With the recent spasms of the Phoenix Real Estate Market, there is being created right now, one the most incredible opportunities for the Real Estate Investor.
If you are (a) not happy with the 0.5% return you are getting from your bank account, (b) worried about inflation, or (c) uncertain about the future value of your stocks and bonds, pay attention.
Despite what many are saying, the U.S. economy is not returning to health. Businesses will continue to go bankrupt, homeowners will continue to lose their homes, and unemployment will continue to rise.
The financial markets are becoming more precarious. Stock market indexes are up since March of 2009, but PE ratios are now standing at about 24 — which mean that most stocks are 40% to 50% overvalued. The bond market is overvalued too.
It’s enough to make you want to stay in bed all day.
But in this section of my website, I am going to share with you my thoughts on how to provide a user-friendly game plan for Real Estate Investment success.
How to Protect Against the Threat of Inflation
The biggest single threat to your wealth is not the overvalued stock and bond markets but the very likely probability of a sudden and ruthless period of inflation.
You don’t have to be an economist to understand why.
Inflation means rising prices. When the stock market went up from below 700 in March 2009 to 1,200 in April 2010… that was stock inflation. When home prices rose by 80% from 1997 to 2006… that was real estate inflation.
You can make a lot of money during inflationary periods if you buy early (while prices are low) and sell later (when prices are high). But you can get killed if you wait too long and buy late (when prices are high) and then are forced to sell (when prices are low).
So the trick to profiting from inflation is to understand the trend. Getting in early and getting out early. Pretty simple so far, huh?
The reason the smartest moneymakers in the world are expecting inflation now is because the government has been spending trillions of dollars to try to keep the banks and brokers and insurance companies from going out of business — even though those same banks and brokers and insurance companies are responsible for inflating the economy to begin with.
The government will never, ever allow these institutions to “fail.” Because if they do, we will be in a real Depression… and then all the politicians we voted into office will worry about losing their jobs. Since their cushy jobs (and amazing expense accounts) are their primary priority, they will always approve these huge bailouts — even though they know that, eventually, they will destroy the value of the dollar.
It doesn’t matter what party they belong to. The Republicans started the bailout programs and the Democrats extended them. They fight about spending on health care, but they don’t fight when it comes to the big financial institutions.
The government didn’t actually have the trillions of dollars they spent on bailouts. They had to borrow it from the U.S. Treasury.
And how do they pay back the U.S. Treasury? There are only two ways. One is by raising taxes; the other is by printing more dollars.
Countless economic studies have shown that there is only so much money the government can get by raising taxes. If they tax people too much, the economy slows down. And when the economy slows down, there is less wealth to tax… so the government’s income actually drops rather than rises.
Obama knows that he probably wouldn’t be able to raise taxes enough to pay off the debt incurred by the bailouts. Still, he is going to try to tax Americans as much as he possibly can.
Where will the rest of the money come from?
Obama also knows — as does every other smart politician — that there is a sneakier and less risky way to pay back the Treasury. And that is to let the dollar collapse.
Here’s why: When the dollar depreciates (gets less expensive), it becomes easier to pay off big debts. Who wouldn’t want to be using today’s dollars to pay for gas that went for $1.50 10 years ago? Or to pay for houses that went for $75,000, on average, 20 years ago? Well, that’s what the government will be doing 10 years from now: paying off a debt that won’t seem nearly as big as it does now because they’ll be paying with inflated dollars.
Traditionally, there are three types of assets that appreciate during periods of inflation. One is real estate. Another is precious metals. And the third is stocks that are related to commodities.
Since my expertise is in Real Estate I am focusing here on the real estate opportunities that are available right now and, Real Estate is a good place to start. Hundreds of billions of dollars will be made in real estate by the smart money in the next five to 10 years.
Your Real Estate Plays
It’s no secret that half of the world’s richest entrepreneurs built their fortunes through real estate. What is less commonly known is that most of their great fortunes were made during inflationary periods… like the one we’re facing right now.
It is impossible (and foolish) to try to predict the bottom (or top) of this (or any) market. But, by any measure, we have just gone through one of the biggest real estate recessions in the history of the United States.
In Arizona, for example, you can find properties for less than half of what they were selling for at the peak of the market. More important, you can buy these properties with 20% down and start enjoying positive cash flow from month one. (Four and five years ago, you couldn’t get positive cash flow out of rental units with 50% down.) So today’s prices make sense from a businessman’s perspective.
There are homes can be bought right now for in the $120,000 to $130,000 range (after closing costs and renovations). We are getting monthly rents of $1,300 to $1,600 on these. At that rate, investors we are working with are making about 8% to 10%, not counting appreciation.
Investors should continue to buy real estate so long as prices are low. If they go down further, they should buy further. There is very little risk of losing money, because all the properties I’m advising my investors to purchase are making money on a monthly basis. Even if rents drop, they won’t be losing. The 8% to 10% yield they are enjoying will cover them even if rents go down another 15%, which is highly unlikely.
But the real opportunity is in the appreciation potential. As I said, appreciation from inflation over the next 5 to 10 years as inflation pushes up real estate prices will make investors lots of money.
There are some who say that real estate prices won’t inflate with the rest of the economy, but I think they will. Here’s why. Buildings are built with core commodities… lumber, copper, aluminum, concrete, steel. Labor is another big expense. You can’t have inflation without a rise in those costs.
Plus, properties in many areas are selling for less than replacement value. In some cases, even if you got the land for free, you couldn’t build these homes for what you can buy them for today. That’s even after taking depreciation into account.
Last but not least, in many instances, it’s already far cheaper to buy than it is to rent. Eventually, this will turn the tide toward buying. It’s just a matter of time.
So that’s my recommendation: Start buying undervalued, quality rental properties now. Don’t wait for the market to bottom. Just find properties that will give you a net cash flow of at least 8% to 10% after all expenses (including property taxes, maintenance, fees, etc.).
So where are these properties and what’s the best way to start?
As a Real Estate Broker, I have access to hundreds of great properties in every market and have been able to help many investors make excellent purchases from sources like banks, government agencies and even private owners.
In addition I am able to offer a turn-key situation whereby the property is managed and maintained with very little interaction
through my property management company.
This provides a worry free way to invest wisely in the undervalued Phoenix Real Estate market as so many other Investors have done.
There has been no shortage of great deals. In fact, there are more than ever due to many companies who have purchases large numbers of homes, rehabbed them and now have the challenge of trying to find new purchasers since their model is to “fix and flip”.
This has been creating a glut of great homes ready for you to purchase and hold for the longer term. This is known as “Buy and Hold” strategy and because as I have outlined earlier, will provide a great way to increase your financial portfolio.
For a sample of the type of homes available right now and for more details, contact me and I’d be happy to send you some specific examples.
Sal Cartagine is an award winning Real Estate Broker with 23 years experience specializing in residential, relocation, rentals, investments and property management. Sal can be reached directly at (602) 818-3886
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