What You Need to Know About Investing in Out-of-State Real Estate Properties

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

Sometimes, your best chance at finding a good property to invest in means venturing out beyond state lines. Doing so opens the door for opportunities for diversification and potentially higher returns. However, like any investment strategy, there are both advantages and challenges to consider before taking the leap into out-of-state real estate investment.

Pros of Investing in Real Estate Out of State

Diversification of Portfolio

One of the primary benefits of investing in real estate out of state is the opportunity to diversify your investment portfolio geographically. By spreading your investments across different markets, you can reduce the risk of local market fluctuations, like region-specific economic downturns or natural disasters.

Access to More Favorable Markets

Investing out of state allows you to capitalize on real estate markets offering better growth prospects or higher rental yields compared to your local area. Some regions may have lower property prices, higher demand for rental housing, or more favorable landlord-tenant laws, making them attractive destinations for investors seeking better returns.

Potential for Higher Returns

In some instances, investing in out-of-state real estate can generate higher returns compared to local investments. Investors may benefit from appreciating property values and increased rental income by targeting markets with strong economic fundamentals, population growth, and job opportunities. Additionally, investing in emerging markets or areas undergoing revitalization efforts can offer substantial returns over time.

Tax Benefits and Incentives

Depending on the location of your out-of-state investment property, you may be eligible for tax benefits and incentives unavailable in your home state. Some states offer tax breaks for real estate investors, such as property tax exemptions, depreciation deductions, or credits for investing in certain development projects. Investors can maximize their potential returns by researching the tax laws and incentives in different states.

Cons of Investing in Real Estate Out of State

Distance and Management Challenges

One of the most significant drawbacks of investing in out-of-state real estate is the logistical challenge of managing a property from a distance. Being physically distant from your investment property can make overseeing maintenance, handling tenant issues, and responding promptly to emergencies more difficult. Hiring a reliable property management company can alleviate some of these challenges, but it also adds another expense and requires careful vetting to ensure competence and reliability.

Limited Market Knowledge

Investing in a market that you are not intimately familiar with can be risky due to limited knowledge of local trends, regulations, and economic conditions. Without a detailed understanding of the local market dynamics, investors may find it difficult to accurately assess property values, rental demand, and potential risks. Conducting market research and building relationships with local real estate professionals can help mitigate this risk, but it often requires more time and effort than investing in-state.

Increased Risks of Fraud and Scams

Investing in out-of-state real estate exposes investors to a higher risk of falling victim to fraud or scams, particularly when conducting transactions remotely. Investors must be extra cautious and conduct thorough due diligence to avoid issues like fraudulent property listings, deceptive sellers, or unethical practices by property management companies. Verifying property ownership, conducting inspections, and obtaining professional advice can help safeguard against fraudulent schemes.

Legal and Regulatory Differences

Each state has its own set of laws, regulations, and landlord-tenant statutes governing real estate transactions and property management. Investing in out-of-state properties requires investors to familiarize themselves with these legal frameworks and ensure compliance with local regulations. Failure to understand and adhere to the legal requirements can result in costly fines, lawsuits, or even the loss of the investment property.

How to Effectively Invest in Real Estate Out of State

1. Conduct Thorough Market Research

Before investing in out-of-state real estate, thoroughly research the target market. Analyze key indicators such as population growth, job market stability, rental demand, vacancy rates, and property appreciation trends. Utilize online resources, market reports, and local real estate professionals to gather valuable insights into the market dynamics and investment opportunities.

2. Build a Reliable Network

Establishing a network of reliable real estate professionals in the target market is essential for successful out-of-state investing. Seek out reputable real estate agents, property managers, contractors, and legal professionals who have in-depth knowledge of the local market and can provide valuable assistance throughout the investment process. Building strong relationships with local experts can help mitigate risks and streamline property management operations.

3. Leverage Technology and Remote Management Tools

Embrace technology to facilitate remote property management and communication. Utilize property management software, online platforms, and virtual tours to streamline tasks such as rent collection, maintenance requests, and property inspections. Implementing robust communication channels with tenants and property managers can help address issues promptly and ensure efficient operations, even from a distance.

