In some markets housing prices continue their drift down stream. In some areas of the country, the market has fallen, 30, 40, and 50 percent (California, Florida, Michigan, Arizona and Nevada). Some pundits claim the deflation of our currency, along with other economic woes may signal a depression, while others say aggressive government stimulus packages may lead to super-inflation. Consumer spending is down, unemployment is up and bankruptcies are occurring at an alarming rate. What are we to do?
Just when you think there may be no hope, take heart. Bad times, do lead to good times, but most importantly, they signal opportunity. As the disasters of 2008 leave carnage in the real estate markets that were hardest hit, the opportunists now step in. For those with the guts to step in and make lemonade from the lemons of the past, the future is bright. It is times like these, that make real estate millionaires.
There is a lot of cash sitting on the sidelines just waiting for the “upswing”. The pent up demand of those who pulled their cash out of the markets to wait for better days, is getting ready to unleash. They are waiting for the “go”, the “green light”, the “gong”. However, no one rings the bell when the time is right. It is just like the stock market. By the time it hits the news and the bell rings, the bulls are already running.
There are key indicators that you can watch while you wait for that bell. One of these is the ratio between sales price and rental rates. The traditional relationship between housing prices and rental rates is about 20 to 1. (One general rule is to only buy a rental property that can provide at least 5% of the purchase price in rental income. As an example, a $100,000 house should rent for at least $5000 per year.) During the housing bubble, that number became very distorted and resulted in ratios of 33 to 1, and worse. Basically, that meant that you could not hope to even break even on rental income.
With the drop in home prices, you can now achieve the “ideal” ratios and even better. Once again, it is possible to buy and sustain the property with positive cash flow. This means that housing prices have begun to normalize to the natural growth that should occur year over year (approximately 5% since World War II). There may still be some peaks and valleys in the leveling of prices, but overall, it is adjusting to its natural trend of growth.
For investors and homeowners, who have the foresight to jump in now, the opportunity awaits. While others wonder, watch and wander in the fog, the best of times is here for the brave. The plan for those willing to jump in is to buy and hold small residential properties. The math works for the rent coverage, so jump in, hang on for the ride and profit in a big way in 3-5 years.
