Investing outside of the stock market
A recent article in the New York Times explained that some large companies are moving into the real estate market, buying hundreds of homes during the current downturn.
But big companies are not the only ones that can do this. Our daughter has been doing it for over a year in the Eugene, Ore. area. And there is no reason that individuals right here in Santa Monica cannot do the same thing.
Although local brokers don’t like to talk about it, the prices of homes in many areas around West Los Angeles are down about 30 percent from the peak.
Yet rental prices are not down nearly that much. During the bubble, it did not seem like a good idea to buy and rent out a single-family house because the rent almost never covered the costs of ownership, so there was always a negative cash flow.
But with prices down and rents stable or even up a bit, that scenario has changed. And in the Los Angeles area, outside of Santa Monica (where it is not legally permitted) some folks are able to cash in on short-term rentals at very high prices.
Our daughter Raquel, an immigration lawyer, seems to have figured out the best of all possible scenarios. She has a verbal agreement with a local bank that when they have foreclosed on a property they will notify her. She pays off the amount that was due to the bank on the loan, (or negotiates it), in cash. In the Eugene area this often requires only about $50,000 in cash for many of the homes that go into foreclosure.
A few years ago Raquel set up a construction company and got it licensed as a contractor. The president and equity partner is a young man who had worked for her for some time fixing up her home and some apartments she owned. He fixes up the foreclosed property and they then rent it, usually to a family that Raquel has met through her immigration law firm.
The deal is that the renters get a bargain rent, effectively the cost of owning the property plus the value of the investment dollars at 8 percent, in exchange for which they continue to improve the property under the supervision of the contractor.
One hopes that the value of homes in the Eugene area will, someday, begin a new upward climb. Meanwhile, the rental income is helpful.
The expectation is that the combination of the rental income on the investment plus the appreciation on the property will exceed the return that would be received if the same money were invested in the stock market. But that certainly is not a given.
Note that a modest increase in value is projected for Portland, Ore., perhaps the same market as Eugene. But Los Angeles is not looking as good.
Averages are not the way to predict investment success, so each potential investment requires individual consideration. But one thing I feel pretty clear about: if you can pick up a good deal on a house and do the work yourself, or with a partner that accepts part of the equity in lieu of cash for services, the chance of very good profit success over the next five years is very high.
For information about Merv Hecht and more details on the strategies and stocks he writes about in this column, visit his website at DoubleYourYield.com.