4. Visit the Property and Conduct Due Diligence

Whenever possible, visit the investment property in person to assess its condition, location, and surrounding neighborhood. Conduct thorough due diligence, including property inspections, title searches, and financial analysis, to verify the property’s viability as an investment. Engage with local inspectors, contractors, and real estate professionals to gain additional insights and identify any potential red flags or hidden costs.

5. Secure Financing and Consider Tax Implications

Explore financing options and evaluate the financial implications of investing in out-of-state real estate. Consider factors such as mortgage rates, loan terms, and down payment requirements when structuring your investment. Additionally, consult with a tax advisor to understand the tax implications of owning property in a different state, including potential deductions, exemptions, and compliance requirements.

Conclusion

Investing in real estate out of state can offer compelling opportunities for diversification and potentially higher returns, but it requires careful planning, due diligence, and effective management strategies. By conducting thorough market research, building a reliable network of local professionals, leveraging technology, and implementing sound investment practices, investors can successfully navigate the complexities of out-of-state real estate investing. With the right approach and diligent oversight, out-of-state real estate investments can become valuable additions to a diversified investment portfolio, contributing to long-term financial growth and wealth accumulation.

How to Protect Yourself from Hidden Debts and Costs in Investment Properties

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

Tread Carefully: Hidden Debts in Property Investments Can Cost You

Real estate investments have long been hailed as a dual-benefit venture, offering the immediate allure of cash flow and the promise of long-term wealth. Whether you’re delving into the world of fix-and-flips or banking on the steady income of a rental property, the potential returns from real estate can be truly transformative for investors. Yet, in the rush of excitement and the prospect of profits, some investors leap before they look, bypassing crucial due diligence steps that can be costly.

From overlooked tax bills to undisclosed liens, the landscape of property investment is riddled with potential pitfalls. Lured by the promise of quick gains, investors can unwittingly take on these hidden burdens, turning a promising venture into a financial sinkhole. While many assume that the standard closing process will uncover any latent liabilities, the reality is often more nuanced and requires a deeper dive.

Understanding Property Taxes as a Smart Investor

Property taxes, though often begrudgingly paid, play a pivotal role in supporting our communities. From fire departments to schools and local law enforcement, the funds gathered are channeled into vital public services. Essentially, these taxes strengthen our federal, state, and local governments, enabling a solid infrastructure with cultivated services that benefit every citizen. For those navigating the home buying process, property taxes might seem straightforward – a mere annual financial obligation; however, delving deeper reveals a myriad of local regulations that can muddy the waters.

The inception of property taxes can be traced back to approximately 3000 B.C. in ancient Egypt, where funds raised were funneled into iconic projects such as building the pyramids. Fast forward to ancient Greece and Rome, taxes fueled the construction of structures that still captivate us today. In America’s early colonial days, taxation practices varied, but it’s notable that some of these funds bolstered the fight for freedom during the Revolutionary War. The 18th century ushered in a significant shift, with states like Illinois, Missouri, and Tennessee pioneering a taxation approach based on property value – which marked the dawn of ad valorem taxing.

In contemporary society, property taxes predominantly serve local needs and improvements and are commonly collected at the municipal level, reflecting the localized nature of the services they finance. The extensive list of local taxing authorities encompasses cities, counties, school districts, community development districts (CDDs), special taxing districts, villages, townships, and other governing jurisdictions. The funds dispersed from these taxes bolster our education system, libraries, infrastructure, law enforcement, public transport, and an array of other community-centric services.

Today’s property tax calculations are more nuanced than their ancient counterparts and calculated with 3 methodologies:

1. Sales Evaluations: Determines a property’s market value by comparing it to similar recently sold properties, considering unique attributes and current market conditions.

2. Cost Method: Estimates the expense of rebuilding the property at today’s prices, subtracting any depreciation due to age or wear and tear.

3. Income Method: Used primarily for investment properties, this method gauges potential rental income, subtracting operational costs and considering the return on investment.

Diving into the realm of property taxes can be complex, but all taxes fall into 2 essential classifications:

1. Ad Valorem Taxes: These taxes are based directly on the value of a property or transaction.

Example: If a home is appraised at $300,000 in a county with a 1% ad valorem tax rate, the homeowner would owe $3,000 in taxes for that year.

