Real Investments

Investing in Real Estate

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We’re Moving!

This is Everett here (I’m the guy on the right in the picture), and I’m pleased to announce that Rental Realty is moving to its new location! That’s our new building behind us in the picture, and we couldn’t be more excited to have our own location.

From there, Rental Realty will continue to be an outstanding single family residential property management service for the Central Arkansas area.


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To buy a house, or not to buy a house. That is the question. [Part 1]

It is a common belief that, when deciding between owning a home and renting a home, homeownership is always a better choice.  When the recession hit and home prices fell, this thinking changed: The belief that homes always increase in value has been challenged.  Many hard-working families are finding themselves financially upside down in their home at the moment they need equity the most.

buy vs rent

There was an evident shift in the the rent vs. own philosophy.  In 2010, Arkansas had a 25% increase in people choosing to rent instead of buy.  This number is staggering.  The recession and economic instability is one of the main reasons for people choosing to rent, but there are also other reasons not tied to the financial crisis that indicate this philosophy may be more of a long term shift.

Americans are some of the most mobile people in the world.  According to the U.S. Census Bureau, the average family moves every five years.  This average has increased over the years.  The growing divorce rate, influx of college attendees, higher average age of marriage, and ease of mobility have contributed to this increase.  I would make the argument that my generation will move even more often than once every five years. Frequent relocation has become part of our culture.

Regardless of how the economy is doing, it is oftentimes more beneficial for a person to rent rather than purchase. Lets say, hypothetically, that your house will appreciate at the historically average rate of 3.7%.  Home prices increased by 3.7% annually, on average, from 1968 to 2009 [according to the National Association of Realtors]. That means that if you purchase a house for $100,000 today, then it may be worth $119,920 five years from now, in a steady economy. That may look like a good investment on the surface, but does not take into consideration transaction costs and holding costs. On both the purchase and the sale there are lender’s fees, agents fees, and closing (title) expenses. Below is an example of a typical FHA loan and the most common transaction costs:


In the scenario of a steady economy, purchasing and selling a house after 5 years would give a $6,743.98 net profit as compared to to renting.  Is that worth it?  Would you invest $100,000.00 in a cyclical industry with the hope of an annual return of 1.25%? I hope not.

Buying with the hope of a return on investment is exactly what many Americans have done when purchasing homes.  This doesn’t necessarily pose a problem, as long as the economy is humming along; but a slight setback in the economy can eliminate your profit. The next chart shows what would happen in an economy where the home was not appreciating:


In a stagnant economy, loss is probable.  This homeowner lost $12,000 by purchasing and selling a house. Oftentimes people will not even realize the loss because the actual costs can be overlooked.  Example: Bob and Roger.

Bob and Roger work at the same company, make the same salary, and live in the same neighborhood. Bob bought a house and Roger rented a house.  After a few years, their company found it would be more profitable to relocate their headquarters to another city.  Roger gave a 30 day notice to his landlord, and put a deposit on a new place within a week.  Bob had to find a real estate agent, list his house, and wait.  As it turns out, Bob was not eligible to buy another house until his current house sold because his debt to income ratio was too high.  He spent the next month keeping his home spotless while making sure his family was mobile enough for a real estate professional to come in and show it to buyers.  Since his house did not sell in 30 days (few ever do), he had to relocate his family to temporary housing in the new city he would be working in.  A month later there was a contract on his house, and after some issues with the home inspection and stressful hiccups with the bank, they finally sold the house. Now they could finally START looking for their new place.  At the same time, Bob also had to keep up with his job and other responsibilities.

Do you know what the most stressful event in a marriage is? Tricked you – #1 is actually just the act of getting married. But #2 is moving.  Understandable.  Bob’s scenario is more common than you may think.  I see it every day. The system of purchasing a new house every five years requires that homes appreciate in value.   The next chart shows what we’ve seen in the last 5 years:


So what lessons can we learn from this?

1) Home values are not guaranteed to increase.

2) We live in a different economy than our parents. Frequent relocation is the norm.

3) Conventional thinking that “it is always better to own a house than rent” is no longer a valid assumption.

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borrow today’s dollars and repay with tomorrow’s dimes.

People may think: Jordan, you’re too young to be a real estate investor.

My successful journey in real estate began 8 years ago when I started to realize the importance of the fluctuating value of a dollar.  I commonly tell people my age,  “Now is the greatest time in our lifetime to invest in real estate.”  Besides the fact that the United States housing market is down and investors can find great deals, there are opportunities to borrow money at the lowest fixed interest rates in history.  The surface of this reasoning is fairly simple:

low home prices + low interest rates = great deal.

Why is this is true?  Think of it in terms of why gold is increasing in value or why oil prices continue to increase. It is a reality that people seem to have accepted without questioning.  The underlying reason that oil and gold continue to increase in value is that the value of the dollar continues to decline.  Reasons why the dollar declines in value:

  • interest rates
  • banking regulations
  • the health of the economy
  • (perhaps most importantly) people’s subjective trust that it is a secure way to hold value.

All of these factors have lined up through this recession to decrease the value of the dollar. This article is not meant to dissect these reasons, but to simply make you aware of the declining value of the dollar.  If the value of the dollar goes down, then the price of the goods go up.  So why not invest in a price now, and watch your dollar retain it’s value in actual goods.

value of the dollar goes down = price of goods go up

What do people do when they fear that the value in their money is not secure?  They invest in real, tangible items.  Gold, silver, and oil are all tangible, therefore their prices have increased.  Houses are just as tangible, and perhaps even more secure because people need to have a place to live.  It is a life priority.  It is this reason that I believe investing in homes is one of the safest investments possible in an unstable market.  Let me take this thought process a step further.  If I were to ask you if the price of gas will increase in the next 30 years, you would say yes.  This means that, intuitively, you have the mindset that inflation will occur.  This is very much supported by history.  In the last century, the United States experienced a deflated market in only a dozen years.  The other 88 years, prices have increased.  If you were born in January 1988, you have experienced 95.91% inflation in your lifetime.  That is to say, a dollar then could buy about what two dollars buys now.

“I got it,” you say, “Prices of things typically go up, so what does that have to do with me buying a house today?”  Well, it has a lot to do with it.  If you can purchase a house for $100,000.00, borrowing money at 3.5%, then you have purchased tomorrow’s asset with today’s dollars. This fits the adage that you can borrow today’s dollars and repay with tomorrow’s dimes.  This opportunity is historic. If you have the ability to purchase a house that you can hold long term, do it.  And for the next 30 years, every time you drive by the gas station… you will smile knowing that you have hedged yourself against inflation.