What’s Going On Here?
It’s hard to connect the dots and make sense of things today. For example, stock prices are making new record highs but company earnings are declining. Real estate is at record highs but there are very few first time buyers. Rents are at record highs but our population growth is only .9%. The average 2 bedroom apartment in San Diego now rents for $2178!
Here’s a question for you – how much does it take to retire and live off the interest? If you had a million dollars and you could get 5% interest, you would have $50,000 a year to live on. Not bad. But what if the interest rate is zero what would you get? Zero. What if you had $10 million? Still zero.
In fact, no matter how much you had saved, you can’t live off the interest. And overseas it’s even worse – there you will have negative interest rates, meaning you are guaranteed to lose money if you put it in the bank.
We just came back from visiting a friend in Corvallis, Oregon. The town is undergoing massive change as the local college is seeing a massive student inflow from… India! These Indian students and their families are driving up home prices, rents, you name it. You will see many burkas as you walk or drive around town. And our friend, a local on fixed income, is seeing rents rise so much that she doesn’t know how she will survive.
My sister is moving to Dallas-Fort Worth. Six months ago she could buy a house for $180K and now they are all over $220K, with multiple cash offers. Anything entry level is sold instantly. She managed to snag one and will rent it out for $1950 a month. Yes, $1950 a month rent for a modest cookie cutter tract house in Texas!
What’s going on? No one expected interest rates to be this low for so long. It’s unprecedented. This is a world-wide problem as all central banks continue to devalue their currencies. People need to get some kind of return on their funds, not zero percent or less. The world is searching for yield and U.S. stocks and real estate seem a good a place as any to find some kind of return on your money.
How long can such a world continue? The logical answer is until it can’t. The practical answer is longer than anyone thinks. Since more and more paper money is sloshing through the system, then real estate, rents, and the stock market will all continue going up. Until they can’t, and what the world looks like after that is anyone’s guess.
So what can we do? Since we can’t live on zero interest in retirement, we really don’t have a choice. We must be invested in dividend paying stocks, real estate and precious metals.
As you might guess, I’m a fan of real estate. No other investment lets you deduct depreciation on an asset that is actually going up in value. But where does the money come from? You can buy a house with your self-directed IRA. Or you can lend yourself the money from your 401K and be your own banker. In my 26+ year career I’ve seen many creative ways to fund a real estate investment.
Many of my clients have purchased real estate in an area they already visit frequently, for example, a favorite vacation spot or where their kids or grandkids live. You can then write off some of the travel as a business expense.
I know prices are really high here in San Diego and it’s hard to put together an investment that makes sense. So how about Texas, or Oregon or maybe Las Vegas? Prices there are still below the 2006 peak. Personally, we just bought a place in Yuma this year because the cash flow numbers are very good and it’s close enough to manage it ourselves.
Am I worried prices will collapse in Bubble 2.0? Of course I am because I know trees don’t grow to the sky. But as long as the Federal Reserve, the European Central Bank, the Bank Of Japan and every other central bank in the world continues to create money out of thin air, it will take more and more of those paper dollars to purchase real assets. Someday that will end and then we’ll just have to figure out what to do at that time. But at this time I see everything going higher, fueled by vast amounts of currency not only from the U.S. but also from other countries flooding our shores.
As you may know, I’m a Certified Residential Specialist (CRS), the highest designation in the real estate industry. That gives me access to a tremendous pool of real estate talent all across the country. So if you’d like to know a great agent anywhere, just give me a call. I can put you in touch with an agent who is also an active investor in that market and knows where to find the best appreciation and cash flow. Just give me a call and I can make that connection for you.