2. Non-Ad Valorem Assessments: These are charges tied to specific services provided to the property, irrespective of its value.

Example: A flat $50 monthly fee imposed by a homeowners’ association for community landscaping and security, regardless of the home’s market value.

Understanding how property taxes are calculated and where they are applied is crucial for savvy investors to protect themselves from hidden costs and ensure a sound financial property investment.

Leveraging Tax Tactics for Protection

Taxes underpin the support systems of governments at the national, state, and local levels. When these remain unpaid, taxing authorities will act decisively to recover their dues. For investors, navigating this space requires an understanding of tax lien certificates, tax deeds, and the importance of tax certificates as they offer potential strategies to safeguard against hidden costs.

3 Tiers of Taxing Authorities:

1. Federal
2. State
3. Local

When property taxes go unpaid at any of these levels, authorities can put a lien against the property in question. The title might then be auctioned with its associated liens. If the situation escalates to a Tax Suit, it could result in structured repayments, bankruptcy, foreclosure, or a tax sale. Certain thresholds of debt on homesteaded property might see the tax collector directly issuing a certificate to the county, which can lead to a judicial sale, clearing all taxes, liens, or mortgages tied to the property.

Tax Lien and Tax Deed Certificates: How They Protect Investors

Understanding the difference between a tax lien certificate, a tax deed, and a tax certificate is crucial for investors aiming to protect their investments:

Tax Lien Certificate: Acquiring a tax lien certificate means buying the right to collect the unpaid taxes on a property, not the property itself. If the original property owner wants to reclaim their property, they must repay the owed amount, plus any interest, to the certificate holder. For investors, this represents a potential return on investment as the interest can be substantial. By holding a tax lien certificate, an investor safeguards their investment. If the property owner fails to settle their dues within the redemption period, the investor can move forward to acquire the property, often at a fraction of its market value, thus reducing hidden costs of direct property acquisition.

Tax Deed Certificate: Purchasing a tax deed is an indirect method of acquiring property. Instead of buying the property outright, an investor buys the unpaid taxes, which often comes at a much lower cost than the property’s market value. If the original owner fails to reimburse the investor (including the owed taxes and accrued interest), the investor becomes the property’s rightful owner. This strategy minimizes hidden costs because investors are essentially purchasing properties at significantly reduced prices.

Why You Need a Tax Certificate: Not to be confused with a Tax Lien or Tax Deed Certificate, a Tax Certificate is a comprehensive document that outlines the individual taxing authorities for a property and its history of taxes. It provides property assessment details, the current tax rate, and a summary of the amounts for the current tax year. Such a certificate will show any unpaid balance with local taxing authorities and any tax liens on the property. Obtaining a Tax Certificate is crucial for investors to determine what taxes they will pay, verify taxing districts, understand municipal utility providers paid through property taxes, uncover potential unrecorded debt, and ascertain any tax liens. For investors, acquiring a tax certificate is a pivotal strategy to uncover potential tax delinquencies that often go unnoticed in standard title searches.

By understanding and leveraging the mechanisms of tax lien and tax deed certificates, as well as a comprehensive tax certificate, investors can unlock invaluable strategic advantages. These tools not only present opportunities for profitable returns but also serve as shields against the pitfalls of hidden costs. While the path of property investment is riddled with complexities, with the right knowledge and approach, proper tax tactics can pave the way for more secure and informed decisions. As every state wields its unique set of rules and perimeters, investors can benefit significantly from seeking counsel with local tax professionals to maximize their protection and potential gains. In essence, when used judiciously, tax-based strategies can transform challenges into opportunities for the discerning investor.

Navigating HOAs and COAs for Investment Properties

When purchasing an investment property, it’s crucial to understand the role and reach of homeowners’ associations (HOAs) and condominium owners’ associations (COAs), which oversee around 53% of U.S homes. These organizations, while beneficial in maintaining property standards, come with guidelines and financial obligations.

