Why Now?
The foreclosure crisis offers an attractive entry point for long-term real estate investors here in Southern California. Historically, single-family properties didn’t “cash flow” for investors. The rental income from the property often didn’t produce a cash-on-cash return based on the purchase price and prevailing mortgage rates that was sufficient to justify the investment.
Currently REO properties can be found in high-quality neighborhoods and mortgage rates are at historic lows. The combination of a discounted acquisition price combined with inexpensive financing means that single-family properties (1-4 units) now can produce cash-on-cash returns of 5% or more. While this is not a high return by historical measures, it is relative to other investment opportunities in today’s market. And it means investors can earn a solid return while they are holding properties in anticipation of future price appreciation.
The chart below shows the last complete real estate cycle experienced in Los Angeles. The market peaked in June 1990 and didn’t regain its peak value until February 2000. The market hit a technical bottom in March 1996. The good news for an investor trying to time the cycle was that the market traded within a 5% range of that bottom value for 32 months – almost 3 years! (from November 1994 to June 1997).
The next chart shows the current market cycle from its peak value in September 2006 to the most recent monthly index value. The market put in a technical bottom in May 2009. It appears to be bumping along the bottom and the current index value is slightly more than 5% above the bottom put in almost two years ago. Downside price risk, especially for high-quality neighborhoods, now appears to be limited.
