Dear MSM Reader,

Feel like the real estate opportunities have floated out of your reach with the bubble? Greener pastures may be just around the bend…

A Tale of Two Cities: Bubbleville vs. Bargaintown
By Justin Ford

It was the best of times to buy real estate. It was the worst of times.

First, some of the worst first …

In Oakland Park, Florida … not far from where I live … you can buy a 35-unit apartment building for $4.5 million. For that price - if you bought this property with 100% cash - you’d get about $184,000 in net operating income (NOI) per year.

NOI is the money you have after deducting rents lost because of vacancies (2%, according to the sales sheet for this property) and paying operating expenses (such as insurance, property taxes, property management, utilities, maintenance, and grounds care).

That works out to a yield of about 4.1% on your cash. Or, you could simply buy a liquid, government-guaranteed, 13-week T-bill and get a higher yield … about 4.5%.

So why buy the apartment house instead of the T-bill?

Well, for the appreciation, of course. T-bills don’t appreciate. But, then again, how much appreciation can you expect from a building with a lousy 4.1% yield … especially when area properties have already tripled in value in the last six years?

Not much, I think. But here’s the real killer in this deal …

You usually don’t buy properties with 100% cash. Not even Donald Trump does that. You use leverage. Leverage is the thing that lets you put money to work at higher rates of return. But that’s if - and only if - you buy an asset that generates a lot of income relative to the price you paid.

So, say you have $100,000 in cash and you use it to buy a $100,000 property, all cash. If your NOI is 4% and the property appreciates 6% in a year, your total return is 10%.

But if you use that same $100,000 as a down payment to buy a million dollars worth of property, you can make a lot more money (as long as the property pays for the $900,000 loan and all operating costs). If the property appreciates 6%, you’ve made 60% on your money.

How? Well you put $100,000 down and get a 6% return on $1 million. That’s a $60,000 gain on your $100,000 investment. And that’s 60%.

If you pick up another, say, $20,000 in net rents (after expenses and loan payments), that’s another 20% on your $100,000 investment. Total return in the first year: 80%.

But again … that would only work if the property’s rents were high enough to pay for the $900k loan, cover all other carrying costs, and generate some net rents to boost profits and create a cash cushion (margin of safety). But that isn’t happening anymore in the Bubble Markets.

Take our Oakland Park property again …

Forget 10% down. Let’s say you put 25% down to buy the building. You’d end up with a loan of $3.375 million. With a 25-year commercial loan at 6%, that works out to annual payments of $261,225.

But this property only has a NOI of $184,000 a year. So you have negative cash flow of over $77,000 a year!

And that’s after a hefty 25% down payment. And it also assumes the miniscule 2% vacancy rate claimed for this property … and that the operating costs weren’t under-reported in order to beef up the meager net operating income.

Truth is, you’re probably really looking at a negative NOI of $85,000 to $90,000 a year here.

And, by the way, this property was on an Investor’s Wholesale List! If that’s the “wholesale” price, you don’t even want to know what retail would be.

That’s how it is in the bubble areas. Real estate agents have turned into agents of the unreal. The prices at which they’re listing properties have nothing to do with the real world.

And South Florida isn’t the only bubble market.

In California, only 14% of residents can afford the median-priced home. That’s down from 19% a year ago. If you’re selling one of these properties, you just lost a quarter of your market. In parts of Northern California, it’s worse. Only 7% of the state’s population can afford a median home there.

In Boston, the median home sells for about 300 times the monthly rent! You can’t cover your mortgage and expenses at those ratios. A lot of recent homebuyers and investors are now learning this the hard way.

The Providence Journal reports that foreclosures shot up 34% in Massachusetts. In some of the pricier counties, they’re up 40%. And if interest rates continue to climb, the slew of ARMs could send the foreclosure numbers higher still.

The Next Great Real Estate Bulls

But itís not all bad news. Just as there are Bubble Markets, there are still some excellent Bargain Markets in the U.S. today.

In fact, thousands of homeowners and investors are fleeing the Bubble Markets and heading to the Bargain Markets … and theyíre helping create the Next Great Real Estate Bull Markets in the process.

In tomorrowís article, weíll be discussing exactly what makes these markets so attractive (you may be surprised!) and how you can profit from them now.

Ed. Note: For more information on market cycles from bubbles to bargains, and a special discount on our newest report The Secret Sunbelt Cities: An Insiderís Guide to Six-Figure Profits In America’s Best Value Markets click here now.

To Become A Savvy Property Owner, Act Like A Renter

In order to know if a property is going to have a positive cash flow, you must know its rental value. This is important because rents need to cover expenses.

To get to know the rents in your area stone cold, complete the following exercise. Create a chart with the following headings: Address, Type, Square Feet, Monthly Rent, Number of Bedrooms, Price per Square Foot. Find a dozen properties for rent in your neighborhood, some apartments, some houses, and call them as if you are looking for a place to rent. Find out the information about them and plug it into the chart. From there, you can figure out the average monthly rent in your target area by type (apartment or house,) and number of bedrooms.

Just the act of calling on properties for rent will start to give you a good instinct for how much you could reasonably charge for any given property you consider buying.