If your purchased property falls under a HOA or COA, it may be beneficial to utilize either of these two tools to uncover potential fees and hidden costs:

Association Estoppel– known by various names depending on the state, this legal document highlights the property’s standing with the HOA or COA. An estoppel reveals any outstanding dues, violations, special assessments, and more, providing a transparent picture of any future costs or obligations.

Association Identification– An efficient service tailored for companies that prefer direct communication with associations or management firms but lack the bandwidth for extensive preliminary research. Identification can provide basic property information.

By leveraging these tools, investors can confidently navigate the intricate dynamics of HOAs and COAs, ensuring they make sound and well-informed property investment decisions.

Utilizing Best Title Practices & Post-Closing Procedures

In the real estate sector, title defects represent a discrepancy or irregularity in the ownership or description of a property; these issues can range from liens against the property to documentation errors. Recognizing these defects early is crucial, as they can lead to disputes and even litigation, which can be costly. Establishing open channels of communication between stakeholders, such as lenders, sellers, and buyers can preempt many of these issues.

These staggering statistics emphasize the importance of a thorough title inspection and a comprehensive post-closing process:

– 30% of land titles have defects, which means 1 in 3 closings will require curative work.

– 30% of title issues stem from survey or boundary issues.

– 10% of post-closing recordings have issues, many of which can result in title claims.

– 17% of all properties contained code issues.

– 18% of all properties had a building issue.

– 30% of all properties had overdue utility bills.

– 61% of researched properties have issues that could become the responsibility of an unaware buyer.

To initiate the best title practices and ensure a proper post-closing procedure, it’s critical to be vigilant at every step. Here are the most prudent actions you can take to ensure your title is clear and your closing is finalized without the possibilities of issues down the road:

1. Comprehensive Title Examination: Hire only highly experienced title examiners covered under Errors and Omissions Insurance to safeguard against potential title issues. Utilizing standardized procedures ensures consistent quality checks and minimizes the chance of oversights.

2. Inspect Records: Merely relying on indexes can be insufficient. Accessing documents directly from land records helps in unearthing any underlying discrepancies, ensuring a title free from potential county clerical errors.

3. Thorough Historical Review: For properties with long-standing histories, it’s crucial to search beyond the state’s standard timeframe. This ensures all title-related documents, even those from long ago, are accounted for, providing a clearer picture of the property’s title lineage.

4. Court Proceedings & Documentation: Titles can have legal complexities. By scrutinizing court proceedings related to title rights and meticulously reviewing schedule B and lender documents, potential defects in the title chain can be spotted and rectified early on.

5. Proactive Title Defect Solutions: Navigate the complexities of potential title defects with preparedness. For instance, to prevent issues from invalid tax sales, carefully review all associated notices. Also, confirming the marital status of sellers and borrowers is crucial in preempting any future spousal title claims.

6. Conduct Municipal Lien Searches: Not all liens are immediately visible in public records. A comprehensive municipal lien search brings to light unpaid utility bills, outstanding code violations, and building issues, offering a more transparent view of any potential encumbrances on the property.

7. Get a Land Survey– A survey provides a detailed and accurate representation of a parcel of land, depicting its boundaries, features, and other critical elements, preventing unforeseen disputes and costly rectifications later. While often perceived as an additional expense for buyers, a survey is a safeguard for investors, ensuring the integrity of a transaction and minimizing unexpected closing delays.

8. Guarding Against Mechanic’s Lien: Mitigate the risk of a mechanic’s lien filed during or after closing by acquiring property permit histories and securing lien waivers from owners or contractors.

9. Post-Closing Diligence: Despite advancements in digital record-keeping, the real estate and title industry often grapple with outdated methods prone to human errors. Simple mistakes, like number transpositions on a mortgage satisfaction document, can result in challenges for homeowners during resale. Be sure to track/verify all post-closing documents are accurate.

By prioritizing these practices, property investors can confidently secure their assets, ensuring long-term stability and minimizing unforeseen risks.

Knowledge & Due Diligence: Your Best Protection Against Hidden Fees and Costs

In the intricate world of property investments, due diligence is not just recommended, it’s imperative. The realms of title practices, property taxes, and homeowners’ associations conceal pitfalls that can quickly turn a promising investment sour. Understanding and navigating tax strategies, title defects, and HOA/COA obligations are pivotal to safeguarding one’s assets and financial interests.

