They’re tearing down houses out west…as you’ve probably heard. It’s cheaper than going through all the necessary steps to get the houses mortgaged out, so banks are just bulldozing McMansions.

And closer to home, toxic drywall has become the scourge of South Florida.

It’s particularly bad in St. Lucie County. They’re now saying thousands of homes could possibly be contaminated…that the nearly-toxic levels of sulfur might have seeped into the foundation, meaning the homes will need to be demolished.

And the rest of the U.S. housing market is just as shocking. The free-fall in home prices is still accelerating. 20% of American homeowners are underwater on their mortgages…some 11% (and maybe more) of all the homes in America are unoccupied and unsold…

But most Americans still don’t recognize the biggest mistake they made during the boom…

And That’s Confusing Real Estate Speculation With Real Estate Investment

It didn’t even occur to me until just a few weeks ago.

I was watching a presentation from Frank Trotter of EverBank, and it gave me a renewed bearishness for housing. As one of America’s few responsible bankers, Frank has an intimate knowledge of the U.S. housing market…and since his bank isn’t holding a boatload of “toxic assets,” he tells it like it is.

He insisted that houses are not investments; they’re utilities. Buying a house for US$150,000 in 1975….then selling it for ~US$850,000 in 2005…sounds great, but after inflation, you only made about 1.5% a year.

That’s a nice little gain, but not on an investment. The house required upkeep…the lawn had to be mowed…you can look at the 1.5% as a return on your time.

And yet, as Frank answered questions following his presentation, the audience asked questions about when…and where…they should be buying houses. “Is it a good time to buy in Austin?” they asked…

And I realized that we’ve all been fooled. Hoodwinked you might say.

You see, the bubble saw prices rising like a rocket ship; and anyone with a piece of the action stood to make a ton of money. Even I watched the shows on TLC – saw a few nervous, amateurish homeowners flip a house and clear US$100,000 – and I was fascinated. “If they could do it…” we all thought.

But that was during the bubble. And as prices fall across the board, so do the profits to be had from speculation. And just because houses might start to seem cheap doesn’t mean the market’s in for the same kind of rising prices we saw in recent years. In other words; speculation is dying a pretty quick death in U.S. housing markets.

And indeed, most bubble-based “investment” really turned out to be speculation. These deals exposed “investors” to a heap of leverage…and as the old saying goes… “Leverage makes poor men rich, and rich men poor.”

But at the same time, falling prices are making true Real Estate investment more and more attractive, as houses and apartments reach crucial rent ratios and rates hit all-time lows.

So what is true Real Estate investing?

It’s All About Cash Flow!

And in some ways it’s easier…and far safer…than any form of Real Estate speculation.

Our Executive Editor – Justin Ford – has been investing in Real Estate for years. He’s taught courses and seminars on the subject…made a bundle off of cash-flowing properties…organized deals for other investors…and he knows firsthand the profit potential of true real estate investment.

And unlike most people, Justin still sees mortgages as a great way to build your wealth with relative safety. In a recent conversation with some of the younger members of our staff, Justin laid out a scenario where Real Estate investment could make them a fortune by the time they reach their 50’s…

“Go out and buy some houses selling for ultra cheap prices,” Justin says. “Buy at 4 to 5 times annual rent. You’ll be able to pay management, all expenses and debt service, allow for 10% vacancy and put a few dollars in your pocket every month. But make sure you get a fixed rate. Because the mortgage will then “kill off” the balance through amortization.”

“So buy a house today for $50k that was worth $125k at the peak”

“Have it professionally managed. 30 years from now, the mortgage will be zero. If you throw the extra cash flow at the principal, you’ll probably pay it off in 20 years or a little less. You’ll own the $50k house, free and clear.”

“And if it goes up just 1% or 2% a year on average (and it could go up a LOT more than that thanks to inflation) your $80k or $100k is yours free and clear. And you put in just $15k to buy it. (That’s $10k down payment and $5k closing costs and reserves.)”

“So you turn $15k into $50k, plus get net income in a scenario where there is ZERO appreciation for decades. Highly unlikely…given the major correction is probably more than halfway over (some homes, after all are selling for less than replacement cost, even if you got the land for Free!)”

“Add to that all the money pumping out of DC,” Justin concludes, “…and the prospect for inflation, including housing inflation, in the next five years or sooner is strong.”

We’ll be going into more detail on Real Estate investing in future A-Letters. But one thing is certainly clear; with the stock market still up for grabs and many other investments still suffering, true Real Estate investment could be one of the best profit opportunities at these levels…one that pays a steady cash-flow and gives you a real, tangible investment for your money. It’s at least worth considering.

Matthew Collins

Source: The Biggest Mistake We Made During the Housing Boom