Long Term Perspective

Real estate in Southern California is cyclical.  The current down cycle we are currently experiencing is by no means the first.  If you bought residential real estate at the prior market peak in June 1990, you would likely have been underwater until February 2000 when the market finally regained its peak index value of a decade earlier (source:  S&P Case Shiller LA metro index).  From peak to trough the market declined about 27% during that period before regaining its prior level.

If you bought during the 2005-2007 period, you’re probably still underwater and will be for a while yet.  The S&P Case Shiller Index for Los Angeles hit a peak in September 2006 and has declined by 38% since then.

However, even if you bought at the earlier peak in June 1990 and remained invested, your property today would have appreciated 70% even after this most recent large price decline which began in 2006.  If you had bought in 1995 and sold in 2005 your gains would have been much greater.

Of equal importance is the fact that you would have enjoyed rental income throughout that period.  The keys to success are a long-term perspective; a financial capability to ride through the cycles; and an acquisition price that produces a solid ongoing annual cash flow yield from the property’s rental income.  Long-term appreciation is what turns a good real estate investment into a great one.  However, it can’t turn a bad investment into a good one.  If you buy a property with weak cash flow at the top of the market, don’t depend on the market to bail you out.

You also have to believe in Los Angeles: the lifestyle, the weather, nearby beaches, deserts and mountains, the Hollywood glitz, etc.  If you think that what makes LA unique and attractive now, will continue in the future then real estate can be a good long-term investment for you.

Lastly remember that while general market conditions are influential on your real estate investment results, choosing the right property and neighborhood are even more so.  Valuation is based on a multiple of operating income. A highly desirable property in a highly desirable neighborhood will allow you to grow your operating income by raising rents at a rate that exceeds market-level growth.

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