Knowledge truly is power in the real estate domain, which is why investors need to be educated and equipped with the right tools to make informed, secure, and profitable decisions to ensure success with their property investments.

For a deeper dive into protecting yourself from hidden debts and costs in investment properties, download our comprehensive whitepaper.

The Truth About the 2023 Housing Market; Is a Crash Imminent?

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

This article is based on the episode of the Building Equity podcast “Economist Explains the TRUTH about 2023 Housing Market Crash! | US Economy + Real Estate Break Down” with guest Simon Caron of the Uneducated Economist YouTube Channel, available on YouTube right now. Click here to watch the episode. Check out Simon Caron’s channel here.

For 2023, there are many questions surrounding the housing market. Pundits and economic experts range in their suggestions; factors such as inflation and low housing inventory are used liberally to espouse either an anticipated crash or correction. While the industry is shrouded in uncertainty and worried investors continue to sit on the sidelines, it’s also important to consider that a record high number of investors who bought properties from 2009 to 2015 with self-directed IRAs have sold those properties in the last several months.

This means that while many have missed out on opportunities, there’s also a substantial number of investors who have capitalized, harvesting profits that have flowed back into their tax-free self-directed retirement plans. As we navigate through a high-inflationary environment, it’s more imperative than ever for investors to deploy their capital in meaningful ways. 

Looking at the Price of Lumber to Predict What’s Next for the Housing Market 

To get a better understanding of micro- and macroeconomics and its impact on the housing market as well as foresight on the upcoming year, perhaps one of the best examples of a commodity experiencing similar unpredictable fluctuations in recent years is lumber. Starting with a rise prior to the 2020 pandemic, the price of lumber peaked at $1,700 per thousand board feet in May of 2021, surging over 50% in a year. While there were indications in late 2019 of an impending rise in price with mill closures, mill curtailments, and overall inventory depletions, all signs pointed to a supply chain breakdown as the major impetus and not so much the Fed printing more money, even though they went from $850 billion on their balance sheet to $4.3 trillion.  

Entering the pandemic, we saw the price of lumber start to shoot up. After people started spending their stimulus checks on lumber to build new decks, fences, and remodel their homes, there was a sharp depletion in inventory, very much like the low inventory rates seen in the housing market. As a response to the sharp decline in lumber inventory, mills began firing up, pumping out loads of lumber, only to see the price dip back down to $400 per thousand and then back up to $800 as the industry attempted to keep up with supply and demand. With lumber production being a multi-faceted operation, it’s difficult to see where the demand should be according to the inventory levels.  

Areas across the U.S. are seeing inconsistency with lumber inventory as some pockets are adequately supplied while others are not. Until inventory can be fulfilled evenly across the country, it’s expected that these fluctuations in prices will continue before an equilibrium is found. 

Now juxtaposing the housing market with the lumber industry, you’ll see a similar trajectory as the demand for homes increased; we witnessed a huge jump in home prices, which also started climbing as the 2020 pandemic ensued, reaching epic rates into 2022. But as mortgage rates continue to rise and builder sentiment falls, just as the price of lumber starts to come down, the cost of homes will follow, creating a more opportunistic landscape for investors in the real estate industry.  

Signs of a Housing Correction, Not a Crash 

With builder sentiment falling and existing home sales down around 15% compared to last year, there’s major concern regarding the future of the housing market. Many builders do not wish to get stuck on a project that will result in selling for less as construction costs rise, which can then contribute to low inventory rates. Most speculate that this overall disposition indicates a looming crash, but the most critical component of a pending crash is an increase in foreclosures. For foreclosures to take place, the economy would have to see a rise in unemployment, which would be a major catalyst for people being unable to make mortgage payments. But even in the current economy with talk of a pending recession, we are not seeing a rise in unemployment, which is currently at 3.5%, nor are we experiencing a jump in foreclosures. Foreclosures in general are still relatively low. 

