Wednesday, March 11, 2009

Crisis or Opportunities?

CRISIS or OPPORTUNITIES? There are always two sides to a coin. One side is credit crunch, soaring foreclosure rate and 25-year high unemployment rate (8.1% as of 3/6/2009). The other side is OUTRAGEOUS OPPORTUNITIES to find bargain houses anywhere in the US. All of sudden, tremendous potential buying opportunities are screaming for your attention:

• Residential rental with cash-on-cash return better than ever
• Houses that cost less than the construction cost
• 70% off from the peak

However, given the likelihood of continued market volatility and uncertainty regarding the depth of the recession, you should move forward with caution and selectivity in assessing every investment opportunities. Consider as well longer term time horizon and sufficient capital resources.

Many people have asked me, is it a good time to invest in real estate yet? Are we reaching the bottom already? Nobody knows the future and neither do I. Even Warren Buffett has been criticized of buying too early and that he needs a new crystal ball. But here is my personal opinion, if you can find residential rental with annual cash-on-cash return of 6%-9%, and you plan to hold it for five to ten years, it will not hurt you even if the house values dip a bit further. You still receive 6%-9% of your investment every year. Am I right?

I know exactly what you are thinking. You argue with me, “but if I wait a little more, and I buy at the bottom, my cash-on-cash return will be even better”. My friend, think about this, if you know where the bottom is, that means the bottom is over and we are in the recovery mode. When the sellers are aware that house prices are recovering, do you think they will give you bargain? NO! Time is in their favor. They would prefer to hold and wait because they know they will get higher sales price the more they wait. And when do you think that buyers have more negotiation power (please look at the graph below): when the price is going down (point A), or, when the price is going up (point B)? You definitely have greater negotiation power at point A. It is possibly you even pay close enough to the bottom.

I have to admit, this investment is not for everyone, especially if you can’t afford to wait. Financing is scarce now even for somebody with perfect credit. If you have extra cash, you can purchase residential rental below $200K in good neighborhood, and expect to get 6%-9% cash-on-cash return. We also learn from history that recession may take a long time to recover. In Southern California for example, the house value started to go down around 1990, dropped up to 26% of value, and it took nine years to go back to 1990 value.

The other side of the coin, people are seeing outrageous opportunities. According to National Association of Realtors, buyers stepped in to snap up properties at steep discounts in December. San Francisco Chronicle reported ultra-rich Chinese from China are going to seize the opportunity to take advantage of some great deals in New York, California, Boston and Las Vegas.

So, crisis or opportunities? The ball is in your court.

Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved

1 comment:

  1. From a Simpson's episode:
    Lisa Simpson: “Look on the bright side, Dad. Did you know that the Chinese use the same word for ‘crisis’ as they do for ‘opportunity?’”

    Homer Simpson: “Yes. ‘Crisitunity!’”