IMPROVEMENT – At the end of 2009, 10% of mortgages had at least 1-payment past due and another 5% of mortgages were in the foreclosure process. At the end of 2010, 9% of mortgages had at least 1-payment past due and another 5% of mortgages were in the foreclosure process. As of the end of 2011, 8% of mortgages had at least 1-payment past due and another 4% of mortgages were in the foreclosure process (source: MBA).
That is good news and progress in the Residential Real Estate arena. Will you go out and buy a rental home now with prices down? Probably not. It is very hard to make the financial and time commitment of that size for most of us. Most of us do not have the property management expertise, time to manage it, and finances to do it. Some say the biggest time management challenges of owning rentals are the three troublesome Ts: Tenants, Trash, and Toilets. That is what most of the landlord’s phone calls are about. (And the IRS considers it ‘Passive Income’!!!)
How can we find a “Buy low and sell high” opportunity today in Real Estate that is reasonable? Look to Commercial Real Estate, not Residential.
First, valuations: Residential properties are valued for the vacant structures and land only. Commercial properties are valued significantly by the current income production they provide. Therefore, if a property is producing income due to it being full of lease tenants, it should be valued higher and sell for more. If the same size property is vacant and has no income, it will sell for far less as a Commercial (income-producing) property.
Second, financing: If the property has no tenants, the potential buyer will have significant challenges getting financing to buy it. Why would a bank loan money on property generating no income to make the loan payments? Right now, banks are very wary of Real Estate anyway, so if banks won’t finance it, that further lowers the price since very few buyers exist with cash to make it happen. It is a buyer’s market right now.
Right now is a perfect time to find some carefully selected Commercial Real Estate at very low prices. There are good properties with distressed owners. You can own a share of a professionally managed partnership or trust with minimal investment and no management time commitment.
Real Estate is a great hedge for inflation too. Since it does not go up and down with the stock or bond markets, it provides very good diversification for your overall portfolio. You can easily buy in to these professionally managed properties for the income they pay (6% to 8% is not unusual) and/or the potential increase in value that they hold once the properties are more fully leased or improved by the experienced management of the partnership or trust.
If you are interested in getting more information on a few of these great buys, please let me know. The time is right to ‘Buy low so you can sell high’ in a few years!
I am sure that many of us will look back in the near future with regret that we did not do what will seem so simple in hindsight later on. It has been said that we rarely have regrets for the actions that we took. Regrets usually are from the actions that we did not take.