Investing in Real Estates
October 25, 2005

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When the King of Real Estate Investment cashes out, should you do the same?

If I were you, I would. 

Tom Barrack, arguably the word's greatest real estate investor, said by Donald Trump to have "an amazing vision of the future, an ability to see what's going to happen that no one else can match", is selling most of his real estate assets in the United States, according an interview with Fortune Magazine in late October, 2005.

As for the current US real estate market, Barrack says, "There's too much money chasing too few good deals, with too much debt and too few brains."

In fact, he sees signs of the tech bubble mentality in real estate. Too much capital is chasing real estate, he explains, with hedge funds, private equity groups, and rich investors all bidding on the same properties. "They've driven prices to the point where the yields on high-quality properties are like the returns on bonds, around 5 percent or 6 percent," says Barrack. "That's too low."

And he sees the bubble deflating soon. Barrack thinks the catalyst will be a trend few others are talking about, a steep rise in the price of building materials and labor. "Construction costs have spiked 20 percent in the past nine months," he says. The reasons: Shortages of labor and materials like lumber because of the building boom, and increases in the price of oil, needed to produce everything from plastic piping to insulation to shingles.

The slump will show up first in speculative hot spots like Miami and Las Vegas, he says, where condo developers are preselling their projects for what looks like big profits. When they actually build the units over the next year or two, he predicts, they will end up spending more then the units are now selling for.

At that point, says Barrack, the developers will try to raise prices. "But most of these buyers are speculators," he says. "They will either sue the developers to get the original price or take their deposits back and walk away." The developers will then put the units back on the market, and the glut of vacant condos will drive prices down. "It's the busted deals caused by construction costs that will cause the turn in the market," he says.

If I were you, I would wait for the real estate market to cool down, in order to avoid paying too much.  Don't forget, there is also the property tax every year, which is proportionally related to the price you paid for your property.

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