A more realistic outcome for the future of the housing market would be a downturn in home prices. Homes that saw an increase in price of over $100,000 this past year could see their purchase tag reduced by $60-$70,000, which theoretically wouldn’t be a crash but more of a return to normal. Even with a third of homes being purchased by all cash buyers, as mortgage rates teeter around 7%, it’s reasonable to believe buyers will be deterred, resulting in the eventual reduction in home prices. Especially since mortgage rates are no longer increasing at the exponential rate as they were before, it’s more likely to estimate that a reduction in house prices is inevitable, pointing to an eventual housing market correction. 

The Federal Reserve’s Role in the Housing Market 

One of the key strategies implemented during the financial crisis of 2007 to 2009 and the start of the 2020 pandemic was called quantitative easing. The Fed purchased longer-term securities on the open market, including U.S. Treasuries and mortgage-back bonds. The perfect metaphor for a mortgage-backed security is if a bunch of mortgages are thrown into a box and that box is sold off to an investor; everybody’s paying their mortgages and the investor receives the capital investment back plus interest. Because this practice nets significant profits, the Fed created a huge demand in the market for these types of securities, given that it’s guaranteed a buyer and there aren’t concerns about who to sell to. This results in the mortgage rates climbing, security prices falling, and the yields rising, which increases overall mortgage payments due to the interest rate jump. 

These mortgage-backed securities (MBS) are not the toxic asset that they once were; there was a time when people received these mortgages when they really shouldn’t have: either they didn’t have a job, any viable income, or they owned more than one property. Today, these borrowers are much more qualified, making these types of investments much safer. 

The Federal Reserve’s Impact on Inflation 

As the Fed influences interest rates, they also seek to control inflation by raising rates to slow the economy and bring inflation down. Beginning in 2018, the Fed began looking to set an average inflation rate. The biggest misconception surrounds the 2% target; many confuse the 2% average inflation rate with a 2% target rate. It’s anticipated that we will see interest rates low when they shouldn’t be, and we will also see them high when they probably shouldn’t be as well. But it’s a 2% target inflation rate over time, meaning that monetary policy can be adjusted to a lower or higher rate, but over time, the Fed is still aiming for that 2% average inflation rate.  

Interest rates were artificially low for a significant amount of time, causing asset prices to rise dramatically, like the housing prices. This practice is carried out so when prices do drop or when interest rates rise, the Fed can bring those asset prices back down to where they should have been prior to the artificially restricted interest rates to control inflation. 

Based on this information, it’s plausible to believe we’re going to see interest rates stay elevated for a longer than anticipated amount of time. Even after the inflation comes down, the interest rates will stay high to achieve the average inflation rate of 2%. 

Smart Investing in a High Inflationary Environment

As interest rates continue to tick upwards and inflation weighs on the economy, the pressure is on investors to make heathy, safe investments. Many people are still cautious, waiting for a good opportunity to deploy their capital, whether it’s in stocks or real estate. The most challenging aspect for investors is knowing when to engage, finding the right entry point into any market. It may seem like the safest option is to save your dollars, especially since the U.S Dollar Index is the highest it has been in 20 years, but holding onto money over time results in erosion, reducing purchasing power. It’s not unreasonable to predict a deflation scenario as the demand for dollars could explode. On the contrary, it’s also not irrational to predict that over time the dollar could completely lose its value; either way, investing right now is the smartest thing to do.  

One of the benefits of a real estate investment over others, like a stock at $100, is having control of your investment strategy. With real estate, chances are if you have a good tenant, you’ll be getting paid over the next few months. And even if you purchased recently, over time, you’ll be able to increase rent which changes the financials of your return on investment, allowing you to stretch your money even further. Whether it’s high yield mortgage-backed securities or simply a rental property, it’s more imperative than ever for investors to get into the game and deploy their money for long-term gains. 

Explore Resources, Gain Insight, and Make a Better Investment

Whether it’s understanding markets, intrinsic value metrics, or the ins and outs of the real estate industry, smart investors are turning to IRA Title Pro for all their needs. If you’re using your self-directed IRA to buy and sell real estate, then you NEED to know about IRA Title Pro and their countless programs, tools, and educational sources that can help take your investing to the next level. 

