Real Estate is the Best Anti-Inflation Play

[wgadget]

You never fully own real estate, and your property taxes are subject to the whims of bureaucrats. Real estate is not very liquid either. If you needed to leave the country in a hurry most of our stacks would fit tidily in a carryon.

Just my opinion.

 

[newbitech]

How is having ownership to a business that invests directly in real estate paper ownership? You're way too comfortable throwing around the word "paper" to basically mean "an investment that I don't like because it isn't metal." I have a right to a portion of the underlying assets and the income generated from those assets. These are real houses. People have bought them. People are living in them. They aren't just pictures I drew on a piece of paper.

All you have to do is look to pending home sales, construction data, and the price-to-rent ratio chart I posted above to see that real estate isn't overpriced. It's moving faster now than at any point in the last 5 years. How many indicators do I have to post before I stop encountering ridiculous claims without any backing whatsover, such as this:

What I find remarkable is that this board cannot find a single reason why ANYTHING OTHER THAN GOLD OR SILVER could go up in value. Already four pages in I've heard now that inflation will drive real estate prices down, and so will deflation. If Obama sneezes tomorrow, real estate, stocks, anything but gold and silver will go down. If Obama doesn't sneeze tomorrow, then real estate, stocks, and anything buy gold and silver will go down. There is no consistency in the thought process here with the exception that everything will be worth less tomorrow unless it is sold in a coin shop. It's borderline delusion at this point.

1.) it's not, that is my point. You own the paper, not the asset. You bought into a derivative, which is backed by nothing more than fiat which is the main reason we have to worry about inflation destroying wealth to begin with.

2.) right, someone else bought them. You own a share of a company that makes a bet whether or not that person can pay their loan. You are not even betting that the housing market will rebound in price, you are betting that consumer credit has bottomed. You are looking at the wrong charts!

If you were even talking about owning properties to rent, you'd still need to be more concerned about incomes since you are making the argument that your investment has cash flow. That's only true so long as people can pay rent. In an inflationary environment, you cash flow is getting competition from things like, food, heat, and baby formula.

I have look at all those charts. The one you are ignoring however is price to income. After you get done with that simple one, you also might want to look at Loan to Value. If if you are really brave, look at consumer credit.

 

[wgadget]

Not to mention what happens in a deflationary depression economy. If you're gonna buy real estate maybe it would be best to buy in the depths of the depression, after the collapse.

 

[newbitech]

Not to mention what happens in a deflationary depression economy. If you're gonna buy real estate maybe it would be best to buy in the depths of the depression, after the collapse.

he's talking about pooling funds with a REIG to buy and flip, or buy and rent. It's a decent way to get a foot in the door, but hardly an inflation beating proposition since even folks with 100% ownership without the overhead of a REIG are gonna have a hard time beating inflation with RE in the current climate.

If you were a DIY'er, yeah. If you manage your own properties, yeah. If you have access to a line of credit, yeah. If you are willing to buy the worst of the lot, and hold out for the entire neighborhood to rebound (assuming it does) yeah.

But if you are gonna drop 25k into a REIG and have paper on 25 properties, and get $250 a month income stream, umm.. you are aren't really hedging against inflation. Since its gonna take 8+ years just to get your initial investment assuming no inflation at all. What's worse, you can't even decide to sell those properties when you want cause you are part of a group. You also can't get a line of credit against those properties ASSUMING the value goes up, since again, you don't own them.

Better to drop that 25k as a down payment on an 80k fixer upper, get a 10-15 year loan with lowest possible rate, make double payments to build equity, and PRAY that the market rebounds in 5 years.

 

[gerryb1]

Real estate, much like gold, is safe in that you cannot make more of it. Should interest rates rise due to an increase in the level of inflation, then the cost to build a new home would also increase.

You contradict yourself here. It's very easy to make more real estate, and we've been doing it since the first mud hut was built.

 

[wgadget]

You contradict yourself here. It's very easy to make more real estate, and we've been doing it since the first mud hut was built.

There is SO MUCH real estate out there that is either in foreclosure or underwater, giving the owners very little opportunity to move or sell. I believe it's called SHADOW INVENTORY. There is no housing "recovery." The banks have given the leeway to hold onto bad mortgages for up to five years, letting the houses sit vacant, deteriorating, as the Fed buys them up. Fantastic.

