Is Real Estate at the Watershed?

I read an article the other day on the Social Security system that was downright scary!  It said that, for the first time ever, Social Security is now paying out more than it's receiving from taxes.  

In fact, the funds once set aside by the government to pay back Social Security are now gone!  I'm talking about billions of dollars ravaged by incompetent spendthrifts in the U.S. Congress over the last couple of decades.

So Uncle Sam is now paying Social Security back with IOUs in the form of $2.5 trillion in U.S. Treasury bonds!

So this puts the entire Social Security system in jeopardy by 2037.  And when I say "jeopardy", I don't mean this kind either:
 

"I'll take 'Idiot leaders of Congress' for $80, Alex..."
 

So how old will you be in 2037? 

60?  70?  Maybe 80? 

Think about what your retirement could be like without having any monthly Social Security check on which to rely.  

Do you have a pension?  Good for you if you do, but it seems like fewer and fewer workers these days have one. 

So where does that leave you -- with a 401(k) in a best stock market in 2011 that has gyrated like crazy over the last 10 years, but is basically flat to negative in all that time?

Will this be you in 2037?

Listen, I don't have a pension either, and even though Social Security may still be around when I reach my mid 60's, I'm sure as heck not depending on it.  Yes, I've got some 401(k) money and some funds in my IRA's, but that's the kind of money that will allow me to eat out at Bob Evans, when where I really want to go is the Ruth's Chris Steakhouse.

So I'm staking the largest percentage of my future retirement on real estate. 

With all of the volatility in the real estate market lately, why would I do that?  Here is why:

Did you know that throughout time, the richest people in the world have all owned a great deal of real estate? 

And did you know that since 1963, the real estate market has only had two down periods, those being 1989-1992 and 2007-today?
 

Let's go back to 1992 for a second.

Had you invested heavily in real estate in 1992, using 15 year mortgages with 20% down, look where your investments would have been when the mortgage was paid off in 2007.  The $100,000 house, for which you put down only $20,000, would have been paid off by your tenants and worth about $240,000.

That's a 1200% gross profit in 15 years!

So ok, you got greedy and didn't sell in 2007, and now it's worth only $170,000, right?

That's still an 850% profit in 18 years, or about 47% per year!  But don't forget to count the rental income, perhaps $40,000 or more you've made in the last three years with the mortgage all paid off! 

In other words, while the value may have been dropping from the peak, your rental income was acting like a dividend to offset almost 60% of that loss.

With the rental income, the gross potential return (before taxes, insurance, repairs) climbs up to over 1000%!

You see my point?

Tycoon readers, you need to understand one important point -- perhaps the most important one that I have made on these pages in months.

There is only a narrow window of opportunity in the real estate market that will last maybe another year or two at most. 

During this time, foreclosure properties will be so cheap and interest rates so low that you will be able to buy properties on 15 year mortgages and have a positive cash flow every month while your tenants pay down the entire mortgage!

Come on Ethan, this sounds like 100% pure hyperbole.  What proof do you have?

What proof?  Well, I just did it myself.  I bought a HUD home for a little over $80,000, put down $20,000, and took out a 15 year fixed loan at 5.125%.  My total monthly mortgage payment, including taxes and insurance will be $621. 

I just secured a lease with a tenant for $975 a month!  

But already there is competition brewing all over the country, as other savvy investors are sniffing out the bargains.  Cash purchases of real estate, which normally average about 10% of all sales, were at 26% last month.  In the most hard hit areas, such as Las Vegas, NV and Phoenix, AZ, cash purchases were 50% and 40% respectively.

In San Diego, the number of flipped re-sale properties have doubled in recent months, as cash investors are scooping up terrific bargains and reselling them at great profits within a few months.  Some of these homes are being purchased in large quantities by investor hedge fund pools.

So I'm not waiting to buy, and I don't think you should either.  

To paraphrase Warren Buffett, the most famous investor of the last 40 years, I want to be the guy who bought when others were most fearful.  I want to be the guy who gets in on the good deal before others drive the prices back up again.

In fact, this is the face that I want my relatives to make when I tell them that I am once more acquiring properties.

 

When I see that face, that will confirm that I am right!

Tycoon readers, if you have ever been interested in acquiring real estate, 2010 and 2011 are going to be watershed years for doing so.  Great looking foreclosure properties are ripe for both long term rentals, using leverage with fantastic interest rates, and even once again for short term flipping.

To quote the very astute Teeka Tiwari, in an article that he wrote in early 2008:
 

" The beauty of real estate is the LEVERAGE, the bloody LEVERAGE is MAGNIFICENT!!  It allows the smart buyer to propel themselves into an economic band that they could only dream about."

 

So how old will you be in 15 years when your rental property mortgages are all paid off by your tenants, and you have your choice of selling the property at a huge profit or using it for monthly income for the rest of your life?

60?  70?  80?  How about only 45?

This week, I want you to declare your financial independence from Uncle Sam!

That means that when you hit retirement age, you can thumb your nose at Uncle Sam when he says, "Sorry, there are no more funds for Social Security", or "Sorry, you now have to be 85 years old to collect Social Security."

So what's in your retirement plans, Bob Evans or Ruth Chris?