Jason Hartman’s special guest for episode #316 of The Creating Wealth Show is Jed Kolko, Chief Economist and VP of Analytics at Trulia. Jed’s background in economic development and research methods helps him transform real estate data, economic trends, and public policy debate into digestible insights for home buyers, sellers, and renters.

Before Trulia…

In Jed’s prior role as Associate Director and Research Fellow at the Public Policy Institute of California (PPIC), he led research projects and advised policymakers and business leaders on economic, housing, and technology policies.

Before his work at PPIC, Jed directed Forrester Research’s consumer technology market research, advising corporate executives on technology adoption and demand. He has also held positions at the Office of Federal Housing Enterprise Oversight (now FHFA), the World Bank, and the Progressive Policy Institute.

Michael and Jason Talk Current Events

Before getting down to serious real estate market analysis with Jed, Jason and regular guest, Michael, kick around a few timely topics. To get the discussion going, Michael asks how Jason would characterize the differences between an investment or speculation. In other words, why is his style of income property investing perhaps the only true form of investing around?

Defining Investments

Investment is a word thrown around loosely. A stock is an investment, right? Obviously. And so is a mutual fund or precious metal – wait! Not so fast. According to Jason, anything that doesn’t generate income or rent is not an investment but rather speculation. So strike all that stuff we just mentioned from the list. Except in rare cases where a stock pays out dividends, they aren’t investments. You buy a stock in hopes that the underlying company’s value will increase. That, friends, is speculation, pure and simple.

On the other hand, Jason’s style of real estate investing profits each month through tenant rental payments. This is why he doesn’t recommend buying vacant land. Unless you can rent it out as pasture land for grazing, it’s no better than stocks.

The Difference Between Investment and Speculation

Of course, the goal of buying an income property is to have immediate positive cash flow, but there is one permutation where it might actually make financial sense to tolerate a small negative cash flow for a period of time.

One of the most appealing aspects of investing in rental properties is you can finance the purchase price. We call that a down payment. There is no other “investment” where this is possible. Buy any stock, bond, or precious metal and you’re going to have to come up with the full price in order to take possession. For example, ever tried to talk your stockbroker into selling you a certain number of shares but you only pay him 20% of the price? Not to worry, you say, you’re good for it. You’ll pay the balance off in monthly installments. Trust us. No broker will say yes to that offer.

A Special Case: The Deferred Down Payment

There is one case where a negative cash flowing income property might still qualify as a good investment. This would be in the event you were were able to buy it and make a below normal down payment. Under current market conditions expect to pay 20% down for a real estate purchase. This just means that if the property costs $100,000 you’re going to have to bring $20,000 in cash or check to the closing.

But what if you were able to find a lender that only required a 10% down payment? The $10,000 you would save (the difference between a 20% and 10% down payment on a $100,000 property) puts you way ahead in the game. Even if your initial cash flow was, say, $100 monthly in the negative, there’s a good chance appreciation and rent increases will turn your cash flow positive long before the cumulative negative total reaches $10,000.

What is Trulia?

In recent years, Trulia has become a well known force in the industry for real estate analysis. Think of it as an online real estate marketplace serving buyers, sellers, and investors looking for property. It’s a specialized, sophisticated search engine. Thanks to the collection and analysis work undertaken by Jed Kolko and his team, Trulia is able to collect and manipulate search data generated by tens of millions of unique monthly visitors to the website into in-depth local demographic snapshots.  

* Keep in mind the following information is several years old and may NOT apply to current market conditions. Do your own research before taking action!

Ask Jed – Rent or Buy?

When this episode aired some of the local markets hardest hit by the recession and housing crisis were starting to recover. Jason and Jed discussed the annual rent versus buy recommendations published by Trulia. At that point in time, Jed said buying was the clear favorite if you’re just looking at it from a financial perspective. According to his analysis (based on a fictitious property purchased with a 20% down payment and 30-year, fixed-rate mortgage), it was 44% cheaper to buy than rent in all 100 of the largest markets in the U.S.

Property Search Patterns

Are there generalized search patterns to be gleaned from the data? Definitely, according to Kolko. When it comes to foreign investors, Florida and California are popular. Florida is also popular domestically, though it’s interesting to note that prospective midwest buyers are interested in Florida’s west coast while New Yorkers want to be on the Atlantic side of the Sunshine State.

For More Information

Mr. Kolko suggests those who are interested to simply visit the Trulia.com website and browse around. The trend blog area is a good place to start reading up on major trends in real estate analysis. (Image: Flickr | MarkMoz12)

More from Jason Hartman:

The Art of Stress-Free Productivity Tips
The Raving Capitalist and Stock Investing for Dummies

The Jason Hartman Team

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