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Friday, March 2, 2012

Warren Buffett’s Investment Advice Is To Buy Houses


Warren Buffet was on CNBC a few days ago and he said that he would buy "a couple hundred thousand" single family homes if it were practical to do so.

Let's break down what it means to own a property right now in San Diego. First of all we need to look at the historic prices of houses here. Please see the Case-Shiller chart below of the HPI (House Pricing Index) from 2000 until 2010;



Unfortunately, I could not find a chart that was updated up to 2012 from 2000 but I did find this chart that just came out with Case-Shiller data that shows where the market has gone from 2005 and on.

As you can see, the prices have dipped since the middle of 2010. Right now, house prices are roughly the level that they were at in the middle of 2002. Many people think that if they buy a house right now, it's as if they bought it in 2002, but most people forget that interest rates in mid 2002 were at about 7% for a 30 year fixed. Our current interest rates are below 4% for a 30 year fixed or 40% less than 2002 rates. So if you buy a house to live in, it will cost you a little more than half the price it did then. What that translates to is almost half the mortgage payment. For someone buying a property to live in, this is great news.

If you are buying a property as an investment, right now is a great time as well. For the past decade we have seen a mere 1% increase per year in rent since 2002 (according to commerce statistics, adjusted for inflation). I believe that the rental market has been depressed because it was so easy to buy a property during the "boom" time of real estate, that is when vacancy rates went up in San Diego. When the "bust" of real estate came, we saw young adults not being able to afford to live on their own anymore and this kept the vacancy rates up. According to Peggy Alford, president of Rents.com, more than 1.2 million of them moved back with their parents from 2005 until 2010 and many others doubled up together. In order to curb the depressed demand for rentals, landlords had to provide rent concessions such as a period of free rent in order to win leases. Now that the economy has started its recovery, many of these young adults are starting to look for a place to live again as renters rather than owners. They have seen so many of their friends and family suffer from foreclosures and short sales. The memory of the heartache is fresh in their minds.

As good as this all sounds for the rental market, the predicament in which we find ourselves is that we are in the bottleneck in financing. If you are one of the select few that qualify for financing, you are able to take advantage of this situation. Here are a couple of examples of the deals that I have recently funded;

Studio Condo in West Point Loma
$71,000 - Purchase Price
$255 - Monthly HOA
$74 - Monthly Taxes and Insurance
$1,050 - Rent
---------------------------------------------
$721 - Monthly Positive Cash Flow
12.2% Return on Invested Funds

3 Unit Property in Lakeside
$156,000 - Purchase Price
$30,000 - Rehab Costs
$162 - Monthly Taxes & Insurance
$400 - Monthly Utilities
$2,875 - Monthly Rent
---------------------------------------------
$2,313 - Monthly Cash Flow
14.5% Return on Invested Funds

These are the two best examples of great cash flow properties. Although these were purchased with cash, if one were to get financing on these properties, the return would increase.

http://sequ.com