2021 might bring a real estate crash, but analyzing the last crash of 2009 and what the FED is doing, it is more likely we see inflation increasing real estate prices rather than collapsing them.
In August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More
The real estate market is in the following situation:
- undersupply in more than 50% of places all over the words
- be there!
- a differentiation in demand for various real estate properties
- Extremely low interest rates that make it cheap to buy and take a mortgage
- Inflation that will likely push prices higher because the FED is printing so much
The key to investing in real estate are:
- you are investing in one property, not the real estate market
- find a deal where that is a bargain by using the rule of 66! When you look at 66 properties in a market, you are an expert and you know what are the best deals
- create a financial structure that in the worst case scenario you don’t lose anything but get a small return
- in the best case scenario, the sky is the limit
- will there be a crash in 2021? Nobody knows but what I know is that waiting for a real estate crash usually costs more than missing the opportunity to buy when you have it.
In short – it is not about the real estate market but about the real estate you buy and the financial structure you have alongside your investing goals!
Real Estate Crash Ahead or Inflation Hedge
Real Estate Investing
Good day fellow investors. I believe that real estate is often in our financial lifespans, the low hanging investing fruit that one needs to take advantage of where possible. Tere is now the Fed that will do this. So in this environment, I really wanted to make a video that will add a lot of value to you. If you’re thinking about if you have the opportunity to invest in real estate and discuss the key components that are important when it comes to real estate investing. We recently discussed the Fed and how they are going to let inflation loose. Higher inflation means also that real estate is likely to provide inflationary protection.
And on the other hand, you have extremely low mortgage rates. Yes, we are going into a recession, where real estate prices might crash or not. We are going to discuss the key factors that determine real estate prices and long term investing. If you get a lot of value from this video, please click that like button and subscribe.
I start to thinking about this video when I got this message on the inflation video about Sven is it now a good time with fixed mortgage rates of 2-3% to invest in real estate? And the comment below was not invest now let for real estate prices, let them dive and then start investing. Is it smart to wait or when you find the right investment? Is it smart to invest now? This is what I want to explain.
Let’s say that you have 100k you want to invest now, 2020-2021 real estate, on a value investing basis, what is the outlook? If you can find that the worst case scenario investment gives you free percent per year from cash flows. That’s a good real estate investment because if this is the downside, the upside is 15 percent per year even more if you do things properly. And that is what are we going to discuss by discussing interest rates, the rent versus price rule, the rule of 16 or 66 whichever you prefer. I prefer the 66. And by the end of the video you should have a clear understanding of what investing in real estate is.
Real Estate Crash Ahead
So let’s start I put crash in the title because I don’t know when you put crash in the title, everything on YouTube explodes, best videos I have most watched is always crash crash crash. Let me know in the comments whether you would have clicked on this video if the title was five core investing real estate principles or key factors to watch. With crash, I don’t know why, but people are attracted to that. And in this comment, also let prices first crash and then buy. Everybody is dreaming about that crash buying, crash opportunity waiting, but the real important factors are completely on the opposite side.
Supply and Demand
The real key factors when it comes to investing in real estate are supply and demand employment, available financing, liquidity, rent to mortgage ratios, prices and of course sentiment and not whether there will be a crash or not soon. Let’s immediately start with supply and demand. The housing supply shortage, if there is a shortage in supply prices are likely to go up.
But you will see also later when we will discuss real estate and real estate it’s not the same. You’ll see that it’s not the same to invest in just real estate. 29 States in the US have housing under supply, which limits your risks when it comes to investing. The other States It’s a little bit riskier to invest. So it’s not just to invest in real estate, you’re not investing in every property in the US, you are buying one house.
That’s key to understand. Also, when it comes to short term demand and supply, it’s very difficult to do forecasts. I am really specialised in the Dutch real estate market and one of the biggest banks said, six months ago, there will be a decline in 2020. Real estate prices went up 7%. And now they say there will be a decline, small one in 2021, and then 22, and then up again. It’s impossible to predict.
Therefore, again, you have to focus on the things you can predict, or so that whatever happens you do well. Because even now, even with the latest Corona crisis, over the last few months, real estate prices actually went up. So the crisis, everything, real estate prices went up. And we don’t know whether those will go up or down next, other things matter more when it comes to investing.
And over the last years, those that have been waiting here, oh, real estate prices are going to crash. It’s too much debt, this and that. Well, by waiting you simply miss on the good investing opportunities that are there. And yes, this is what everybody is scared about or hopes for a crash so that you can buy cheaper. But if you are waiting for a crash, you always wait for prices to go lower, lower and lower. And then most of those that wait for something like that don’t buy here. They, in fear of missing out, buy here or something and then they lose money. That’s the risk of speculating on what the market will do.