Our amazing closing team and national title company provide incredible resources for investors every step of their journey, whether they’re buying, selling, or lending. Our title company caters to self-directed IRA transactors so they can close real estate transactions faster in a streamlined fashion. 

Get in touch with us today if you’re serious about getting off the sidelines and making smarter investment decisions. 

The Latest Real Estate Guide to Investing in the U.S. Housing Market

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

This article is based on the episode of the Building Equity podcast “What’s ACTUALLY Happening in the US Housing Market | A New Real Estate Investors Guide in 2023” with guest Jason Hartman, CEO of Empowered Investor and Real Estate Tools, available on YouTube right now. Click here to watch the episode. Check out Jason Hartman’s work here.

Investing in real estate may be tough for some to consider with asset prices being so high. It can be extremely discouraging when potential investors see the costs associated with completing a real estate transaction, so much so that it may deter people and they miss out on an incredible opportunity to generate long-term profits.

It’s crucial to understand the metrics behind real estate investing when looking at both cash flow and asset prices versus other hard assets, like investing in gold and silver as well as notes and mortgages that are secured by real property investments in private businesses. It’s tough to grasp the worth of an asset without getting perspective on how valuable it actually is when compared to others.

Understanding the Current Economic Climate as it Relates to Real Estate Investing

Recent data suggests that we are on the cusp of a recession. While the Federal Reserve is trying the best they can to stop inflation for our centrally planned economy, had they raised interest rates sooner and at a more gradual pace, the idea of a soft landing might have been more plausible.

While inventory in the housing market is higher than it was before, it is still historically low. As of February 2023, there’s about 625,875 homes for sale in the United States. Experts suggest that a normal market would contain anywhere from 2 to 2.5 times that amount, leaving the current market with approximately 6 months left of inventory at current absorption rates. This isn’t the only deviation; we’re also seeing current property owners with incredibly cheap mortgage rates.

Many homeowners with mortgages have rates far below today’s level, and recent data reveals that 37% of all homes in the United States are paid off, meaning overall, people are not under financial duress with mortgage obligations. To technically have a “crash”, there should be both distressed owners and distressed sellers.

Note: At the time of this writing, we are seeing consumer credit card debt and subprime auto loan delinquencies surge. How this affects the 37% of homes that are free and clear we don’t know, but figured it worthwhile to include as it seems likely we are transitioning.

Based on current data and trends, it’s safe to assume that the rest of the country also has relatively low existing mortgage rates, so there is no evidence or indicators of an imminent crash as of right now.

The Biggest Mistake Investors Make

The first mistake that most investors make is that they don’t invest. People find all types of justifications and reasons to avoid investing in real estate, whether it’s overall hesitancy or attempting to time the market. However, as with any asset class, market timing has historically been proven to be an ineffective strategy. The most successful investors are those that make smart, value-oriented decisions, buying and holding their assets.

A perfect example of this is the great recession of 2008: this was an anomalous instance, an occurrence that happened once in seven decades, and as the economy rebounded, prices began to rise and people began to worry, thinking the metaphorical “bubble” was on the verge of bursting any minute. As many people anticipated this being the peak of the market, they waited for a cool off period, preserving their cash for a “right time” to invest, creating even more doubt and missed opportunities. Had people remembered that we are in a centrally planned economy, they would have had more confidence to capitalize.

As the central planners react to the market, it’s not just a matter of supply and demand or basic economic fundamentals. When things get bad, the Fed makes changes and specific adjustments while the government does the same. During the COVID-19 pandemic, when many chose not to invest or change their current investment strategy, some lost out on appreciation. And that’s the thing about investing, you actually need to invest if you want to reap the benefits.

Furthermore, research has shown if people hold onto their money without investing, it is guaranteed they will lose 9% a year just to inflation.

Using the Right Measuring Stick to Understanding Intrinsic Value

Many people may have trouble assessing value because they’re using the wrong measuring gauge; they compare the price and the value of real estate to one thing: the U.S. dollar. The U.S. dollar is a moving target, meaning it’s constantly being debased by inflation, which makes this metric a huge mistake in terms of determining value. It’s smarter to compare with other commodities and asset prices to understand the concept of intrinsic value.

