Over the last few years, real estate has been the unpopular kid at the investment cafeteria. Untold billions of dollars of wealth have been erased in the real estate and sub prime crash over the last 5 years.
The great Nathaniel Rothschild said the following about such times:
The best time to buy is when there's blood in the streets.
That means ignoring the hype during bull markets and ignoring the paranoia and popular negative sentiment during bear markets.
Below are the 3 most common myths about the real estate market today, mostly dealing with the people who believe that residential real estate is somehow this inherently broken business model.
Below we're going to discuss three basic myths that are so obviously false, the fact that they're popular views is a great example of why people who just regurgitate popular sentiment get eaten alive.
1. "The entire market is good or bad."
Housing isn't a commodity with a set spot "price" for a certain amount of house. There are great deals, there are hideous deals, and there are mediocre deals. Ignore the average and below average and focus exclusively on the great deals -- doing that is a huge step in the right direction.
This means that every time you see an article or comment by some reader talking negatively about the entire market -- or heck, even positively, like the entire market is a great investment -- you can rest assured they're oversimplifying the market. This is especially true for people looking to invest in single-family houses.
Go get any real estate booklet that has listings, and you'll probably see plenty of houses that are hideous investments -- not just for speculation purposes, but for rental purposes or even living purposes as well. But at the same time, there are almost always going to be some houses that are a better deal than the rest.
This is true on a national vs. local level as well. I live in a state where the local houses often don't sell for much more than the rental income you can get from the houses. $120k can buy a nice single-family home, and $~1k can rent the home. That's a nice house -- not a junked house. That's a relatively boring, stable income source, assuming one buys it with cash and outsources the management to a property management company. With low interest rates, it's still a little riskier, but doable.
At the same time, I'm sure there are plenty of big cities where the average house is absurdly expensive. I wouldn't doubt that in the slightest. That's the entire idea -- you have to hunt and peck. Ignore the bad deals, and look for the good deals.
A friend of mine that I regularly have lunch with has been investing in good deals for years. He owns roughly 20 houses now and even after the great crash, he's doing fine -- all together, he's literally a millionaire while investing in a method that plenty of angry "eternal renters" claim is impossible. The joke is on them.
2. "The bills outweigh the income."
I recently wrote an article on whether housing was a good investment. My conclusion was simple: yes, for the long haul, if you get the right deal.
One person left a series of comments declaring that the bills would outweigh the income, some sort of disaster could hit, the interest over the long haul would be too much, it would take decades to finally recover the expenses.
Most of this is simply untrue, especially for someone who isn't trying to buy the biggest, baddest, most expensive house on the market.
Again, a lot of this depends on the market -- and a lot of it depends on the person's goals, as we'll discuss in a minute.
I'm currently in the middle of looking for a house to purchase, and I've been surprised at the huge gaps for different houses -- there's often a 100% difference in prices for relatively similar homes in the same neighborhood. If that's not an inefficient market, then I don't know what is.
One of the homes is a house I should be able to purchase and pay off within 5 years. Yes, that requires a substantially larger payment that I could be putting toward a retirement fund -- but that's just it. Once the house is paid off, the yearly costs of maintaining the house is far, far cheaper than renting -- I'll be paying heavily up front, of course, but then I'll have literally decades of lower necessary income.
This means that I'm essentially changing my bills so that a much smaller income isn't nearly as destructive to my lifestyle.
And that's the problem with renting -- it often requires that someone have an extra $1-2k per month in income just to literally not be homeless. When the house is paid off, that often makes an income half the "normal" size perfectly livable, meaning that during a recession or a tough labor market, losing one's job or being demoted isn't even close as damaging as before.
An example, again, is that a debt-free homeowner in my neighborhood could work a full-time minimum wage job and do just fine, and even save money every month.
This is an absolutely critical point that plenty of people don't understand even slightly -- usually causing complete havoc during economic turmoil:
When you cut your necessary monthly bills, the impact to your financial situation is greater than just the overall money you save.
Let's say that your bills are $3k per month. Finally, you decide to spend the next 7 years completely focusing on getting rid of bills. Seven long years later, your home is paid for. If you're good financially, you might even be completely debt free. Suddenly, your monthly expenses drop like a rock -- now you're monthly bills are roughly $1.5k per month. You decide to put $500 of that in an emergency fund, and put the rest in your regular portfolio.
Will this make money over time? It depends. If you're using a lazy man's portfolio and are going to live quite some time, then sure, you're probably going to make a lot of money. If you're a trader, there's no telling if you will or won't.
But the problem most people make is that they simply are looking on the long-term net worth impact -- on average. The problem is that the future rarely works out as planned, and the beauty of owning one's own home -- for many people -- is that sudden unemployment is literally twice as easy to fix. You can take a job that pays half as much -- you can survive on half as much income. You're far more recession proof than before.
And yes, for all the naysayers who believe that this only works in some housing markets or locations, you're probably absolutely right. If this doesn't work in your market, move along -- but for plenty of people, it absolutely does.
This is important to understand: there's no "one size fits all", and not everyone should do this. That's true for almost every major financial choice -- not everyone should buy a home, not everyone should go to college, not everyone should start a business, etc -- one size fits all might be great for caps, but not for money.
3. "This time it's different!"
After my long-winded post above, I'll keep this short: whenever people begin saying that we're in for a multi-generational bear market or anything close, watch out -- they're the people Buffett was talking about when he said "be greedy when others are fearful." It's amazing -- in 1979, everyone was saying gold was going to stay in the sky forever, in 2008, everyone said the age of stocks was over, in 2012, many are saying real estate won't be a good investment during our lifetime.
Housing prices might just drop again soon -- but that just makes more of a buying opportunity for those of us who are looking to build up financial security, generate new income sources, and profit from the emotionalism of others.
Disclosure: I'm planning on making an offer several residential homes within the week.