By Joel Ross
US real estate may be the one place left to hide. If you look at the world right now, the list of unknowns is staggering, and what happens in the next six months will affect everything for the next generation or longer. This is a major inflection point in history, and there is no leadership at all to help direct things to a good end. Just look at the list of unknowns to which there are no answers right now:
US election
Israel attack on Iran
Syria exploding
Islamists taking control of Egypt and setting off another Iran style regime
Europe solving its banking problems
Spain staying solvent
Dodd Frank going into effect
Obamacare being implanted or repealed
Tax reform
Fiscal cliff
EPA implanting more harsh regulations if Obama reelected
Cordray turned loose on banks if Obama reelected
Major terror attack somewhere
Greece staying in the Euro
Pakistan staying stable-or what passes for stable there
Major shift in US energy independence through fracking and deep water drilling
There has rarely been a time in modern history with so many black swans circling, any of which could cause major disruptions, war, further economic decline, or the rise of dangerous regimes. Or things might go in a good direction, and then things could really take off. The problem is there is nobody who can predict the final outcome of any of the above list.
When there is so much uncertainty, companies don’t expand. They do not hire other than what they absolutely need which cannot be covered by overtime or temporary workers. Investors don’t take big risks. Governments muddle. Eventually one or more of these things will happen- good or bad and then a direction will be established-good or bad. There will be decisive acts on each of the above in the next six months and then we will know better where we are headed.
So then what to do. US real estate is likely one of the only safe places to go. Values are still relatively low in most places outside of New York, Washington and San Francisco. While there could be another decline if there is a major recession soon, the more likely thing is some continuing value increase, stability or, at worst, a small decline in value for awhile, then up again. A decent property, in a good location, with a good cash flow, reasonably levered, is about as safe as you can be right now. If you can acquire an asset at a 7% or 8% cap now, and lever it 65%, then you can likely clip coupons for many years and not really worry. From here, real estate values are not likely to have any serious decline in the US. What is more likely is there will be high inflation is a few years when all of the monetary stimulus combines with a return to growth. Then you can raise rents.
As opposed to stocks, which will remain highly volatile, bonds which will pay nothing for at least two more years, and then drop in value as rates are raised, and offshore investments which are subject to huge black swan events, US real estate is a relatively safe haven for years to come. Gold pays no return and is far too speculative. Currencies are way too unpredictable. Commodities are going to remain volatile and subject to many unpredictable events.
I like collecting rent checks and being able to go look at and touch an asset located where I can get to it easily. Just remember-it is all in the buy- don’t chase the price to excessive levels, or then it is no longer a good investment. Real estate is only good if you buy it right, and you do good solid due dili to make sure of what you are buying.
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