Tuesday, October 20, 2009

My Philosophy on Real Estate

Here in central Indiana, it is unlikely that we will ever see the type of crazy appreciation of real estate that was seen on the coasts. There are several reasons for this:
  1. It is difficult to attract population growth. We don't have the beach or mountains or any other topographical feature that would be considered desirable.
  2. As a result of number 1, it is easy to build new houses. Just buy up a farm field and start building. There are no physical restrictions that make the land especially scarce. In fact, builders over-built so there are currently a glut of homes.
  3. Lack of major industry growth. There just aren't a ton of jobs being created. When the United Airlines hub pulled out in the early 2000's, lots of homes went into foreclosure adding to the overbuilding glut. We just don't need any more houses for awhile.

Because I can't count on appreciation, I have to look to cash flow for real estate profits. Even that can be difficult since the ready availablility of housing has kept rents fairly stable. When insurance and property taxes increase, that puts pressure on cash flow.

It has been my hope all along that the majority of my real estate expenses can be paid by tenants. Sure, I will have to come up with the occasional repair bill, but my goal is that at the end of the 30 year fixed mortgage (about the time of retirement), I will have a steady cash flow that can be used to supplement my retirement income.

It may take a year or two to get back all the cash I put in, but after that the investment will more than pay for itself. It can be difficult to take such a long term approach to investing in this day of immediate gratification. But, I would urge you to look to the future in 10, 20, and 30 years when you invest.

Consider that when investing in real assets. Will this company be around in 30 years when looking at the stocks and bonds of that company? It may be hard to say. Will this piece of land still be here in 30 years? Likely. Will this gold coin still be here in 30 years? Likely. And not only that, the land and gold will have some value. So if I can simply get the majority of the expenses paid over the 30 years of being a landlord, I will end up with a property which throws off cash or could be sold. I like the thought of that.

Until next time--Keep it REAL!

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