Instead of focusing on the real thing, buying the best property out there, not focusing on what the market Do when it comes to 2009. The problem was the liquidity problem, a lot of that a lot of leveraged real estate that backfired because of speculation. Now, we have the Fed, as we said, printing a lot of money, putting a lot of liquidity wherever they can. We had the buffer to prevent the 2009 situation moratorium on foreclosures, that might last longer might not. So that’s something different. So I don’t really expect the 2009 scenario to last we have the Fed saying they will let inflation lose key components when it comes to market but there is always something more important, which is the right property.
Now when it comes to interest rates, interest rates work as gravity on financial assets, real estate prices, and over the last 40 years, interest rates went from almost 20% those went down To the current zero, and over the last 10 years, the average is close to zero. if interest rates stay low like this, which is free money, especially if you look at real interest rates, you’re practically getting paid to borrow money, then real estate prices might go higher, higher and higher.
This is one and even if interest rates increase, like it has been the case in the 50s 60s and 70s, what do you think happened here did real estate prices go up and or down? Real estate prices went up here, here, here, here, here, here, here. And here. So real estate is a really special asset class, that one should really think about investing once, twice, 345 times in your lifetime, once in a decade, and then you’re set for life. If we look at stock prices, this is the s&p 500. So when you Interest rates were going higher, higher and higher. The s&p 500 didn’t do that good. inflation adjusted, it went from 700 points down to 300. So it fell 50% from 68 to 92. If I remove the inflation adjustment, then the stock market was flat, for all the part with high inflation, real returns would actually negative.
But if we look at real estate prices in the United States and the rest of the world, those went higher and higher, even in the inflationary period, so stocks were flat, real estate prices went up significantly. What’s this free times over the period while stocks were flat? So real estate is an asset that gives you inflation protection, which is very important now that the Fed said they are going to print and do whatever retakes. Here we have an example from Don off the that wrote that bought the house in the 70s. Before inflation, made a lot of money, so sold that house eight years later for four x. And this is an example of inflation protection.
On the other hand, we have miles here that bought his first house in 2008 sold it four years later, for about 30% less. So now he’s scared of real estate and he’s scared because he was speculating, not investing. You’re not investing in real estate to get burned. You have to find an investment that will give you stable cash flows. In the worst case scenario. It’s about the property, not about the market.
Also, financial assets are now a key component of wealth. That translates into spending GDP in the economy. Therefore the Fed governments will not an hour Not letting stocks crash and are not letting real estate prices crash, because that would destroy the financial system that we live in. And therefore they prefer inflation in place of real prices. with inflation allowed, the current prices will become real prices one day, and that’s better than a crash.
So they will do whatever it takes to prevent the crash. If we look at the wealth in the United States, we see that real estate this light blue, depending on what percent percentile of the wealth groups you are, but is one of the most significant along pension entitlements one of the most significant components of wealth, selling the house you have bought 3040 years ago buying something else. Giving to our children is a really key component of spending so they will not allow you Though What? trillions 40 trillion of dollars to fall to 15, lower average wealth levels and lower consumption.
Mortgage Rates Low
Plus the key when it comes to investing in real estate, the 40 years fixed mortgage rate average in the United States, Europe, wherever is at the lowest possible historical levels, you can borrow for 30 years for less than 3% interest rates less than 3%. And I believe that the average inflation rate over the next 20 years will be higher than 3%. This means that the most likely scenario out there is that you can borrow money for free in real rates in real interest rates.
So somebody is giving you free money, and you can buy something of value or real asset. That’s something by the way disclosure last week, we bought the house I’ll make a video on that when I have the time. So I am long real estate but This one was not an investment. This was an investment in us in the quality of our life. But it still will be good. Next video, subscribe. Nevertheless, cheap money really makes you think about finding that low risk, high potential reward investment. Now, this was these are the fundamentals impacting the real estate market.
The Right Property
Everybody’s thinking about real estate, there is the market, there are the average prices that we just discussed, but those are average prices. So the right time to invest in real estate is when you find the right investment property to hold for ever. We’ll go through the rules, enter a valuation example. And you will have your answers whether that or that opportunity is good now or not, not whether the market will crash or that that doesn’t really matter. And it’s impossible to predict.
