Real Estate

[Bardo]

I know that we are all planning on the end of the world, and the rising seas which will make us the sole survivors in the new "Waterworld" of global climate change. But I can't help but think that now is a good time to buy real estate if you can afford it. The question is, what is the best real estate investment in this whacky market? I know there are some savvy investors among this group of dreamers. Speak up!

[Sailormann]

Not sure if I qualify as a "savvy" investor but what has worked well for me is buying little pieces of land fairly close to urban centres. You need to hold them for five to ten years, but the profit can be pretty substantial when cities grow.

Unlike buying houses, there is no maintenance required and the taxes involved in carrying land are negligible.

Look for developers who are going under and have to liquidate fast. There are always one or two, and in the US right now - there are probably a few more than usual...

[T37Chef]

Interesting you bring this up, we are looking for an investment property. What do you all think of rental properties as investments? Run by a rental agency...

[Bardo]

We have residential rental property, and it carries itself. The profit on that investment is in the appreciation over time. In our area (Southern maryland, outer edge of commuter ring to DC), it is hard right now to find value in a residential unit. Granted, the prices are down, but the number of rentals available is up, so rent is somewhat depressed. That means a heap of equity in the house in order to make the payment low enough to be covered by rent. Sailormann, the idea of close-in lots here and there is interesting. Certainly the inventory should be decent in the emerging markets. I am thinking of a small commercial unit, like a strip mall with 4-6 shops. But I don't know if the down market is having the same effect on the commercial market.

[sailhog]

We bought a house on Hilton Head Island five months ago. At that time, RE prices were down approximately 15%. I didn't want to buy into a falling market, but they seemed to have stabilized, and my wife couldn't standing living in a house we did not own. The one problem we did not foresee was all of the ****-heads who bought these exotic negative amitorized loan products, and which are now getting the business end of the stupid stick. My two cents: it's going to be a long time before the RE market comes back nationally. Then again, all real estate is local. Interestingly, I recently heard that Europeans are coming to the US to buy real estate in Florida for firesale prices, and at an exchange rate that discounts the purchase by 40% if they're buying in Euros.

[Sailormann]

Interesting you bring this up, we are looking for an investment property. What do you all think of rental properties as investments? Run by a rental agency...

I have never done anything like that, so I am not sure if it would be profitable or not. For me, it's too time consuming. I would feel that I not only had to keep an eye on the tenants, but on the agency as well. They are out to make a profit - so every dollar that they earn from my property would be a dollar that I don't receive.

However, I'm a pretty cautious investor. I have never gotten into derivative securities or even small cap stocks. Don't use a stockbroker or financial planner either.

When you invest in things where profits are dependent on the actions of others, you are increasing your risk greatly.

Hence, land is about the only thing I've found that I am completely comfortable with. Mind you, I have acquaintances who are less risk adverse and who are worth a lot more than I am.

[Sailormann]

I am thinking of a small commercial unit, like a strip mall with 4-6 shops. But I don't know if the down market is having the same effect on the commercial market.

This is an opinion based on absolutely nothing except personal observation (and a bit of regard for what has occurred after the last two market crises):

The current turmoil we are seeing in the financial markets will work its way through into the general economy in about 18 months. In about 30 months interest rates will rise fairly dramatically. The value of a strip mall is based on where the land it's built on is situated, what the condition of the building(s) is/are, and the general state of the economy.

If the economy is strong, then there is demand for commercial space and if the mall has attractive buildings on it that are in good condition, and it's in a good location then it has a certain market value.

Once the buildings deteriorate, it becomes less valuable, and if consumers are not spending money hence not supporting the tenants that rent the stores, then it holds no value, except for the value of the land it is built on.

Hence - I would tend to think that there will be less commercial activity taking place in three years' time, and that the value of any commercial property will bottom out then.

In our region, the commercial real estate market tends to lag the residential market by about 18 to 24 months. It is probably similar where you are. I think that the "savvy" investor has already sold any non-core holdngs that they have. The properties that are on the market now are the less desirable ones, and I think that you can expect their market value to continue to decline for a while.

