Author: Michael Douville
Consider these two items to change your investment thoughts: P/E ratios and Margin Debt! The Case Shiller P/E of 15.21 has been the average for years and years. It represents approximately a 6.6% annual total return of the S&P. As of January 8th, 2018, the Case Shiller P/E is 33.34 indicating an extremely high valuation; maybe an extreme overvaluation! Good times eventually end! In order to “normalize” to the 15.21 level, the S&P Pendulum would have to deliver a 60%+ loss. This time could be different, but the pendulum has never stopped at “Normal or Average” when the Cycle ends, but continues to the “Equal but Opposite” extreme delivering an 80-90% loss. Margin Debt, especially the current “Historic Margin Debt” facilitates the extreme by accelerating the downward move.
Margin Debt is magical when the market trend is positive and is an absolute Nightmare when the selling begins. Margin Stock Sale Requirements are set by the Investment House and once triggered, the margined stock is sold at whatever the market will bear, usually at a significant loss. Selling begets more selling and wild price swings can ensue; also crashes! The individual investor is often caught in a very bad and costly event. No one wants to leave the Party early! FOMO (Fear Of Missing Out) is notorious for clouding judgment regarding Risk! Rental Property in the growth corridors of America may provide even better returns at much less Risk!
Consider these conservative facts: Maricopa County, the Home of Phoenix, Scottsdale, and Chandler in Arizona has appreciated 3.98% per year for almost 35 years including the Great Recession when Phoenix became the Poster Child for Excesses! 3.98% does not sound like much, but consider this: Investment Down Payment is only 20%. Purchase a $200,000 rental with $40,000 down and the appreciation in the Rental Investment generated 19.9% gain in just a normal year! 2017 was a stellar year for Maricopa County with estimates of an average 9.8% appreciation. That $200,000 rental property is now almost $220,000 with a gain of 19,600. Remember that $40,000 Down Payment? In 2017, that $40,000 gained 49%!!!! As Income Investors, there is always cash flow that grows year after year, the initial rate has been at least 5%; that needs to be added! A Standard Year with 3.98% appreciation including cash flow and the return is almost 25%. There is more!!!
The first year Principal Reduction on a $160,000 mortgage, paid by the Tenant, is over 6%! Add that to the Return Mix and the rental property is returning over 31%. If the Investor qualifies for Depreciation, a $200,000 rental property will provide Tax Savings which can significantly vary from one Investor to another, however, typically another 4%+ is achieved. Add that to the 31% and in an average year, the cash flowing, cash flow growing Rental Property has returned 35%+!!!!!!
Consider the Risk! Consider Income growth! Consider Investment growth. Consider Maricopa County that receives 222 new residents everyday for part of your portfolio.
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