents bought a house here in Cocoa Beach, it took two monthes to just find a rental. They would be advertised on monday and booked by wednesday.
The house here are pretty cheap, and I know Cocoa will expand, as there is new construction on a mall. Miami is getting too big, the rest of Florida will follow.

I figure that a house i buy will only grow in value, and I can rent it out to others. THe interest rates are very low right now and all.

I was thinking maybe I could put down $25K on a 60K house, and pay the rest off over a 30 year period, which would be clsoe to nothing?

Plus in two years I will be a Registered Nurse, so I will have a stabel job, ect.

What is the better route, real estate or stocks? REal estate seems safer and more fun. Seems like a cool hobby.
Buy a house, fix it up, ect.

I apoligize for being naive.

Thanks for all your help.

[squiffy]

Both stocks and real estate are good. But I would start with real estate.

Even top stock picker Peter Lynch, who was head of the famous Fidelity Magellan fund, suggests you buy a home before investing in stocks. There are tons of advantages to real estate that make it superior. Though once you have a house, you should start focusing on stocks.

Read these books by Peter Lynch

Learn to Earn
Beating the Street
One Up on Wall Street
And read Investing in Real Estate by Andrew Mclean and Gary Eldred

Florida is probably a great state for real estate, especially if you live in a great tourist spot or college town.

Make sure you get something in a great neighborhood.

With a home, you save on rent, you get great tax deductions, and you get the benefit of leverage, borrowing a huge amount of cash with only a small down payment.

If you can comfortably make the monthly payments, get the largest mortgage you can afford. You really don't want to put too large a downpayment down. A larger down payment generally gets you a lower interest rate and a lower monthly payment, so you don't have to worry as much if you lose your job, as the monthly payments won't be as hard to make.

But assuming your parents can help you in a pinch and assuming you are a steady worker who won't be hopping from job to job, try not to put down more than say 5% or 10% down. Certainly not more than 20%.

If you put down 20% you don't have to pay mortgage insurance, which is nice.

But you generally don't want to put down say 50% on a place.

The larger the downpayment you put down, the less cash you have onhand for emergencies or to put on the stock market. And it will be tied up for decades unless you sell the home. You can refinance the mortgage and get at some of the money, but you will have to pay fees to the bank to get the refinanced loan, which makes accessing the extra money more expensive.

Besides, now is a great time to buy real estate. Prices are probably inflated, but financing is low, so to some extent they offset one another.

If you absolutely cannot get into a home within the next year, then perhaps you can think about putting some money into the stock market. But you should do a lot of studying before jumping in.

Also read The Warren Buffett Way and the Warren Buffett Portfolio by Hagstrom.

The only problem with real estate is it is super-boring and super slow. Get rich slow. Never believe anyone who says you can get rich quick. It's just not true.

99.9% of us get rich slow. Anyone who says any different is trying to fleece you. Or is going to subject you to an intolerable level of risk.

Here is a quote from Learn to Earn by Peter Lynch

"Buying a house or an apartment is the most profitable purchase most people ever make." p.102.

"Stocks are likely to be the best investment you'll ever make, outside of a house." p. 109

[Redhotman]

Put yourself in my shoes. You are 20 living at home with 80K in the bank. Never had a job. What is your apporach to investing? I know I gotta do lots of research, but im interested as u are very kowledgable.

[squiffy]

Also, get the largest apartment or condo or home that you can comfortably and safely afford. And rent out an extra room or two to college friends, etc. This is a great way to make a profit and reduce your mortgage payment, while having fun.

Make sure the renters are reliable. Don't overcharge, but if they are using one half or one third of the house, it may be fair to charge them say a quarter or third of your mortgage costs. You can charge more if the market will bear it.

Even when I was a lawyer in Texas, I rented out the upper floor of my home to a good friend who worked at the same firm. It really helps cut down on your mortgage costs. But I also charged him below market rent since he was a friend.

