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Financial Jiu Jitsu will teach you how to gain leverage in the real world, step by step, until you are confident you no longer need more.

Review of my prediction on Tucson real estate prices

Review of my prediction on Tucson real estate prices

Last year on 6/13 I published an article titled How Much Higher Will Tucson Real Estate Go Anyways? Here is the final paragraph of that article with the important stuff in bold:

"I believe that it is likely Tucson home values will improve by an additional 28%. How long it will take is fairly arbitrary to me personally, but since that info is relevant to most people, I will ballpark it for you:

  • a conservative estimate would be that a full recovery will occur in the next 5-10 years.
  • An aggressive estimate would see this bounce back up in 2-3 years. (I believe this personally but cannot justify it. So alas, it is a risky estimate at best)
  • Realistically, the recovery will fall somewhere in the middle of the road at 4 years.  

There you have it, 28% in 4 years is not bad at all. It ain't gonna to turn you into a millionaire but at this point that'll do pig, that'll do."

So I had predicted a 7% y-o-y increase in sales price as being the most likely. Here we are almost a year to date (This is 5/1/18 in case anybody is wondering) and the y-o-y prices have done the following:

 6% gains y-o-y in Tucson, AZ. Not bad for a young buck not bad I'd say.

6% gains y-o-y in Tucson, AZ. Not bad for a young buck not bad I'd say.

As the more astute reader will notice, the X-axis of the graph is always strange on Trulia, as today is 5/1/18 and the graph shows 8/1/17. Whatever, you get the idea. 

But note, there was more to my prediction. I will double down and say that the housing market has an EASY recovery to pre-recession highs and target an additional 22% to go in 3 years. This is not a metric I am very concerned about, because of the piddly initial investment on a rental property you absolutely do not need the property to appreciate at such a rate to make money. I have calculated in the past that a conservative expectation of a return on investment of a rental property will be in the realm of 31% a year. Don't believe me? Then check my numbers here:

The benefits of holding a rental property while claiming depreciation essentially mean that your net worth could tolerate a 31% LOSS in return on investment and still break even for any given year. Assuming 20% down is your initial investment, that means you could easily weather .31*20 or a 6% loss in house value annually before you would ever even see red on your bottom line. That's fairly impressive right there, and in and of itself indicative of a huge safety factor/cushion for real estate investors. 

If I haven't convinced you to get in yet then I probably never will. It is important to note that with any investment there will be inherent risk. The following scenarios could completely destroy any hope of this being a profitable endeavor for you:

  • Another 2008 level crisis where you welch on your mortgage because the paper doesn't look good any more.... (note no sane person would do this but apparently we are a minority in the US)
  • You lose your job, burn through your 6 month safety cushion, and have to sell the place while the economy is in the middle of a recession. I do not think that all of these events are likely to occur in situ, but it is possible I guess. 
  • Your maintenance cost is through the roof for many, many years and you can't afford to get it done so you lose your tenants. 
  • Your wife leaves you and takes it.

Nothing above is very likely, except for the wife thing and I would think that would be a no-brainer because in any scenario where you have accumulated a net worth you are going to lose your ass. I might as well have put "heart attack that kills you" on the list come to think of it. All of the scenarios above are completely avoidable by using common sense and planning. Any recession can be weathered, people made it through 2008 and their house values bounced back, and people made it through the dotcom bubble bursting too. What are you waiting for? Lightning to not strike? Go get started building your net worth and don't come back until you have done something worthwhile. Otherwise why read this financial blog stuff anyways, are you a masochist?

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