About 3 years ago I was posting several videos on my Facebook telling people they needed to buy investment properties. I laid out all the reasons it made sense and broke down several deals so that anyone could understand it. I’ll never forget, I had 3-4 people send me private messages telling me that I was wrong and it was wreckless for me to advise that because it could end up costing people dearly if the market turned. They were convinced we were about to see the “bubble” burst and home prices would come crashing down.
Rather than listen to the fear mongers that were neither in the real estate industry or understood what was actually going on, I decided instead to buy myself 7 more rental properties over the past 36 months. In fact, one of them recently reached out to me and asked if he should buy a rental property. Yes, the same dude that had messaged me half a dozen times telling me I was crazy was now wanting to get in the game.
I have some more news as well, it STILL is a great time to buy rental properties and your primary residence and here is why:
1. Rates are below 5%, this is insane value for buying real estate
2. You can leverage 80% of the banks money on an investment property and 97% on a primary residence.
This is so important because it means that $10,000 down is worth 5-30X that in an appreciating market.
For example:
If my $300,000 house goes up 10% over the next 2 years that is $30,000 in value. I can buy a $300k primary residence with $10,000 down. If I put that same $10k into the stock market and it goes up 10% then I get $1000.
Do you see the power of leverage?
One advantage I have and why I was so confident in those videos for the past several years is because I was actually around and saw first hand what was happening when the real estate market did have a bubble burst in 2007-2009. The game is so different now than it was then and in those changes brings all the security.
Here is a list of a few things that are much different now vs the great recession of late 2000’s:
- There aren’t enough houses to rent and buy due to the fact that nobody was building for about a 5 year span after the crash.
- Rents have gone up almost 40% in most markets creating a much better cash flow for investors.
- Anybody that has bought since 2011 has equity in their home and any investor that has purchased since 2009 had to put 20% down. The number of people upside down on their property is a fraction of what it was before.
- Because of the low interest rates it is much cheaper to own a home then it is to rent the same home in almost every single market across America excluding only the coasts. This means that even if the market would start to drop nobody would sell because their monthly costs would go up to move.
- This is opposite of what happened before. It was much cheaper to rent then own the same home so most people dropped their primary to foreclosure and rented the neighbors house for $500-1000 less per month.
- There were horrible adjustable rates that cause home owners mortgage payments to shoot up hundreds and sometimes thousands of dollars per month. Nobody is going to hang on to a rental when you rent it for $1400 and the mortgage is $2600/mo.
I could go on and on but I’m not trying to write an entire book here. The facts are this, we live in a date world now and the data is promising. If you have been paying attention, almost every single industry is getting better and better at predictions. It’s because we have much more data and the lesson of history to pull from. It is much more likely that the real estate market will continue to climb before it dips in any way. (This is market specific and even price range specific so that is important to know. I do believe the higher end properties that have been over valued the past few years will come back down.) But the market as a whole and the properties you would want to buy as investments will continue to see strong gains.
And here is the best part of all… Even if the market goes down, you can protect yourself against it by doing one thing, buying properties that have a great cash flow today! After all, as long as you are buying for the long term wealth aspect of real estate, it really doesn’t matter if the market sees a temporary dip. Cause good market, bad market, flat market; if your property cash flows then all it means is that you are one month and one year closer to somebody else paying off that mortgage for you and building more equity and wealth into your properties.
Real life example of how one of my properties will perform in a market crash…
Lets pretend for fun that the market crashes 40% over the next 5 years! That would be twice as bad in this area as the last crash so pretty bad. I would call this a worst case scenario and some major disaster in the world we couldn’t see caused it:
Current value $365,000
Mortgage on $315,000 purchase price w/ 20% down- $1600/mo
Current rent minus management fee and repairs- $2100-200= $1900/mo
Disaster strikes - Value falls to $219,000
Mortgage payment - $1600/mo still
Rents fall 20%- Manage it myself and rent is $1680/mo
Every year my principle on this loan would still fall around $6500 for a net monthly profit of $80 plus $540= $620/mo
Meanwhile time works in my favor and after it falls for 3-5 years it then goes back up for the next 5-6 years and my property is again worth $365,000 and meanwhile I owe about $100k less on it.
I really hope this helps you understand why investing right now is still a minimal risk game if you are in it for the long haul. Short term anything can happen. But if you can borrow money at less than 5% and leverage 80-95% of the banks money, the risk is well worth the reward. For more information on the best investment and real estate buying opportunities or to meet to discuss a game plan for you, contact me at jimmyrex@kw.com