2010 – The Rise of the Sophisticated Real Estate Investor
September 28, 2009 by Chris Record
Filed under Featured, Real Estate Investing, Recent Articles
Recently I spent some time researching statistics related to mortgage origination, foreclosures, and our economic climate as it regards to investing in real estate. Based on all of my research I am convinced that we are going to see a massive increase in opportunity in 2010 and I am excited to position myself in front of these trends to capitalize on it!
Foreclosures have been booming around the country, and with the limited ability to get funding we have seen a surge in creative real estate investing. We have also seen the average investor lay low because of the difficulty of today’s real estate market which has presented even more deals and opportunities for sophisticated investors who know how to negotiate and move properties.
Here is a summary of reasons why I feel that 2010 will be the year that sophisticated real estate investors create a tremendous amount of wealth…
SUPPLY AND DEMAND
As the population goes up, the demand always goes up as well. Many amateur investors are focused on where the market is today, rather than looking at the past to recognize trends for the future. Supply and Demand always rules but only savvy investors allow logic to lead over emotion. Remember these three words: “Numbers Never Lie”.
Currently the population in the United States is soaring and according to an article in USA Today, we are projected to reach over 400,000,000 people by 2042. According to the US Census Bureau we are gaining a new person every 11 seconds (one birth every 7 seconds, one death every 13 seconds, and one international migrant every 31 seconds). We are also seeing record numbers of births as more babies were born in the United States in 2007 than any year in the nation’s history, topping the peak during the baby boom 50 years earlier!
Soaring Population in the United States
In order to become a more sophisticated investor, it is important to understand population trends related to your local market that you are investing in as well. Use this tool to compare population growth of the states you are investing in to get an idea of whether your market is growing or not. Here is an example of the DC Metro population growth comparing Virginia, DC & Maryland.
Population Growth in Washington DC, Maryland & Virginia from 1979 to 2000
So as you can see from this graph, DC has maintained it’s population while Maryland and Virginia have shown tremendous growth. Also take into consideration that this date is only up to the year 2000.
Understanding supply and demand truly helps separate the sophisticated investor from the average investor. When we take a look at the rolling 12 month single-family permit activity across the nation, it become pretty evident that we are ready for a rebound in permit activity in 2010 and many educated investors believe that we will start to see this turnaround in 2010 for a variety of reasons.
Rolling 12-month single-family permit activity from 1960-2009
REAL ESTATE IS ON SALE
When we look at the cost of housing compared to family incomes we can see that today’s down real estate market is completely different from the real estate market of the 1980’s when the ratios reached as high as 60%! From this chart we can easily identify that real estate is on sale and is very affordable for the average family. We are currently seeing a 25% affordability ratio on homes nationwide which allows investors to move properties much faster as their are more able buyers out there.
National Housing Cost/Income Ratio 1971-2009
MONEY IS ON SALE
Next we take a look at the 30-year FRM rates vs. Prime Rates from 1971-2009. I remember back in 2004 when every loan officer and mortgage broker was urging everyone to refinance and lock in low rates before they catapulted back up to over 10%. Of course we all believed the could not possibly stay that low so record numbers of refinances started happening and people were happy they locked in such a low interest rate. However, here we are several years later and interest rates are still unbelievably low! In a traditional real estate bubble you would expect rates to jump up as high as 15-20% but we are in a fortunate situation where rates have stayed low and money is still on sale!
30 Year Fixed Rate Mortgage Rates 1971-2009
When you take into consideration that money is on sale and real estate is on sale it starts to really become clear why NOW is such an ideal time to become an investor. I.D.E.A.L. is actually a great acronym for real estate investors because real estate can provide:
- Income
- Deductions
- Equity
- Appreciation
- Leverage
FORECLOSURE BOOM
According to My Budget 360 the foreclosure filings nationwide have risen from 100 million to 300 million in the past few years alone!
Foreclosure Filings Nationwide
There are countless reasons as to why our country got itself in this mess, and it is incredibly sad for many people that are facing foreclosure, faced with losing their homes, their dignity, their equity and their credit. On the other hand if you are someone that is looking to purchase a home, the opportunity has never been better!
in 2001 only 1% of all mortgage loans originated were interest-only or neg-am loans. By 2006 that number had reached nearly 30%! The first graph below shows the Option ARM (adjustable rate mortgages) reset schedule, totaling hundreds of billions of dollars in the next two years. The next graph is the interest only and negative amortization share of total mortgage purchase origination’s for 2000-2006. Keep in mind that “73 percent of homeowners with ARM’s don’t even know how much their monthly payment will increase the next time the rate goes up.”
Option Arm Reset Schedule 2008-2012
Interest Only and Negative Amortization Share of Originations from 2000-2006
My reason for sharing these graphs with you is to help you understand that we are getting ready to see another wave of foreclosures come in as a result of the ARM’s resetting and people not being able to afford their new payments. When I really started diving deep into these statistics it became clear to me that 2010 would be a great year of investing, but that it would require becoming a sophisticated investor to take advantage of it.
- I believe that we will start to see a turnaround in the single family permit activity in 2010. Most of my professional contacts in the construction industry share this opinion with me as well.
- I also believe that we will continue to see a steady flow of foreclosures that won’t stop anytime soon. This provides a great opportunity to pick up properties at deep discounts either directly from homeowners in the pre-foreclosure phase, or from auctions and banks after they have been foreclosed.
- Due to the difficulty in getting traditional financing, the majority of these properties are going to be picked up by sophisticated real estate investors using creative acquisition strategies.
- Since real estate and money are both on sale, now is the time to take advantage of these trends and opportunities.
So in summary, I would encourage any would-be real estate investor to start studying pre-foreclosure investing as well as auctions and REO’s. There are opportunities in today’s market to pick up properties for 50% of the appraised value when you know what you’re doing and there is an influx in hard money lenders and private investors out there that are looking for better returns than they have been getting in the stock market lately.
The key to becoming a sophisticated investor to take advantage of this perfect storm in 2010 is to first get educated. Learn about Subject-To as a technique to pick up properties with no money and no credit. Learn about Wholesaling as a way to move these properties quickly to other investors who will fix them up and retail them. Learn about Hard Money Lending and how to raise private capital by helping people self-direct their retirement plans. And most importantly get connected with other local sophisticated investors in your area that you can do deals with and partner with to help ease your learning curve.
Please comment below to let me know your thoughts and opinions of today’s real estate market and where you feel the deals and opportunities currently are. If you are having success with a specific real estate strategy, please share it in the comments below so that we can all network and find out what’s working! And if you would like any assistance getting started as a real estate investor, feel free to contact me and let’s take advantage of this Perfect Storm in 2010!
Chris Record, CEO
Record Investments, Inc.
925-482-5478
cashflowchampion (at) gmail.com
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