Is Real Estate Too Risky Now?

By Al Thomas

Yes….and no.

It depends on what type of real estate you now own or plan to buy for investment, not a personal residence.

There are three basic types of real estate: homes, apartments and commercial. The latter include everything from the Empire Estate building down to storage units.

As long as the economy is doing well all of them will be good investments, BUT what happens when everything goes South as it did in 2008 and does not come back as it did in 2003? Which one would you want to own?

It takes steady good-paying jobs to keep the housing market going. The geniuses at the Federal Reserve do not understand it is not interest rates that sell houses. It is jobs. The current administration continues to destroy new business formation and expansion where new jobs are created. But enough of that.

With 9,000,000 fewer people working today than 5 years ago it meant many of those folks could not make the mortgage payments. There are 2,000,000 vacant houses with millions more people under water on their home values.

That $250,000 house is now appraised at around $125,000 and carries a mortgage of $195,000. Those are round number guesses, but not too far off. To try to rent this property will result in a cash flow loss. Not a good investment especially if you lose the tenant for any period of time.

If the same numbers are applied to an apartment complex the results will not be so bad. When people can’t afford to buy a house they have to have shelter and an apartment is the cheapest solution. Even the loss of a few tenants will find there is still enough cash flow to maintain all the normal building expenses.

Commercial property of various types will fair erratically. In a hard-hit jobs areas restaurants, cleaners, auto dealers, retail stores will find owner income declining. Storage facilities will do well as those displaced from their homes may not be able to find appropriate space in an apartment. Auto repair, food stores should do well. Owners of the latter types of buildings will continue to have good cash flow.

Cash flow is the secret of investment property, not appreciation.

It will depend upon where real property is when the next crash hits. There will be another economic decline no matter what our government does to try to stop it. These are normal cleansing cycles that weed out poorly run businesses. Bankruptcies are the cleaner. Let them happen. It strengthens the economy.

Single family investment houses should now be sold or traded for multi-family units of 6 to 10 or more. The larger the better in growing areas. I will not discuss appreciation in this column.

In my opinion we are very close to going over the edge again as we did in 2001 and 2008. There are too many factors that QE Infinity cannot overcome.

It is now time to review your real estate portfolio and act accordingly.

Al's new ebook (32 pages) is available on Amazon for 99 cents. It explains the Golden Cross and the Death Cross. These are well known methods of determining long term trends in the market. If you only learned one method of technical analysis this would have kept you out of the 2000 and 2008 crashes and will keep you out of the next one that is coming soon. Search by Never Lose Money In The Stock Market Again. Copyright Williamsburg Investment Co 2013