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What To Do Now, 2009

I have been burdened over the Holidays. Many concerned Investors have called seeking real estate advise for 2009. I find myself stuttering and sputtering for meaningful reply. What is sound advise today to properly inform and guide Real Estate Investors into 2009?  I don’t have a magic potion but if I did, I would drink it and crown myself King of all foretelling. Unfortunately no. At the end of the day I rely on painful experience and common sense.

Flippers…Buy/Sell

I believe the financial world was redefined in 2008. New rules, trends, and assumptions are presently formulating in the marketplace and will continue to throughout 2009. Uncertainty is our common bond. In times of uncertainty it is much better to avoid buying real estate if the end play is flipping for profit. Why? Because times are uncertain, which means the market has not yet provided reliable sales data to justify value analysis. Considering sales data prior to September 2008 is a mistake simply because Buyers then bought property before the crash and did not have to deal with the economic stress and fallout we all feel now. Today we barely have 3 months of market data since Sept 08 (not nearly enough to establish predictable trends). It is wise to back away and let the market establish where it is going, rather than you tell it where you want/need it to go. The market is bigger than all of us, therefore we must respect it. Patience is a virtue.

Landlord…..Buy and Hold

Cash flow is everything with rental property. If it can pay you a respectful return for your investment it may be worth buying, then again it may not. A projected 6%-7% cash flow return on rental property is a loser, always has been always will be. Why? Because rental real estate is messy. 6%-7% projected returns are usually based on thin yearly maintenance projections, few make ready moments, and fewer midnight move outs. “It looked so good in the handsome professional prospectus package when I bought it”. I’ve owned rentals for 30 years. I hate rentals. If I budget 10% for maintenance and vacancy, it will invariably be 15-20% that year. Tenants move and leave the unit a disaster and conveniently forget to pay last months rent. (Murphy is alive and well indeed.) It’s hard to sell rentals. Showing, inspecting, negotiations all involve to some degree, the tenants and their willingness to accommodate. Furthermore, most Investors die owning property they’re sick of because you can’t take the net cash from the sale and invest the remainder into anything that will reasonably provide the same level of return . If I could, I would. No toilets, tenants, falling trees, domestic disturbances, drug raids…..well you get the picture.

On the other side of this discussion, (or better yet, rag session) believe it or not, I have consistently realized a healthy 25%+ annualized cash on cash return on several rentals owned for the last 15 years. Wow that’s pretty good. How? Because I am talented, good looking and special??……well, no……Because I happened to buy these rentals at or near the bottom of the market in the early 90’s.  Prices today can’t get close to providing this level of return, so Investors must account for appreciation to justify the purchase and achieve a respectful return. Now, let’s be real honest…..It’s not likely Austin real estate will appreciate in 2009. A better argument can be made for depreciation. So why buy and hold rental property if price declines are expected for the year 2009?  What do you achieve? It’s just better to buy when the market outlook is conducive to prices increases. Sorry, there just isn’t much argument to load up on rentals in Austin Texas, in 2009.

Statistical Analysis

Finally, I am preparing a statistical analysis of all areas in the Austin City limits which I believe will be of benefit to you.  I’m hoping to have my study available later this month. I will attempt to explain with only the facts why, in my opinion, it is risky to casually buy real estate at this time in Austin Texas. I want to plainly say that I am bearish on Austin real estate for at least the first 6 months of 2009. Conversely, there will come a time I promise, when real estate will perk up, inventories will decline, prices will begin moving up. I do not have an opinion yet, as to when that will be, but I want you to be ready, willing, educated and able to take full advantage when that time arrives. Strive to be in a position to prosper when the market turns.

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