Posted by Frugal on June 3rd, 2012
Putting the money at where my mouth is, I bought my second real estate property (besides my primary residence). I actually bought several months ago, and just in a couple of months, the real estate has gone up by about 5% to 12%. Based on the speed of rally, it is obvious to me that the secular bear market in housing is not over. Hope springs eternal. As long as the participants are still full of hopes, the bear market won’t be over.
Based on the current conservative valuation of my second property, I’m already at least $40K in positive territory. I always marked everything including real estate to market prices, but in this case, I will choose to be conservative due to my long-term bearish view on housing market. My first real estate property which gained me $300K at the housing peak has been marked down by about 45% to the current market price, including a 5% off that I would need to pay real estate agents if I ever decide to sell it. I obviously should have sold it near the peak, but let’s not go there because it involved some unpleasant family feuds. Sometimes, you not only need to out-smart the market, but also need to convince your family as well.
I have been extremely busy lately, due to publishing of my Kindle book, and also becoming a landlord for the first time. Running through credit checks on various applicants, I shake my head on how financially fragile these potential tenants are. I wish more people would take my advice and live under their means.
My property is rented out already, and I’m only about cash flow even on a 30-year mortgage, due to the fact that I have cashed out before and refinanced several times. My tenants will be paying down the principal for me, and so the net profit would grow as the principal is paid down.
If you’re still sitting on the sideline, at least you should wait till the slower winter season. Hopefully, prices will pull back somewhat at that time. Have patience. Housing market won’t come back before year 2026 (or 2006+20 years for a bubble to deflate). Every time I say this, people won’t believe in me, and would shout at me, but we will see. If you buy any houses, make sure you are positive monthly in respect to equivalent rental.
Of course, the lowest bottom of the housing market in the nominal price will be different from the bottom priced in the inflation-adjusted price, and will be different as well as in the bottom in terms of monthly payment. Ideally, when you buy your home at mortgage rate of 8% instead of 4% now, your housing price should be low, while your monthly payment will be high (assuming that you can still get a mortgage).
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