October 25, 2010

Residential Real Estate, Commercial Real Estate....

The American economy is very resilient and over the past decade we've made it through some tough ups and downs where some people made money and some people got burned.  As the market goes up - there are a lot of "con artists" stating that the economy is sound and can reach even new highs (remember the dot-com bubble, and the credit-era of 2007?).  When the market is super hot and everything is going up - investors can quickly become infected with greed and FOMO disease...(Fear Of Missing Out).  Only to be dissapointed when the market comes crashing down and they're stuck with something they paid too much for.

On the contrary, when the market is in a deep recession or depression - similar to the one we just came out of or are currently in - these same "con artists" pop up again.  This time around they tell you that interest rates are so low and property is cheap...and you need to buy now before everything goes up.  Or they may tell you that you should get out of the stock market because everything is crashing down and you need to put your money in bonds.  Maybe they say you need to trade in your gold metals in return for declining-in-value paper dollars.  Should you believe them?  Who do you trust?

You must learn to trust yourself...that gut feeling...or second thought that we have and so often choose not to listen to.  Also we must do our own research and use some common sense.  Let me elaborate on residential real estate....

During the 2007 credit-era, banks were allowed to lend out money on an 10:1 ratio... that means if a bank has $1 million dollars of actual cash in its vaults - they are allowed to "create" or lend up to $10 million dollars for mortgages, car notes, and various other small loans to give to consumers...they're able to do this because the money is "backed" by the full faith of the bank not going broke or "failing"...(some banks are deemed "too big to fail"...remember?) Even though they failed us anyway...nevertheless...because the banks had so much (paper) money to lend, they were willing to give it away to whomever had a pulse and simply asked for it (i.e., home builders).

Builders got loans to start residential construction...even if they didn't have enough home buyers to move into the properties.  So what happens to the newly built homes?  Investors rush in to flip the properties....to other investors foolish enough to buy it from them....and the cycle goes on until the price of the house doubles, triples, or even quadruples...then the price comes crashing down.  Today, we have several of these types of properties on the market for dirt cheap, as well as foreclosures...but still not enough buyers.  I think it's funny how there are some investors looking for new home construction as a sign that the economy is back...lol. 

New home construction will not solely be a sign that the economy is going strong again...but for those investors looking to "get in while the gettin's good", they should also be prepared to hold these assets for about 5-7 years before even considering to sell again.  If you're just looking for a good rental - then look hard....don't just buy the first thing because it's cheap.

A good sign that the economy is returning to full swing might be to take a look at commercial real estate...you know, strip malls, hotels, business offices, shopping centers, etc.  Might not be a bad place to invest your hard earned money if you haven't already.  Why?  Because the US is still a consumption based economy - so business travel will soon pick up as a sign that corporations are earning again (I'm currently writing this article while on business travel).  People will want to start enjoying those very much needed vacations again (the airline industry is a good investment as well).  Don't believe me?  Take a Saturday and drive up to your favorite outlet mall this wknd and look at how full the parking lot is. 

Trust your own instincts...do your own research and learn about Investing 101...if you need help, find a tutor or someone offering an investment class.
The consumer is slowly coming back around...and the bulls are starting to see red (or in this case, green).


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