Monday, March 30, 2009

Nobody Rings a Bell at the Bottom

How many times have you heard someone say, "Nobody rings a bell at the bottom of the market?" If I had a dollar for every time I heard this, I'd be a zillionaire. But nonetheless, the term is true. We never really know where the the true bottom of the market is, but we definitely know a few months after we've been there.

In the case of buying stocks, timing is crucial and cutthroat. Anybody that bought Citi early this month at $1 per share, has already made well over 100% on their money (if they've sold and taken the profit). In the case of real estate, we have more flexibility with buying and not as much pressure to pull the trigger.

So why do I think now is THE time to pull the trigger and buy? I think it's a great time to buy because something very fundamental is happening in the real estate market. The relationship between your cost to rent and cost of purchasing has changed dramatically. Example: a couple of short years ago, if you purchased a 3/2 townhome in east Boca Raton for $550K, you would be able to rent that property for between $2200-2600/month. These numbers are not etched in stone and I am using an example of actual sales/rentals I've worked with during this time. The monthly costs to carry that home with a 20% down payment (best case scenario) were approximately $4000/month, including P&I, HOA, RE taxes and HO's insurance. This gave the homeowner/investor a negative cash flow of approximately $1400-1800/month. Meaning, I could rent this property from the owner and he'd kick in the difference on the true carrying costs of the property! In other words, the LL was subsidizing the tenant to rent their property to the tune of these numbers above. INSANE. If that's not crazy, I don't know what me old-fashioned, I don't care. I always thought that investing in real estate meant that you were supposed to profit, not lose each month.

Now, if you purchase that same exact piece of real estate today with the same 20% down, your carrying costs are far less. Based on a sales price of $265K, all of your costs would run you somewhere in the neighborhood of $1800/month!! I can now buy this townhome for the same price or a little less than the cost to rent this property at market price. You can actually cover your entire expense AND/OR, maybe even make a couple of hundred dollars per month depending on the local rental market. So the relationship between these two numbers shows you that the old positions have come a full circle. Bottom line: what a huge difference a couple (2) of years makes.

Now, it actually makes sense to buy. Before, it did not. Build your portfolio slowly. Start as early as you can. Take advantage of the low rates now being offered by banks and mortgage companies. Go out and steal a house for your retirement so you can kick back and go fishing.

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