Are you living – and investing – in a bubble neighborhood? Here are the telltale signs …
1. Most people in your neighborhood couldn’t afford to buy their homes today.
2. You haven’t done anything to your house (in fact, it could use a paint job and a new roof), but its still doubled in value in three years.
3. You could almost rent a place for what you pay in property taxes.
4. Neighbors and/or fellow investors are “cashing out” of their homes and moving to a more affordable area of the country.
5. It seems like everyone you know has a real estate license.
6. Even the guy who mows your lawn says things like “You cant lose in real estate” and “Property prices never go down.”
7. You get 14 offers to refinance, seven offers for credit lines, three offers from realtors to sell your home or find you your dream home … all before lunch.
8. Home equity loans are as common as credit cards among your friends.
9. All your friends know what an “interest-only” loan is (though they don’t know why they probably shouldn’t have one).
10. Property prices have risen much faster than income for four to five years.
11. The median (see Word to the Wise, below) selling price of a house is now five times or more the median income in your area.
12. The median-priced house now sells for 15 times or more its annual rental value.
13. Properties no longer “wash their own faces.” Even with a 20% down payment, the rent doesn’t cover the mortgage, management, and expenses.
14. Your real estate market now operates on the “Greater Fool” theory. Prices are no longer tied to rents or household income. If you buy a property at market today, the only way to make money is to find a buyer who’s a bigger fool than you are.
If you live in a bubble neighborhood, don’t despair. You can still make investing in real estate one of your resolutions for 2006 – and make substantial profits. There are two principal ways to do it.
The first way is to learn how to buy real estate in a hot market at 30% (or more) below market value. To do this, you need to find motivated sellers. Im talking about people who are facing foreclosure, burnt-out landlords, out-of-state owners, owners of rundown, vacant properties … and the killer combination: out-of-state owners of rundown, vacant properties.
Its not easy to land one of these sellers. It requires a good deal of work. But its work that can pay very, very well – far better than most MBAs earn.
And that brings me to the second – and best – way to make significant profits in real estate over the next few years: Identify the New Real Estate Boom Markets.
Tap Into the Best Value Markets in America
The New Real Estate Boom Markets are markets that have escaped the bubble so far. But they’re starting to get hot. Why are they getting hot? Because there are hundreds of thousands of property owners in the bubble markets who are tired of high taxes and insurance and want to cash in their inflated equity and move to a much more affordable place.
These “Bubble Market Refugees” will pocket hundreds of thousands of dollars when they sell. And for married couples selling their primary residence, most of that money will be in the form of tax-free capital gains.
They’ll take that tax-free loot and move to a less-crowded market, with far lower taxes, a lower cost of living, and often a better climate and a higher quality of life. They can buy a newer, bigger home on a bigger lot for half or even a quarter of what their old homes were worth. Then they’ll take the cash they didn’t spend and live better for less.
This is what a neighbor of mine in South Florida is doing. An investment partner of mine from California recently did it too. And Ive run into quite a few people who are coming from Arizona, Nevada, and New York to invest in the New Real Estate Boom Markets.
Characteristics of the New Boom Markets
Americas best real estate markets today are dirt-cheap compared to New York, California, South Florida, the Washington, DC area (including Virginia and Maryland), Boston, and much of New England, Seattle, Portland, the resort cities in Colorado, Las Vegas, and much of Arizona … to name just a few of today’s bubble markets. But just because a market is cheap doesn’t mean its heading up in value. The New Boom Markets have a lot more going for them than the fact that you can buy a lot more house, building, or land for the same buck …
They’re usually second- or third-tier cities – but only in terms of population. They have culture, universities, long histories, and diverse economies. They’re well known, often in mild climates or in the Sunbelt, and they tend to rate high in national quality-of-life surveys. They may have a population of about a million or less, with plenty of room for growth.
They have great fundamentals for real estate. They’re experiencing growing population and jobs. Yet properties sell at multiples far below those of the bubble markets. In the New Boom Markets, you’ll find the median price of homes at three to four times the median household income. Compare that to the six-times income in Tucson and Boulder, the nine-times income in Miami and LA, and the 11-times income in Freemont.
Income properties in the New Boom Markets may sell for 10 times annual rent or less. Again, way below the ratios of 40 times annual rent in Venice, Florida – and even 49 times annual rent in San Francisco! So when you learn how to buy under market value in these markets, you can buy for nine or eight or sometimes just seven times annual rent. That means you can probably put very little or even no money down in some instances, and have the properties pay for themselves and produce a positive net cash flow.
Most importantly, the New Boom Markets are growing in popularity and properties are experiencing growing demand. Bubble Refugees are heading to these areas by the busload – literally. (I know of investment groups from other states that are just beginning to arrive and buy properties.) And the New Boom Markets on the radar of the first wave of baby boomers who will start taking early retirement in less than five years.
The long-term trend for the New Boom Markets is excellent. The prices today are steals – especially in comparison to the bubble markets.
I’ve been researching and traveling to these value markets and I have begun to buy properties in one of them. One four-unit in a good area produces just over $26,000 in annual income, yet its market value is just $220,000! That’s less than nine times annual rent … and yet I was able to pick it up for $185,000 (or about seven times annual rent).
An apartment complex nearby was being sold by a bank. It has 24 units and produces $144,000 in yearly income. Its in a B area that is improving, right next to a developing “restaurant row.” It was on offer for just $850,000 – less than six times annual rent. Not surprisingly, when I called to make an offer, it was already at contract. But there are still many excellent deals – residential and commercial – to be had.
“Value is what people are willing to pay for it.”– John Naisbitt
[Ed. Note: Justin Ford is ETR’s real estate expert and the editor of our Main Street Millionaire program. In a teleconference call on February 9th, he will reveal the five markets he believes offer the best values and the best appreciation potential in the country today. Learn more.]