UlTImATE SUccESS GUIdEIt is very realistic to find properties with net returns north of 8% on capi-
tal invested. Don’t settle for less. Don’t make the common mistake of
justifying lower returns by speculating on appreciation. Tangible cash
flow – a check deposited into your account each month – trumps specu-
lation and provides an added buffer of safety.
PURChAse PRICe CoMPAReD to MeDIAn InCoMesHistorically, in the U.S., home buyers pay about 3.5 times their annual
income for a home. This means a household income of $100k, would,
on average, purchase a home priced around $350k. Obviously, some
markets like Los Angeles and New York are higher, with home values
5 to 6 times income, but the norm is 3 to 3.5. When home prices run
too far from local incomes, housing affordability is stretched and prices
have a hard time sustaining. Conversely, if home prices are low relative
to local incomes, values have more room to climb.
During the real estate collapse, post-2007, we saw the effect of housing
prices that soared way beyond affordability. In my hometown of Orlando,
for example, properties were purchased by buyers who borrowed 100%
(or more) of purchase prices that were 9 to 10 times their annual income.
Like a stretched rubber band, we witnessed prices snap back as hundreds
of thousands of borrowers defaulted on their over-extended purchases.
Today, though, this can work FOR us, going the other direction. If af-
fordability is stretched, home prices hit a ceiling. If home prices are low
relative to local incomes, the opposite occurs: home prices will rise to