Moses Kagan on Real Estate

Are apartments still worth buying?

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This period of sustained, low interest rates is driving every sane person out of cash and into hard, income producing assets. Why? Because, after inflation, keeping your money in cash right now is basically like lighting 1-2% of it on fire each year.

This has been true since 2009, but I think most people are just now getting the message. The result, for the real estate market, has been a sharp increase in demand for apartment buildings. I got an email today from a broker I really respect letting me know she has a ton of clients looking for 2-4 unit deals. Guess what? So do I!

Does this mean it’s a bad time to buy? Ordinarily, I’m a contrarian… I like to buy what no one else is buying and sell what everyone is buying.

But right now, I think income-producing apartments (properly investigated and financed) are still a pretty good bet. Here’s why:

  1. Unemployment is still high, meaning that there are still loads of (young) people sitting around without jobs. As they start to get jobs, they will move out of their parents’ homes and rent apartments. This is going to drive rents up sharply.
  2. When you purchase below-market, rent-controlled units at a fair price using fixed, long-term debt, you are effectively buying a bond. The return you get in the first year should be the lowest it will be for the entire time you own the property, because a greater and greater portion of your annual debt service will go to reducing your loan balance and, therefore, increasing your equity in the property.

 


Written by mjkagan

09/06/2012 at 7:04 am

Posted in Brokerage, Buying, Debt

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