 

[The Free Hornet]

What I find remarkable is that this board cannot find a single reason why ANYTHING OTHER THAN GOLD OR SILVER could go up in value. Already four pages in I've heard now that inflation will drive real estate prices down, and so will deflation. If Obama sneezes tomorrow, real estate, stocks, anything but gold and silver will go down. If Obama doesn't sneeze tomorrow, then real estate, stocks, and anything buy gold and silver will go down. There is no consistency in the thought process here with the exception that everything will be worth less tomorrow unless it is sold in a coin shop. It's borderline delusion at this point.

You will not get consistency from a group called the "board". Your own post is proof of that. Find inconsistencies from the same poster. Like going to the exchange, half will yell "buy" and half will yell "sell". If you are expecting something different, that is your misunderstanding.

 

[Jordan]

Jordan

True or False: The real estate market is one of the most heavily manipulated/intervened markets on the planet right now?

True. Which is why I like investing in it.

I don't make the rules, I just play by them. Ben Bernanke and company are making homes excellent investments, so I'm just following their lead. Don't hate the player; hate the game.

 

[Jordan]

he's talking about pooling funds with a REIG to buy and flip, or buy and rent. It's a decent way to get a foot in the door, but hardly an inflation beating proposition since even folks with 100% ownership without the overhead of a REIG are gonna have a hard time beating inflation with RE in the current climate.

If you were a DIY'er, yeah. If you manage your own properties, yeah. If you have access to a line of credit, yeah. If you are willing to buy the worst of the lot, and hold out for the entire neighborhood to rebound (assuming it does) yeah.

But if you are gonna drop 25k into a REIG and have paper on 25 properties, and get $250 a month income stream, umm.. you are aren't really hedging against inflation. Since its gonna take 8+ years just to get your initial investment assuming no inflation at all. What's worse, you can't even decide to sell those properties when you want cause you are part of a group. You also can't get a line of credit against those properties ASSUMING the value goes up, since again, you don't own them.

Better to drop that 25k as a down payment on an 80k fixer upper, get a 10-15 year loan with lowest possible rate, make double payments to build equity, and PRAY that the market rebounds in 5 years.

First, the numbers you used are off both as a proportion and in real terms, however, your thinking is ridiculous. Anyone who slaps $25k into something and gets $250 a month out of it in pure cash flow is doing really well; that's 12% per year.

The way you account for earnings is inaccurate. Over time, the value of the equity will increase as will the rental income stream because that's how inflation works.

1.) it's not, that is my point. You own the paper, not the asset. You bought into a derivative, which is backed by nothing more than fiat which is the main reason we have to worry about inflation destroying wealth to begin with.

2.) right, someone else bought them. You own a share of a company that makes a bet whether or not that person can pay their loan. You are not even betting that the housing market will rebound in price, you are betting that consumer credit has bottomed. You are looking at the wrong charts!

If you were even talking about owning properties to rent, you'd still need to be more concerned about incomes since you are making the argument that your investment has cash flow. That's only true so long as people can pay rent. In an inflationary environment, you cash flow is getting competition from things like, food, heat, and baby formula.

I have look at all those charts. The one you are ignoring however is price to income. After you get done with that simple one, you also might want to look at Loan to Value. If if you are really brave, look at consumer credit.

1) You're a fool for thinking that everything corporate is somehow intangible, but okay.
2) Once the home is sold, it doesn't matter to me if they cannot pay their bills any more.
3) Some are rentals, but the best IRR has been in flips thus far, so I hope those keep going until it gets too big for the local market and it has to start buying to hold. Cap rates are incredible. Price to income is very affordable, hence why the home affordability index is hitting new highs.

 

[Jordan]

You will not get consistency from a group called the "board". Your own post is proof of that. Find inconsistencies from the same poster. Like going to the exchange, half will yell "buy" and half will yell "sell". If you are expecting something different, that is your misunderstanding.

Even from a single poster I can't get consistency.

Gold goes up over time because of inflation, I recognize that. Real estate goes up over time because of inflation and it cash flows during the period. No one is willing to admit that.

 

[wgadget]

True. Which is why I like investing in it.

I don't make the rules, I just play by them. Ben Bernanke and company are making homes excellent investments, so I'm just following their lead. Don't hate the player; hate the game.

Back in 2004, GWBush and Alan Greenspan were making homes excellent investments. We all know how that worked out.