In November 2022, the National Association of Realtors is claimed valuations could rise, year over year by 1%. Yet larger institutions like Morgan Stanley and Goldman Sachs  are predicting 5-10%, claiming over 2023, we’ll be seeing a 5-10% drop in valuations.

Looking at a country as large and diverse as the United States is, there are almost 400 MSAs (Metropolitan Statistical Areas). There are 50 states with over 3,100 counties and 9,000 cities, meaning lumping these all together is not the correct metric for an accurate assessment.

To get a more precise estimate, the Hartman Comparison Index (HCI) was created by Jason Hartman. This tool compares the price of real estate over the last 52 years to other commodities with intrinsic value that people need to live that are not attached to any one currency.

Commodities such as lumber, concrete, copper, and petroleum products all have intrinsic value, meaning it doesn’t matter what currency they’re being traded in because they’re traded worldwide. They’re needed by everybody.

Hartman Comparison Index (priced in gold)

This HCI example compares the prices of homes to gold. Billions of people consider gold to be money, and up until 1971, the United States operated on a gold standard. But let’s look back to 1970 for some insight when the median price house was $23,000 and gold was $35 an ounce. If you wanted to buy the median price house, you would need 654 ounces of gold. Just 10 years later, as we experienced inflation from the 80s, the median price house tripled to almost $63,000. The gold price went way up to $653, and it would only take 97 ounces of gold to buy the median price house.

Fast forward to 2010 as the country is coming out of the Great Recession; the median house price for a home is $171,000, and gold is almost at $1,100 an ounce. It would take 158 ounces of gold to buy the median price house. Today, the median price of a house is $390,000, and gold is about $1700 an ounce. It would take 227 ounces of gold to buy the median price house.

Priced in gold, housing is certainly not the cheapest it’s ever been, but it’s also not the most expensive it’s ever been either.

Hartman Comparison Index (priced in oil)

Looking at oil, arguably one of the world’s most important commodities, back in 1970, the $23,000 median price house priced in oil was at $4 a barrel, so it would’ve cost 6,400 barrels of oil to buy the median price house. Ten years later in 1980, the house prices almost tripled, and oil was up to $37 a barrel, meaning it would’ve taken 1700 barrels of oil to buy a house.

Looking at today, the median price of a house is $390,000, and oil is at approximately $94 a barrel, meaning it would require 4,100 barrels of oil to buy the median price house.

When assessing whether housing in oil is cheaper or more expensive, it’s clear that it’s not the cheapest it’s ever been but certainly not the most expensive either.

Hartman Comparison Index (priced in rice)

We can look at other popular commodities like rice, which is the food stock of more than half the world, and priced in rice, housing is rather cheap today. And we can keep going.

Hartman Comparison Index (priced in shares of S&P)

We can price it in shares of the S&P 500 index. Priced in the S&P, housing is relatively cheap; it’s only 98 shares of the S&P to buy the median price house. According to the chart, back in 1970, it cost 249 shares of the S&P to buy the median price house, and in 2010, it was 136 shares, meaning price in shares of the S&P for housing is rather cheap, not the cheapest it’s ever been but still affordable.

The best way to comprehend the measurement of what an asset is worth is by comparison/relation to other hard assets. Understandably, most people don’t denominate their lives in gold or oil or any other commodities in the Hartman Comparison Index, but they have a choice, a major one that involves their money and, essentially, their future wealth. When people get paid every two weeks or every month, they do something with their extra money; they either put it in the bank or in a savings account, or they buy stocks or commodities, and they decide on a way to store their wealth until they save enough for a down payment on a house. If people save it in dollars, they can expect that over time because of inflation, they will lose money. Based on these revelations and empirical data, it’s clearly smarter to have money invested in things rather than currency units to maximize their IRA potential.

For more information on the Hartman Comparison Index or any of Jason Hartman’s teachings/strategies, visit his YouTube channel(https://www.youtube.com/@JasonHartmanRealEstate), JasonHartman.com, or listen to his podcast Creating Wealth(https://www.jasonhartman.com/tag/creating-wealth-show/). Investors are also encouraged to check out his Empowered Investor Pro membership(link) and his formal coaching program(link) for further guidance.

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