Last week I wrote that "the financially intelligent understand that news is neither good or bad, it is simply information to be acted on—and to profit from." That line resonated with many, and I thought I'd give a good example of what I meant by that statement in this week's blog post.
This week, The Wall Street Journal published an article entitled, "Home Prices Sink Further." The article painted a bleak picture for the U.S. housing market. Here are just a few interesting points:
- In the fourth quarter of 2010, all 28 major housing markets experienced year-over-year price declines
- It's estimated the U.S. housing market will take 5-6 years to recover
- Inventory levels are growing in most markets
- Market's that fared well, such as Seattle and Portland, are now beginning to weaken
- Sellers and buyers are at a standoff as the threat of future price declines have made buyers unwilling to meet seller's pricing
- Unemployment is the biggest threat to a housing market recovery—and that's not going down any time soon
To many people, this comes as bad news—especially to those who are drowning in mortgage debt, those who are upside down and facing foreclosure. And certainly it would be cruel to say this is good news. But the reality is that it's valuable information.
When I was a young boy, my rich dad taught his son and me the difference between investing for capital gains versus investing for cash flow. He did this by playing the game of Monopoly with us. To win at the game of Monopoly you had to invest for cash flow, not capital gains. That meant that rather than just collect property, you had to build houses on your properties, with the ultimate goal of building a hotel. By building houses and hotels, you ensured steady and greater amounts of cash would come in, which allowed you to purchase more land and build more houses and hotels.
Over the years, I've been labeled as a real estate guy. This is only partially true. I'm a cash flow guy. And real estate happens to be a good strategy for building cash flow. Also, real estate is a good investment because of the tax advantages like depreciation and because of the ability to leverage other people's money. Certainly there are other ways to generate cash flow. For instance my business generates cash flow every month. Each time I write a book, cash flow comes in the form of royalties. And when my investments in oil wells pay off, I enjoy dividends from the sale of oil.
Lately, people have asked me how I feel about real estate now that the market has crashed. My response is the same as always: if you can find a deal that provides good cash flow, go for it. Don't worry about whether prices are going up or down—worry about the cash flow. Remember the age-old slogan: What goes up must come down. Markets boom and bust. A financially intelligent person doesn't try to time the market so much as take of advantage of booms and busts to increase cash flow.
For me, the news that the housing market is crashing is information to be acted on. It tells me that I can purchase quality properties for much less than I could have a couple years ago and that the possibility of enjoying good cash flow is now much higher. Very simply, lower prices mean lower debt payments, which means greater cash flow from rents. If you invest for cash flow instead of capital gains, a boom or bust market means little to you. The only thing you care about is that your investments are experiencing positive cash flow or not. When you're investing for cash flow, when prices go up, it's a bonus, and when they go down, you can take comfort in the fact that your investments still provide income each month.
By all indications, the housing market, which was going up and up just a few years ago, will now be going down and down for a while longer. For some that's bad news. For you it can be valuable information. As I've written before, we're experiencing the biggest wealth transfer in the history of the world. During these booms and busts, the financially intelligent will grow wealthy while the financially ignorant will suffer. I want you to prosper. Continue your financial education, and put into practice what you know.