Rent vs Price Rule
Let me give you an example here on the rent versus price rule. So This is an example in a city that I used to live when in the Netherlands still looking so I found apartments in similar buildings. And we see an apartment is 400,000. The monthly rent for a similar thing is almost 2000 1850 that gives me a four point 62% yield. When you deduct the costs rent minus cost, perhaps you get net one taxes and everything you get net 1300 1400. So the yield is around real yields.
NET yield should be around 3%. And I compare it to the mortgage rate which is lower than 3% which means that it still pays if I want to live in something it still pays to buy rather than to rent and then I’m went to look in the Netherlands for interest rates on a variable rate 1% I have to buy a one time And 300 to borrow 400,000 on a fixed rate, you can click on the card in the video above here to see my discussion on long term rates fixed or variable what you should choose, but on fixed, the monthly payments are much, much higher, but you sleep well and nothing changes in case of inflation.
When adjusted for taxes, you have to see how that works with taxes in your country where you’re from. It’s similar so in the Netherlands, it pays much more to take this rate, the fixed 30 year rather than the variable and here is the example downpayment let’s say I put 100,000 rent minus costs, provisions management fees and everything. It’s 1400 loan is 300,000 fixed mortgage I have to pay 1145.
The monthly profit after all costs vacancies In everything, let’s say it’s 253,000 per year on my 100,000 investment is 3%. That’s the yield, let’s say net yield, perhaps it’s 2%. Depending on the investment, perhaps you can find five, six, in my area, I can find even 1015. But that’s a different story. And that depends on you on what you can find. But let’s put it like this 3% good downpayment, you are very well protected.
The Rule of 66
And here comes the rule of 16. Or even better the rule of 66. This is the map of all real estate that is being sold in that little city of 80,000 people. There are hundreds of real estate opportunities there. And now people ask should we invest in real estate invest is not investing in real estate investing is knowing every property here ever Property going to visit.
Personally you have to go and visit 15 properties and every property that you visit you will know a little bit more about the market a little bit more a little bit more and after 16 properties, you are a specialist on the market after 66 properties, you are a market genius and compare yourself to the competition who is the competition when it comes to buying real estate? couples that are trying to buy a house moving or something just divorced or something like that, oh, we need another bedroom because another key discovering that is the competition mostly those are not investors can’t understand Oh, I just need to refurbish this house and boom, the value goes up. 50%.
When you look at 66 properties, you become a specialist you start to understand the market irrationalities and in local markets like real estate, it’s really easy. To find irrationalities and that’s something that you have to think about when it comes to investing in real estate, not about whether there will be a crash or not. That’s nonsense.
Real Estate Crash And Sentiment
And then there is also sentiment. I remember when we were buying in the Netherlands 2014 15, there was no competition. Why? Because people expected that prices will continue to go down. That’s the only reason everybody had the money, real estate financing everything was there, but people expected prices will go lower. So net not by then when prices started going up, everybody was rushing in the market.
Similarly, now many expect perhaps all prices will go down because of the crisis let’s not buy and then you have less competition when it comes to buying the right properties. And we discussed already the yield of 3%.
But if there is inflation, let’s say that our house that we paid 400,000 is valued 600,000 in 10 years, which is highly possible given the inflation rates, and if you buy a good property, you find a good deal, then you might find this good deal when you buy, then the return on investment 600,000 minus the loan, your value is 300,000, you invested 100,000 that’s twice your money in 10 years 11.6% per year, plus the free percent yield, you are at a possible return of 15% per year from investing in real estate.
Of course, specific situations matter from taxes from available financing from this from this but my message is that you have to find the one right property. See how that property fits your situation, your taxes, your cost, your possibilities, and then see whether that investment property can lead you safely into Worst case scenario to reach your financial goals over the long term. That’s it. Everything else around that is mumbo jumbo, whether it comes to investments in stocks in real estate.
Those are the three things you have to focus on. And if you manage to focus on those three things, become a specialist, you need three to six months to be become a real estate specialist in your area, given the competition. And that’s the key when it comes to investing in real estate where the real estate will crash, whether the Fed will print money, who knows it’s irrelevant.
Real Estate Crash? Conclusion
And if we come to my conclusion, find value investments that can give you this worst case scenario, no risk. everything can happen. I get my free percent. Okay, I’m happy with that with this investment, part of the diversification in my portfolio. Best case scenario, I get 300,000 after 10 years, 400,000 depends on inflation, 600,000 and I can retire on free money that I borrowed for 2.49%.
This is what we do on this channel, we try to find the best low risk, high potential return investments out there with a long term outlook based on what’s going on in the market and what are the likely outcomes when it comes to investing economics money, etc. If you like that mindset, please subscribe. Thank you for watching. I’m looking forward to your comments and I’ll see you in the next video.