It's almost impossible to accurately time markets, all you can do is keep your nose in the air and try to sniff out any trends as soon as they appear. So while it is certainly possible that you could by a strip mall and make money doing so, I don't think that the market is predicting easy profits.

It's a lot of work being a landlord, or supervising a property management company. If you have the time to do it, then your likellihood of making money is much greater than if you were to let someone else make decisions for you.

In a nutshell - I would wait a while. I think that prices are going to tank big time in the next year, and that 24 months from now will be a much better time to purchase, but NOT if you are going in to debt to do it. I would never ever, ever in a hundred million years advise someone to take out a loan or mortgage to buy anything that they are not going to live in.

If you only have $5,000.00 then look for a cottage lot somewhere near water, within an hour's drive of a major city. If you have $100,000.00 then buy twenty of them. I avoid things that are expensive. When you want to sell, there are many more potential purchasers of $10,000.00 lots than there are purchasers of $100,000.00 lots.

Good Luck

[Bardo]

Thanks SM,
Good observations, and they make sense in the current environment. An additional thought: I think value exists in any market if you can sniff it out. There will always be distressed sellers, or heirs who just want to unload a property, or those who don't know what you know about the area or market. These deals are hard to find, but can be very profitable. They require knowledge, time and effort. Your approach is low risk, moderate return, which I like. But I think it worthwhile to keep looking for the sweet deal as well. BTW your remarks on commercial property are probably spot on in my area. I think, in addition, that we have overbuilt here in the last 5 years, so inventory will be up. I am looking in other regions at emerging small cities at the moment. Ideas?

[T37Chef]

Originally Posted by Sailormann

I have never done anything like that, so I am not sure if it would be profitable or not. For me, it's too time consuming. I would feel that I not only had to keep an eye on the tenants, but on the agency as well. They are out to make a profit - so every dollar that they earn from my property would be a dollar that I don't receive.

However, I'm a pretty cautious investor. I have never gotten into derivative securities or even small cap stocks. Don't use a stockbroker or financial planner either.

When you invest in things where profits are dependent on the actions of others, you are increasing your risk greatly.

Hence, land is about the only thing I've found that I am completely comfortable with. Mind you, I have acquaintances who are less risk adverse and who are worth a lot more than I am.

Property would be my prefernce...but we would need return from the property to pay the mortgage so thats out for the first investment. A colleague of mine owns 11 vacation rental properties up and down the east coast and does very well with them. She mentioned the benefit of the rentals is less wear & tear then a full time rental and you have the added bonus of being able to stay at the vacation rental once or twice a year yourself. I have also heard of these rental home exchange websites? Anyone done that?

[Sailormann]

I am looking in other regions at emerging small cities at the moment. Ideas?

I am speaking from ignorance here, as I am in Canada, and have not studied the US market at all but ...

I believe that the people who are going to be buying over the next few years are retirees. IF they can sell their primary residences, or IF they have the money to put into a retirement property before they sell out. The demand for pieces of land between 1/2 acre and 3 or 4 acres should be fairly strong for the next few years and probably peak between 2012 and 2015, as a lot of people will be finally building their dream cottages to spend the rest of their lives in.

Small towns with low taxes and lower crime rates are going to be the most desirable. Warm weather will be important, and proximity to water of course. So... I think that Texas, South Carolina, Virginia, Washington State, perhaps Maryland are good bets. I don't know enough about the cities in those states to suggest specific towns, but I'd be looking for places that have excellent hospitals and then draw a one-hour radius around there on the map. Then I'd start watching - take a drive to an idea of the topography and look for area that were not too affluent, and not too close to trailer parks.

Be very careful that you check out zoning and land-use restrictions. It also helps to read a few of the local publications and the minutes from meetings of municipal governments to determine if they are actively encouraging growth or not. Some communities make it very difficult for newcomers to build.