Isn’t this a bad time to be investing in Real Esate?
Have you been hearing how bad the real estate market is right now? Well, in some ways, that is true. If you bought a house after the year 1999 and you’re trying to sell it, you might find yourself upside down on your mortgage, which means you owe more than your house is worth. Which makes it tough to sell your house, because banks don’t want to lose money. People are feeling the pain of having lost a lot of equity in their homes, so that makes the real estate market seem bad. And for many people, it is. But that is not our business. We are not operating under the same conditions as normal homeowners, and we are not dealing with the issues that real estate agents are having to handle every day all across the country. We are not trying to sell houses that we bought five years ago at the peak of the market.
If you are buying to speculate on appreciation like people were doing in 2004, for example, I personally don’t think you will see rapid returns like that anytime soon. Most real estate professionals believe it will take years for housing prices to steadily climb with significant appreciation again, even here in Southern California. But, again, that’s not why we’re buying, that’s not our business, and that’s not what you would be investing in. Our investment purchases are short term. We buy a house that is significantly below market value because of its condition, we rehab it quickly, and then immediately put it back up for sale at market value. We do not rely upon nor expect any appreciation in the market. In fact, we get in and out as quickly as possible to minimize the effect of changing market conditions.
Have you heard that the real estate market is still going down, that home prices are still falling, that foreclosures are still increasing, and that people aren’t buying homes right now? Well, all of this is true… in certain markets. Remember, real estate is about location. And location, and location. Yes, in places like Florida, Las Vegas, and parts of Arizona, all of these things are true. A number of factors made the real estate decline worse in those areas, and are still affecting the markets there today. Those regions had large population growth – people were retiring there and buying houses there because it was cheap. And because it was cheap and growing, more people bought there for speculation, assuming that their land and home purchases would only keep going up. And for a while, it did – more people moved there and the demand for housing increased. There was plenty of land to expand upon and more and more houses were built. But when the market took a dive and at the same time people started losing jobs, the speculators and many of the unfortunate homeowners lost their homes to foreclosure. Now the speculators are gone and you have lots of new houses sitting empty. People aren’t flocking to those places like they were. With continuing foreclosures, prices keep falling because the demand is not there anymore.
In Los Angeles, though, there is a finite amount of space. We didn’t have tons of land to build upon, so there wasn’t new construction everywhere. The construction took place out in the deserts. But now with the market decline, there are still lots of people living in LA, the demand for houses is still the same, and nobody wants to live out in the foreclosure ghost towns in the desert. So houses near to LA are still selling. The market is no longer in a free fall; in many areas it has been relatively stable for the last year and a half. Some areas have even gone up. Yes, some have declined a bit more, so we still keep an eye on things. But it’s about demand, and there is still a need for housing in LA, and there is a limited number of homes here – it’s not like Florida or Vegas where you can have your pick of 50 nice homes to move into for dirt cheap.
What about the sheer number of foreclosures out there? Isn’t this going to drop the price of homes even more? Well, yes, if there is a significant increase in the number of foreclosures, this can definitely affect the price of homes. This is something we stay abreast of so that we can adjust our offers appropriately and build in some buffer in case the market dips from the time we buy the house to the time we sell it. Currently, the number of foreclosures and the number of people facing foreclosure has remained fairly steady for the past year. If the banks start foreclosing on more homes than they have been, or if unemployment rises again, that’s a sign to us to start expecting a price dip. But, also, remember this, most of these foreclosed homes have not been well maintained by their owners (sometimes for years) because they knew they were facing foreclosure at any minute. Many of these homes are very distressed – either old, unmaintained, or even outright vandalized. These are not the homes that people generally want to buy. So, while they certainly affect the market value of nicer homes in the area, it is generally not a devastating effect; appraisers who determine the value of properties understand the difference between a distressed home and a normal decent home. Because the houses we rehab end up being some of the nicer homes in the neighborhood, their values aren’t dragged down as much by the foreclosed homes. Remember, this not Detroit, where entire neighborhoods are run-down and empty.
But people aren’t buying houses currently, right? Wrong. In fact, the average home in our market has been selling in less than two months. This is because the conditions are good for buyers. When was the last time prices were this low in Southern California, with interest rates on mortgages about the lowest they’ve ever been? People always need a place to live, and most people want to own the place they live in. And now that prices have fallen, and they’re stabilizing again, and interest rates are ridiculously low, it is the perfect opportunity for first-time buyers to get into a home. And that’s what we’re seeing. And that’s the market we’re targeting. We focus on homes that are at the entry level of the middle class. We stay away from homes in undesirable neighborhoods (where the prices may still fall further) and we generally don’t buy homes at the higher level of the middle class (because it may take longer to sell and we’d be subject to more fluctuations in the market). The bottom line is this: now is a great time for middle class home buyers in Los Angeles, and that’s our target market.
A Good Investment
To summarize, Real Estate is about location, and the Los Angeles market is not the same as other parts of the country. The market has been relatively stable recently, foreclosures are steady, the employment rate is steady, the population is still growing, and there are a finite number of homes in the area. Prices are low, interest rates are low, and banks are loaning again, which makes it a great time for first-time home buyers, and they are our target market. This is why we still believe investors can make up to a 10% return or more – because we are confident that Real Estate in Los Angeles is a good investment.