Experts: Change focus

Despite last week’s downturn in the Dow Jones industrial average, it could be a good time to pick up bargains if an investor is willing focus on long-term investing, according to local experts. Or investors might just want to put their money in real estate — outside California since the market here is suffering.

The stock market rebounded some after Tuesday, when the Dow Jones industrial average plunged 416 points, prompted by a massive investor sell-off.

But with the price of stocks at a historic low, it could be profitable to buy if the investor is ready to hang in there for the long haul, said Pete Peterson, financial advisor at Costa Mesa’s Edward Jones office.

Despite Federal Reserve Board Chairman Ben Bernanke’s assertion Thursday to the House budget committee that he projects some long-term economic growth, the market’s dip is evidence that it can be volatile and risky.

“We never know what’s going to happen tomorrow or the next day, so to say this is the absolute buying opportunity for the short-term, we never know,” Peterson said.

But the market’s uncertainty lends itself to the argument of Jason Hartman, owner of Platinum Properties Investment Network.

“Merrill Lynch and those companies have a very good process — I really compliment them on their process — but I criticize them on their product,” Hartman said. “It’s a lousy product and a great sales process, so what we do is help people invest in real estate.”

Hartman said he thinks the people who make money on the stock market generally have significant principal to use, but that residential real estate investing “is a great place to invest the bank’s money.”

But Peterson maintained that an investor must keep an eye on the future.

“Stocks have historically outperformed real estate drastically,” he said. “Now, a lot of people argue … [that] the real estate market may go down, but I still own my real estate. That is true, but if you look at even the biggest crashes from 2000 through 2002 … people still have their stocks.”

As long as investors look to high-quality names to invest in, they won’t have to worry about what’s going on from day to day, Peterson said.

“Just because the terrorists blew up the World Trade Center, although it was so incredibly tragic, it didn’t stop people from drinking Coca Cola,” Peterson said. “Fear and greed are the two things that prevent investors from being successful.”

While he believes playing the stock market is for the ultra-rich, Hartman said investing in residential real estate has created real wealth for the middle class.

But with the Southern California real estate market sagging, Hartman is helping people invest in property outside the state where he says investors can get the best “rent-to-value ratio.”

“We want to see our investors get a 0.7% rent-to-value ratio, which means 0.7% of the value of the house should be the monthly rental income…. It’s acceptable to have a 0.5% ratio … but what’s typical in Southern California is 0.3%,” Hartman said. “It’s actually a better deal to rent here than it is to own now. Here you can rent a $1-million house for about $3,000 per month, which is a great deal for the renter and a lousy deal for the owner.”

Instead, Hartman suggested investing in places like Austin and Houston, as well as Alabama, the Carolinas and Utah.

Since it may be hard for the busy Newport-Mesa resident to manage and maintain an out-of-state property, Platinum Properties will do it for them. The company contracts with management companies in the states it helps investors buy in.

Corey Donaldson — president of Avalon Properties and founder of Orange County Creative Real Estate Investment Club in Costa Mesa — said one of the problems with investing out of state is the difference in tax percentages.

“One of the biggest negatives that had people hurting when they bought out-of-state is that in California the tax rate is 1.1%. In Florida and Texas it’s between 2.5% and 3.5%,” Donaldson said. “People buy properties out of state and expect it’ll be the exact same as here in California, but it isn’t.”

He also said buyers who invest outside California may not have a pulse on what’s going on from state to state.

Regardless of where an investor wants to put his or her money, there is one common thread — diversification.

“I own properties in 12 states and am totally diversified,” Hartman said. “There’d have to be an entire global depression for me to get hurt because all my eggs aren’t in one basket.”

The key in both arenas is to keep looking toward the future — collect rent to pay the mortgage and ideally it’ll lead to a constant cash flow; or invest in big names that stay relatively consistent on Wall Street and prepare for another market upswing. Either way there’s risk.