INVESTMENT SHELTERS

How to clean up in real estate without really trying.

Although gold has been glittering off and on recently, investors who jumped in when its purchase was legalized a few years ago still can’t bail out with enough proceeds to break even. Common stocks are being traded in record numbers, but according to a Changing Times report in April, 1978. the stock averages were still 7.17 percent lower than their 1968 level. Perhaps the best investment over the past ten years has been real estate: The young couple who scraped together a down payment on a $30,000 house in East Dallas in 1968 have seen its value rise to $75,000, an increase of 150 percent.

Actually, the couples return is even more dramatic than that. If they paid 10 percent down they invested only $3,000 of their own money. The average annual appreciation of the house over the ten year period was $4500, an annual return of 150 percent. Their $3000 down payment has become $48,000 in equity. Add to that the principal reduction on their mortgage over ten years, and they’ll clear S54.500 if they sell this month. (Their mortgage payments, around $300 per month, would have gone for rent if they hadn’t bought the house, so they don’t enter into the profit calculations.)

The only problem is, the couple still doesn’t have any money. If they sell their house and buy a bigger one, they’ll probably have to spend most of their profits on a down payment to keep their new mortgage payments manageable. If they can afford to pay $650 a month, reinvesting all the proceeds from the sale of their old home in a down payment will get them a $ 120,000 beauty in Preston Bend.

According to Oliver Mattingly of MPF Research, the fact that the couple bought the house in 1968, watched it appreciate, and is now willing to reinvest the net gain in a nicer home is what keeps the wheels of the real estate market spinning. The rate of appreciation allows the seller of the $75,000 house to make enough profit to buy a $120,000 house. And so it goes, from the bottom to the top of the market.

But what will happen if the couple buying their first house can’t afford a new one? Will the system break down? “The domino theory actually works better if entry level buyers can’t afford to buy new houses,” Mattingly explains. “There was little domino effect between 1970 and 1972 when federal involvement was the stongest. Young couples who had babies and moved out of apartments bought new Section 235 houses for $200 down. But now they’re going to Casa View or Irving and buying houses for $20,000 to $25,000. The seller gets his inflated equity, freeing him to buy up.” Mattingly scoffs at claims that housing is being priced out of the reach of the American public. “There are houses for sale in this area from $4,000 to $400,000.”

There is another type of investing going on in the area, the purchase of “investment” homes. Real estate people have been doing this for years, but almost exclusively at the lower end of the market, and usually involving rehabilitation. But now we are seeing instances of $70,000 and $80,000 second homes being purchased by individuals, usually by someone living in the same area. We talked with a Richardson investor who has accumulated three, each time putting 10 percent down.

“I figure that between interest and expense deductions and the annual increase in market value, I’m making $10,000 a year on each house.” He recognizes that there are risks involved, but so far so good. “I’ve been lucky. I’ve rented to people who have taken good care of the houses. But suppose I get a loser who tears the hell out of a place. I can put in new carpet, repaint and everything for $5,000. So I just make $5,000 on that house some year instead of $10,000.

The investor’s philosophy is indicative of what appears to be a rather widespread faith that inflation has become a permanent feature of our economy, promises of politicians notwithstanding. If this is true, then prospective home buyers will fare better by buying as far up the cost scale as they can afford, but by all means in a choice area. Houses that seem exorbitantly priced (such as North Dallas customs in the Richardson School District) compared with similarly equipped houses in less desirable areas, may well be the blue chips that appreciate the fastest. Real estate prices in the Park Cities and the Richardson school districts have increased by up to 15 percent in each of the past three years, a good three percent better than the rest of the Dallas market- because newcomers are willing to pay for those schools.

With most investment vehicles, like stocks and commodities, it’s the smarts who make the money. By the time the word filters down to John and Mary Q. it’s too late. The reverse is true in housing. While the smarts were taking a bath in real estate investment trusts, John and Mary were cleaning up on Shady Oak Lane.

How long can it last? Two years ago, the Texas Real Estate Research Center at Texas A&M University predicted an 80% rise in the average value of single family homes by 1985. We asked Dr. Roger P. Sindt of the Center if he sees anything on the horizon to change his mind.

“We intentionally came down on theconservative side at the time of the study,”he advises. “But considering the direction the economy is headed – the consumer price index, labor, materials -the 80 percent projection may be too low.Only time will tell.”

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