Why Some Real Estate Still Pays

Across the country retirement dreams are falling with the speed of 401K balances. People are discovering that the easy life they had planned for their “golden days” no longer exists.

The issue, of course, is that it takes money to retire. For most people, “money” means funds from IRAs and 401Ks and Social Security — in other words from private pensions and from a government system which many people regard as nothing short of socialism.

Private Pensions

But in the real world performance counts and while the Social Security system is with us the private pension system is in tatters. Apologists tell us that the pension system is actually fine but that the public simply made lousy investment choices. That, of course, is an outright lie because savers depended upon and paid big fees for financial advice from stock brokers, mutual fund managers and financial planners, advice which in too many cases turned out to be hideously wrong.

However, there has been and there is another way to fund retirements. It’s not glorious and Wall Street doesn’t get a dime, therefore it’s a strategy that’s frowned up.

Long-Term Real Estate Investing

That strategy? Investment real estate.

It’s absolutely true that the value of real estate has fallen in most markets, and those losses also include investment real estate. However, the long-term investor is not particularly interested in values, he or she is more interested in cashflow.

In today’s marketplace we have:

• A huge number of foreclosures — which means many people who have lost their homes need housing.
• A stiff decline in new home construction — which means there are fewer units being added to the supply of inventory.
• A growing population, people who typically prefer to live indoors.

The result is that for long-term real estate investors — people who don’t flip — the current downturn in many markets means more rental demand.

Marketplace Results

For instance:

“About 900 apartments were added to El Paso’s apartment rental market in the past three years, but city and Fort Bliss officials say the construction pace needs to pick up substantially to support the more than 20,000 new Army soldiers and more than 30,000 family members coming into El Paso in the next several years.” El Paso needs 8,000 multifamily units for influx, El Paso Times, April 18, 2009.

“A national survey of rental housing costs shows Utah has become an expensive place for low-income residents to rent an apartment.” Survey finds Utah renters squeezed by high rates, Salt Lake City Tribune, April 16, 2009.

“The survey found that rental rates within the county rose 1.9 percent year over year to an average rent of $1,340.” County’s rental market ‘loosening up a little,’ The San Diego Union-Tribune. April 8, 2009.

Leases

These numbers, of course, do not show the impact of leases. Think about it: If you have a lease would you move to save a few dollars each month? Given the costs and bother of moving, not if you can help it.

The argument here is not that long-term real estate ownership is a foolproof hedge against downward markets, rather the idea is that if you have a growing population, increasing demand and a limited supply of housing the end result is exactly what it should be: Higher rental rates. That’s not a bad result in tough times and that’s exactly what we are now seeing in many markets.

In addition, of course, you don’t have to worry that some derivatives trader 2,000 miles away will make a bet that dooms your company, your IRA, your pension and your retirement.

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