“Intellectual honesty is a devotion to understanding reality to the best of our ability and constantly, consistently, trying to improve on that knowledge. People who effectively practice this virtue are highly valued in the marketplace.”
His eyes told me he meant every word, but there’s no way I was going to listen to him; a 22 year old, barely a man, was telling me to turn my back on buying this new home. I reasoned that my $5,000 down payment was non refundable, and the sales agent just gave me another $5,000 for closing costs.
It was February 2006, seven months after the Reno real estate market crashed. Back when the likes of Inman news avoided the word “crash” like a bubonic plague. And this young man, carrying a manila folder full of evidence, was in the side of the angels all along.
Buying a home, whether it’s our first or tenth, is fueled by personal hopes and dreams — to fulfill our wife’s childhood dreams, a step closer to early retirement, or to buy ourselves more time for our children — and it’s extremely hard to go against these desires if we neglect our God-given instinct, a place where intellectual honesty thrives.
My journey started a year after I stubbornly rejected stern warnings in buying this new home as an investment. By late 2006, it hit me like a rock that the market has been on a nose dive, and I needed to sell. Fast. I immediately cut my losses short on three investments, and, in the process, saved myself from bankruptcy.
Furnish your instinct with facts. Try your darndest to set your heart and mind like a blank, white sheet of paper, where your only desire is to make the right decision. Learn from other’s experience, because it can take 10 years to fully recover from a bad investment. Look before you leap. JUMP.
Here are some things that will help:
- Study home builder stocks and sector group. They’re generally more risk-averse when going gets tough because they’re accountable to stockholders.
- If you are going against the direction of a struggling general market, lean on a decent cash flow rather than future equity. Plan a good exit strategy. Preferably both.
- Avoid averaging down. Many thought Yahoo!’s stock was a steal at $50 after the tech bubble burst.
- A good rule of thumb as a basic buying safety rule is to divide annual rent by the purchase price for the house:
annual rent / purchase price = 3% means do not buy, prices are too high
annual rent / purchase price = 6% means borderline
annual rent / purchase price = 9% means ok to buy, prices are reasonable
Lastly, patience is a virtue. There is a reason why most people don’t reach their pinnacle ’till 45.
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Article Author: Joe SalcedoJoe has written 8 articles for us.
Visit Joe's Website: http://Renohomeblog.com
Fascinated with business models more than super models. Joe is a real estate blogger from Northern NV (based in Reno) stalking the Reno-Tahoe Real Estate market since 2007.He is most at ease (and peaceful) when at home spending time with his beautiful wife Anna and their two kids.(And watching the 2011 NBA Playoffs.)
Joshua Dorkin
{ 7 comments… read them below or add one }
Great advice Joe. Don’t let your heart dictate a business decision. Get the facts. Hire good advisers and if they give you any advice, make sure that they can prove it with facts!
Solid advice, and new investors would be wise to follow. I’m grinning cuz I guess over 12% must be ‘really good’.
Good first article, Joe.
There are so much data, trends, and indicators that influence the real estate market, it’s important to keep an eye on them. I like your advice to avoid averaging down. For the most part, every investment is separate, and how your other investments are doing should not play into your decisions for new investments.
Gabe, Jeff:
Appreciate the comments. IMHO, there’s too much untested consultants and advisers out there.
Mathew,
I think it was Mark Twain who said that facts can be made to lie. I see it time and time again. But the right, basic trends and data I believe can greatly help an investor reduce risk. They just have to know what to study.
Thanks Mathew.
Thanks for the handy rule of thumb, Joe. I would add that experienced investors are currently not looking for 9% and “reasonable.” We want to knock it out of the park, like Jeff, above.
I can’t imagine what kind of logic-tortured, in-denial investor would buy at a 3% ratio — even in the hottest of markets. And a 6% ratio still turns my stomach.
10% is currently my bare minimum, and I don’t even like that benchmark much when some markets let you cherry pick at 15%….plus.
Mitch,
Right on point, man. The buying ‘rule’ was created for 1st time home / move up buyers, not for investors — so yeah, hit it off the park, by all means. I was checking some foreclosures here in Reno and my number was 25%! It’s not hard to find $55/ Sq. Ft here for smaller homes.
Good point, Mitch..