Time Machine Would it not be magnificent to have a time machine and be able to invest with hindsight? It would be so easy to know where to put your money if we could simply manipulate time. The Alchemists dream was to turn lead into gold a technological wonder. In our time given a time machine we could put our money in all the right investments. All of our investments would always work perfectly and we would never make a mistake, every up market and every down market would be perfectly timed. And if we missed a detail we could simply alter time again and do it all over the right way. Sounds like the prefect investors dream!
Map your city and map your country. If I tell you areas in any city, East Los Angeles, Beverly Hills, Torrance, Riverside county or Santa Barbara, all of these regions will make you think of the demographics in a city. The average price of a home, the available shopping, the weather, the type of people that live there and the income that they make will all affect the sales price of a property. Just as we map our city we can also map our country. Real Estate regions always start with cash flow first. The replacement cost to building a home and the land creates an all in cost. The rent charged is enough to cover all expenses and yields profit to the builder for spending time, money, emotion and energy into building the house. This is how all regions start. These are areas in the Mid-West today, such as Detroit, St Louis, Cleveland, Kansas City and Iowa. As demand rises and housing availability decreases and more people want to live in the same place, prices rise. Cash flow areas become intermediate markets. The region becomes a blend of cash flow and capital appreciation. Higher demand areas within a city cost more to purchase, upper class areas become A level areas. Middle class areas are known as B level and working class areas become C level. The most undesirable areas are D level. The differences in these levels become more distinct as demand for housing increases. Several areas in the southern United States have become intermediate markets such as Atlanta, Charlotte Nashville, Memphis and all the major cities in Texas, Dallas, Austin, Houston and San Antonio. Mature markets are the most desirable rents have no chance in covering expenses and mortgage payments. As this demand increases the intermediate markets become capital appreciation markets. Where you have very little cash flow on a monthly basis and the only hope that you have of profitable investment is to sell. This limits exit strategies, since we can't control a market or market demands. A long time ago in the 1970's California was a positive cash flow state. Yes dinosaurs ruled the earth and pterodactyls ruled the sky and we paid with our rent in bark. But indeed, California was positive cash flow. A duplex in Long Beach costs $70,000 in the 1970's and clearly rents would cover the payments. Today in 2011 the same duplex sells for $600,000 and the rents have zero possibility of creating any cash flow. So owning this property becomes a liability each month. Every month we would need to put money into the property to keep up the monthly payment, taxes, insurance, maintenance and vacancy. Our only profitable exit plan for selling a duplex at $600,000 is to hope that we can sell it to the next sucker that is willing to purchase the property for more than $600,000 in the next real estate boom. This is the definition of speculation.
We are at a point right now, where Real Estate prices have stabilized from the down fall of 2007. Unfortunately for many they will be losing even more homes to foreclosures starting next year in 2012 and extending for at least until 2015. This is not a prediction but merely an observation as 60% more notes will become due and rebalance. This will only lead to more inventory that the banks will be very happy to own. Keep in mind lending will only occur when interest rates rise and the banks can sell their foreclosed properties at much higher prices than the REO foreclosed price. We need to be logical about our investments and not emotional. This time frame might take 15 years to complete, consider the last boom in real estate was in 1987, nearly 20 years from the last peak in real estate prices. Can you wait 20 years to get paid?
As investors we deserve both the cash flow and also the capital appreciation. We should get paid with the cash flow on a monthly basis and also the capital appreciation when we sell for long term gains. It's solely up to us to determine the next California. Ironically I sell duplexes currently in cash flow positive regions for $70K right now. But I build in regions that are demographically favorable, not intermediate markets but cash flow regions that are the centers of new technologies, like Aerospace was for California. I enjoy investing in Indianapolis, a region known for advancements in medical technology, health care and freight. Recently Money magazine stated Indianapolis as the number 1 place to invest. This is due largely to the A level areas of Carmel growing 300% in the last 10 years. But we are not concerned about Carmel's A level prices we are more enthusiastic about the 9 service level jobs that are created from the 1 job created in Carmel.
We have a choice today of buying a property in an emerging market or building a time machine. What is the cost of building a time machine? Like so many alchemists have tried turning lead into gold, and failed I am certain that our chances for success are greater if we decided to spend $70K on that duplex and create the option of getting paid today and tomorrow.
Blog Archieve