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Saturday, September 04, 2004

Is there a real estate bubble?

MisterOpus had a comment about there being a bubble in the real estate market. I'm hearing that more and more these days in the mainstream media. I think I tend to agree, but I have two thoughts on that.

First, I'm looking to get into the flipping game. For that, you buy a house, fix it up, and sell it again. The typical holding time is 2-4 months. Since it's such a short holding time, it's pretty unlikely the price will collapse enough to make a difference during that time, especially when you consider the key to flipping is to buy well below current market value.

Second, if you are buying to rent for a couple years or longer, it's even more important to remember that you must buy below current fair market value. As Robert Kiyosaki says, you make your money when you buy, not when you sell. So if you buy at 25% - 30% below fair market value, you've already got a decent cushion built in. And on top of that, you have a tenant who is paying down your mortgage.

The other comment I hear a lot is that interest rates are going up. True, that will make mortgage payments higher and thus, reduce cashflow for landlords. However, I like to look at the other side of this. It also means: 1) fewer people are going to be able to afford to buy a house. This means more potential tenants. 2) A good chunk of those people who refinanced to an adjustable rate mortgage in the last couple of years are going to end up in foreclosure because they can't afford the higher payments. Thus, more houses can be had at auction. More opportunities!

So, am I worried about a bubble? A little, in an abstract way. But the bottom line is you need to learn how to invest in all market conditions to be really successful, so a bubble is just another challenge.

California though, is a land unto its own :-) I don't own any property there, but I have invested in two companies that flip houses in the San Francisco area. They continue to do well...

P.S. Before I forget, I also wanted to mention I took the electricity and gas services out of my name on the property I just sold. I also told my insurance agent to cancel the insurance. This was just paid a month or two ago for the year, so I should get about a $300 refund from that.

7 comments:

ritzcdn said...

Hi Shaun,

I just wanted to let you know that I am very impressed that you decided to post your experiences to help others. So often we are deluged with people who are "takers" and it's nice to know that there are some "givers" out there too.

Shaun said...

Thanks for the kind words! I hope many people find this blog helpful. First time real estate investors tend to be scared on their first deal - I know when I was buying my first property, I was so nervous, I started grinding my teeth at night! With any luck, I can help ease other's fears.

misteropus said...

You make a good point: there is always opportunity.

gilbert said...

Hi shaun,
I am avid reader of your blog. Thank you very much for sharing your real estate experience. I am just starting to learn the REI.
I have a question. When you say you buy 25 to 30% below fair market vale, does it mean that the condition of the is still livable or ready for occupancy? Or does it still needs some fixing?
Again, Thank you very much.

Shaun said...

Gilbert - The condition of the property varies. If the house is livable, try to get it for 25% - 30% of fair market value. If the property needs repairs, you try to buy it for 25% - 30% of the fair market value of the property after the repairs have been made, minus the costs of the repairs.

In other words, if a property needs $5,000 of repairs and, after those repairs have been made, it would be worth $100,000, you try to buy it for $70,000 - which is 75% of $100,000 minus the $5,000 repair costs.

Dave P. said...

Great blog! What I wanted to know is what is the best way to know you are getting a good deal. For example you mentioned purchasing a 25-30% below market value. How do you find out the market value in the first place? Any suggestions?

Shaun said...

market value is found by checking comps in the area. See what other houses of similar layout, square footage, etc. are selling for in the same area. Do a google search for "real estate comps" and you'll get a bunch of sites that will do it. Or develop a relationship with a Realtor. Learn your market and you'll be able to get good at estimating values yourself.

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