Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
Yogi Berra was right. Its déjà vu all over again.
I found an article on TheStreet.com with the booming headline: “It’s Time to Invest in Real Estate Instead of Stocks”
I’m scratching my head over this one. I just don’t get it…
Because when actually did it stop being time to invest in real estate? That’s what I don’t get. I’ve been scouring the news for a couple of years now, and I don’t recall hearing any buzzer sound signaling the end of the game.
Do you? That’s what I thought.
So I decided to take a look at what the guy had to say. And my assessment is that he got the answer right, but for the wrong reason.
Right Answer, Wrong Reason
He wrote:
“…as both a mortgage banker and an active investor in the stock market, I'm quite familiar with the often-asked question: Which is a better investment, stocks or real estate?
The short answer is a home. Scholars of finance may say otherwise, especially over the long term. But given the tax breaks, the leverage and the consistency of price gains over time, a primary residence, or even an investment property, wins -- at least in my book.”
This is where he’s right – but for the wrong reason... the simple reason is that A HOME IS NOT AN INVESTMENT. How many times do we have to talk about this? Seriously, I thought by now, after Rich Dad, Poor Dad, that everyone, especially “a mortgage banker and active investor,” would know that your personal residence isn’t an investment.
He’s right though about real estate, and in particular, rental real estate. It certainly still is time to invest in rentals, but I’ll go into that more in a bit…
He went on to say that:
“Sometimes, though, one needs to be reminded of this, and the recent carnage in the stock markets has done just that. Big time. On Monday, my portfolio was down 6%. On Friday, it was down 2%. And that portfolio is diversified across sectors and asset classes.”
And that “actually, the first thought was that if that money had been invested in property, it wouldn't have seen that sort of steep decline in just a couple of days. Housing has had its hard moments in the past decade, but even then the declines come over a matter of months.
The prices are sticky, as economists say. You never get that the eyes-glued-to-CNBC, I-can't-look-at-my-portfolio, full stomach-gut punch you get from stocks collapsing across the board. (The Dow Jones Industrial Average dropped 1,000 points at the open on Monday that week!)”
He’s right about this as well…
When the market crashed starting about nine years ago, I received a huge influx of long-term private money. And by long term, I mean 20-year money. And that allowed me to load up on rental homes at or near the bottom of the market, four of which I bought at 100% LTV.
The reason? Investors were sick of the rigged stock market game. They wanted safety and security, and the crazy thing was that back then, they LOVED the fact that they could drive by their investments any time they wanted to – because houses were physical investments and not just 1s and 0s on some rigged stock exchange.
And with the recent volatility, people are starting to pull money out of the market. And that presents an opportunity for us investors.
And finally he discussed the Fed, the economy and the real estate market:
“The only bright spot in the current market rout is that the Federal Reserve is unlikely to raise interest rates now in September, as had widely been expected. With stocks as shaky as the San Andreas Fault, an interest rate hike could set off the big one and remove all the ground we've gained through monetary policy since the financial crisis.
Sure, eventually rate increases will come, and barring a recession or stock market decline like the one during the financial crisis, a slow series of small increases might not be a bad thing for housing. It would prevent a bubble, which we are dangerously close to creating in some markets, particularly on the West Coast.
Even here in Denver, for instance, we had been seeing 20 to 30 bids on a single property until a recent cooling, which may be part of the crash in natural resource-based economies, local and global.”
Right, Right and Wrong!
Right about the Fed – it doesn’t seem like a rate increase is in the cards any time soon.
Right about interest rates and the fact that when rates do rise, it will likely have a devastating impact on the real estate market, because it will make homes a lot less affordable.
Wrong about the market. So what if the value of your home increases by 30%? You can’t spend that money until you sell. Until then, all it does is add to your net worth. And you can’t buy groceries with net worth.
So yeah. It’s STILL time to invest in rental properties.
Am I Right?
Agree with my assessment? Hit me with some thoughts in the comments section below.