 

[wgadget]

Meantime, Dodd-Frank legislation is giving the Too Big to Fails fits...The US and the UK are teaming up to slay the dragon. Derivatives, anyone?

http://blogs.marketwatch.com/thetell/2012/12/10/u-s-u-k-regulators-take-on-too-big-to-fail-banks/

 

[Jordan]

Back in 2004, GWBush and Alan Greenspan were making homes excellent investments. We all know how that worked out.

Incredibly well for people who bought, rented, and held? Yep.

This is a great time to buy real estate. Look at the spreads between carrying costs and rents.

 

[wgadget]

Incredibly well for people who bought, rented, and held? Yep.

This is a great time to buy real estate. Look at the spreads between carrying costs and rents.

We have not yet reached bottom. There is a hidden glut.

 

[Jordan]

We have not yet reached bottom. There is a hidden glut.

Okay, we'll see how that plays out.

How much further do you think national housing prices will fall and by when? Please quantify your predictions so that we can come back and see how well you do.

 

[wgadget]

A real estate broker told me that 2 out of 5 homes in my neighborhood are either already foreclosed on or in the process. I heard there are 5 million homes nationwide in this status. So...I guess the market might be cleared in oh...10 or 15 years? I'm gonna guess prices will go down another 20% or so in the near-term (2 to 5 years). Not sure how well the banks' ability to hold onto empty homes for five years is gonna bode with "the neighborhood." As in, "There goes the neighborhood." Dilapidated homes in "the neighborhood" do not make for rising prices, imho.

Also, as the municipalities get more and more desperate for "revenues," property taxes will rise. It's not rocket science.

 

[The Free Hornet]

You contradict yourself here. It's very easy to make more real estate, and we've been doing it since the first mud hut was built.

+1 great point.

Perhaps zoning laws and building inspectors are a way to force artificial scaricity on an unscarce product. Power center cities like DC are another way to create artificial scarcity. The same might be true with tech cities and IP laws. The tech stays there because IP law demands it stay with specific companies. Likewise with public education and medical industry regulation. Centralize the resources and close down anything not under Uncle Sam's thumb (e.g., make running a rural ER prohibitively expensive by forcing them to treat regardless of ability to pay not to mention licensing and medicine/FDA/IP costs).

That said, there does seem to be a limited amount of hip but only a few cities benefit from this effect.

 

[The Free Hornet]

Even from a single poster I can't get consistency.

OK - so not a single consistent poster here???

Gold goes up over time because of inflation, I recognize that. Real estate goes up over time because of inflation and it cash flows during the period. No one is willing to admit that.

The first post (#1), made that admission: "Which means that real estate is a good anti-inflation play that actually generates cash flow - unlike gold - and like gold, you cannot make more real estate out of thin air".

Disregarding the 'cash flow' aspect. What is nice about real estate is that you can leverage real estate to get more real estate. Someone starting off with one tennant may work their way up to dozens or thousands. An ounce of gold will always be an ounce of gold and it is not as easy leverage your way into more gold (you could sell it and buy velocity shares that double the price trends and use those profits to buy more gold).

My beefs with real estate are that it is a job to manage and I already have a job. More so, I am both willingly and unwillingly exposed to too much local real estate market. As such, any real estate plays for me would have to be externally managed (farmland, e.g.) or something that doesn't need management (like a vacant lot) and preferable sufficiently far away.

Okay, we'll see how that plays out.

How much further do you think national housing prices will fall and by when? Please quantify your predictions so that we can come back and see how well you do.

You're forgetting the 3 most important things about real estate: location, location, location. Who gives a damn about "national housing prices"? Which city will be the next Detroit or Las Vegas? Where is the next DC or San Diego? That's what I want to know.

 

[newbitech]

Disregarding the 'cash flow' aspect. What is nice about real estate is that you can leverage real estate to get more real estate.

yes, i am nitpicking...

anyway, the leveraging comes in the form of credit lines. One cannot successfully lever up whilst disregarding cash flow, since the cash flow is required to maintain the credit line. So Rents - Credit Maintenance - Real Estate Maintenance = Cash flow. That is the simple formula.

 

[gerryb1]

How much further do you think national housing prices will fall and by when? Please quantify your predictions so that we can come back and see how well you do.

I think the values are declining by $40B a month, soon to be $85B a month.

So glad they don't need to clear the market! It's much better to instead have empty houses, jobs will be created in the future in the form of salvage and demolition crews. Woohoo!