There is a whole book about this I read many years back. But I cannot remember the title. It's still in bookstores. A small paperback by a woman who bought homes and rented out several rooms.

Look for it at Barnes & Noble or Borders in the real estate section. A really inspiring and instructive book. Sounds very genuine with little bs.

[squiffy]

Two biggest problems with stocks is (1) much much easier to lose a lot of money fast. (2) Generally your gains will be taxable more frequently, say each year, or however long you hold before selling. Your real estate profits will generally not be taxed until you sell. Even then if you lived in the home for 2 of the previous 5 years and it was not a rental property, you can sell tax free up to a certain amount.

[Ray Zee]

that is the real answer. since the new tax law on homes. everyone should own one. it is crazy not to. especially if you dont mind moving or are moving up in the world. with 250,000 or 500,000 if you are married fully tax free of your profit. it is a no brainer to own. you should buy in a growing area of appreciation and sell every two years and take your profit and reinvest in a larger home. after a bunch of moves and years you will have a mansion owned free and clear. most wont make the moves and reinvest so will only make a modest amount because of laziness or attachment to the property.

[scalf]

/images/graemlins/blush.gif.. arguably the best investment advice given on this forum in the last three years state that the second best investment just might be the house next door; (the best investment being buying your own home...)


i have actually done both..and there are hassles and expenses..(i.e. closing cost ripoffs)..but outside of a major deflationary panic; it's hard to see how i will not benefit; especially tax-wise..i.e. for those in top tax bracketts, it is a huge mistake not owning your own home...

jmho..gl..buy a house this coming year..(my only caveat would possibly be areas of recent extreme price )..

it's an investment you can [censored] on..

gl /images/graemlins/cool.gif /images/graemlins/spade.gifappreciation..

[Redhotman]

Now, if I never have had a job before and file as a "professional gambler", would the bank have any problem giving me a loan based on my bank statement? How much would they want me to put down on a $80,000 house if I have 50K in the bank?

[adios]

You should do some lender shopping. The figure that I've heard is that if Loan-To-Value is 70% or less, the lending institution figures they can't lose money. Also in buying investment property methinks it's probably a better idea to use less leverage than in a home purchased for personal residential use.

[Ray Zee]

as long as you have three years of income to show them, you can get a loan. or put about 29% down and alot of banks have to loan with that ratio. ask around.
they look at income, expenses, and your net worth. to see if you can pay the payments.

[GeorgeF]

What is the better route, real estate or stocks? REal estate seems safer and more fun. Seems like a cool hobby.
Buy a house, fix it up, ect.

1) Some people on this board imply that you can't loose buying real estate. I assure you can loose. For example you can buy a house with some hidden defect, like EFIS. It is also possible for real estate to decline in value. For example real estate declined in Japan after their stock bubble burst, do you suppose the same could happen in the US.

2) You seem to think that you will be able to start a medical career and fix up a house. Doing a quality renovation requires skills you probably do not have, time you will not have if you are starting your medical career, and money you might also not have. I personally think you should attempt to maximize your medical career and see if you can get that 40k to 80k+ ASAP. Wasting time on a fixer upper will cost you in the long run. BTW making an extra $40k a year in profit from realestate would likely require you to own(unmortgaged) atleast $400,000 in real estate. I think you should maximize your medical salary.

3) The thing to note about stocks vs realestate is that stocks permit you to diversify across most economic activity in the world. Owning real estate requires you to concentrate all your wealth into a single investment.

4) The medical thing seems like an extremely stable business. This means that you can reduce the risk of a price decline in real estate by being able to avoid foreclosure, even in a down market.

5) "cool hobby". Work the emergency room, see how many dufus' are injured/killed repairing their stinking houses.

I would advise you to buy a condo that will not cost you much of your time (which at your age is more valuable than money) once you have a job you will stick with for 5 years or so.

[Mash]

Remember when you go to get your loan, tell the loan officer that you intend on living at that place as your new home. Don't tell them you plan on making it a rental. You will get a higher interest rate (about 1% more) if you do.