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What Needs To Be Said About Appreciation

by Lisa Phillips on February 2, 2014 · 13 comments

  
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Since I am on the ground in working class neighborhoods, I always try to find out the story of how the neighborhood became so distressed with low prices.  I always find out that these houses used to be in great neighborhoods 20, 30, 40 years ago – but when the jobs left, the neighborhoods began to reflect that economic decline.

I have some words of caution, and some words of hope, for those whose entire real estate investing strategy relies on appreciation, as well as tips for what to look out for to avoid these errors that would otherwise take 20-30 years to find out. For example, “single industry areas” are susceptible, and with the future changing rapidly in an economic downward direction – caution and heads up should be used.

Check out this video for more information!

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{ 13 comments… read them below or add one }

Dennis February 2, 2014 at 3:41 pm

Best bet is to invest in an area where most folks are government workers, the economy never changes for these folks. This includes areas around Universities, where a great deal of the local economy is fueled by government spending.

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Lisa Phillips February 2, 2014 at 4:39 pm

I have to say, even then that party is halting and stuttering as never before. Being in the DC region, you’re starting to recognize the look of alot of government employees faces, especially those deemed non-essential, that taxpayer funding isnt as certain as it was. There is still a ton of waste I see everyday, but people are little more keen than before. Thanks for the comment!

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Aaron Yates February 2, 2014 at 11:44 pm

Good quick post Lisa. Most people have the problem of being ‘closed minded’ or ‘one track minded’ in Real Estate. People like us, newer, seem to be more open minded and accept change.

I’m sure many people cringed when the read this. Many think appreciation is ‘gold’. Look what happened to many of them who ‘banked’ on it. Granted, they were living like kings until then and many did survive. Sure they have much more knowledge than me.

But I learned years ago, no matter what your income comes from, you need multiple sources from various ways.

Keep up the good posts. Maybe we will cross paths again soon.

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Lisa Phillips February 3, 2014 at 8:57 am

Yes, there is a level of being open to a market EVERYONE said was terrible, and I am reaping the benefits, so I definitely want to keep the discussion to see exactly why these old attitudes have not changed with all the associated technology. This isn’t 1999, we know so much more now its amazing we’re not talking about this more.

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Tim February 3, 2014 at 7:09 am

Nice post. They say when buying a home it is location, location, location.
I say when investing in a property it is cash flow, cash flow, cash flow. I do not buy unless there is immediate cash flow (and below current market value is usually a must too to “force appreciation” in todays market.

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Lisa Phillips February 3, 2014 at 9:00 am

Personally, my neighborhood went from completely working class to all Hispanic immigrant in 15 years – No one thought it would change, it came as a surprise to have such a huge demographic shift, but I instinctively know – things change faster than you would think. These long plays can and have definitely worked…but usually when you buy at the bottom. Thank you for the comment!

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Rachel February 3, 2014 at 7:59 am

Definitely a controversial topic, Lisa!

I have colleagues who invest for appreciation who are either negative or break even after all is said and done. From their perspective, I can see the pros in what they do as the neighborhoods are very attractive. It really does require an infusion of capital to weather the storms until selling time — they mostly do not invest for cash flow.

Unfortunately, the flip side is that sometimes these types of neighborhoods attract clientele that is more high maintenance who have higher expectations which can lead to misunderstandings and possibly lawsuits down the road. Of course, it’s not the case all the time but the possibility is certainly there.

Some of these colleagues have made a lot of money in the past yet have lost a lot as well. It may be a numbers game to them; they win some and they lose some. Some have expressed to me investing for cash flow is so paltry and “not enough.” And, these are folks who mostly have advanced degrees!

In any case, I think it’s all a matter of preference and what game one decides to play. Some are in the appreciation game while others are in the cash flow game. Though, having both gives one the best of both worlds!

Good topic for discussion, I know this will raise some eyebrows!

p.s. I’m not sure if you enjoy watching movies, but there’s a scene in The Wolf of Wall Street between Leonardo DiCaprio and Matthew McConaughey where McConaughey basically sums up the game for him: “Nobody knows if a stock is going to go up, down, sideways or in circles. You know what a fugasi is?… Fugazy, fugasi, it’s a wazi it’s a woozy, it’s fairy dust.”

He then goes on to tell him, “The name of the game, move the money from your client’s pocket into your pocket.” This means they make money whether someone makes money or not. And, making money no matter what is the name of the game for those who are in the know!

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Lisa Phillips February 3, 2014 at 8:55 am

Fugasi! That’s it. And, I didn’t realize I was such a wolf! :-) I just say have caution, we were all caught out in 2008, which really made me look and examine what investors where saying on why they are leveraging so much for this: Granted, if you are in a diverse economy, you can weather 20-30 years of the market playing. Just words of caution if you are in a town that relies solely on industries that are slowly being outsourced, because we know where that comes from. thanks for the comments, I just want more discussion on why they are so sure their property values will double in such a long time period, as that’s where I pick up the pieces for my investment strategy.

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Dennis February 3, 2014 at 2:25 pm

Yes, change can happen fast, I have a 3 unit that was on a quiet mostly owner occupied block. One of the little old ladies kicked the bucket, her son decided landlording might be fun and profitable. He rented the place to a nice young man with a “Too Fast, and Furious” type care, actually he had 4 of these cars. He was self employed in the shadow pharmaceutical industry.

Oh, how fast things do change! In Philadelphia things move very slowly when it comes to any government intervention (except taxes and fees). In 6 short months my 3 unit was vacant, all tenants moving to a safer environment. I didn’t bother to fill these vacancies as the tenants would have been substandard.

One day like the wind someone at the DA’s office decided arresting this fellow, and seizing his $100,000 car inventory might be a good investment.
As fast as he blew into the block he was gone, his rental house destroyed in the subsequent police search and general hard living was quickly boarded up.
Later a “For Sale” sign appeared on the house, and all of the other similar signs were removed from four other owner occupied houses.
Peace and harmony had returned to the neighborhood, one of my original tenants moved back in (no need to clean or paint), within a month all was again sunshine and roses.

Looking back it would have been a very good investment to have helped those other four owner occupants sell their deeply discounted homes with a few low ball offers.

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Lisa Phillips February 3, 2014 at 3:29 pm

Dennis: That’s an AMAZING real life example how values can fluctuate, even outside of outside economic influences. Thank you for sharing, I think this a good lesson on the fact that the only thing you can bank on is yourself and your rental standards, but little else.

In general, Its the long term appreciation play that I question, because so much can happen in that time. Especially if its not an owner occupied unit.

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Dennis February 3, 2014 at 3:44 pm

Early on I never looked for appreciation, instead I was only interested in cash flow.
As part of buying low income usually the seller is distressed or the property is so.
All of my units were bought no money down, no money out of my pocket, all with good cash flow.
I will count the tenants paying off the mortgage as appreciation, however all of the properties are worth double their purchase price today. Not hard to claim as they were all bought for 25 cents on the dollar.

I don’t think there will ever be buyers lined up around the corner, but as long as the management company sends me a check each month I will count these properties as a form of perpetual annuity.

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Greg Jackson February 3, 2014 at 7:31 pm

Lisa, nice post and video …

Awhile back, I read, “Timing the Real Estate Market” by Craig Hall (2004). You and the viewing audience might enjoy at a minimum checking out the Amazon reviews. Hall documents seven trends that drive real-estate timing decisions (and job growth is one of them!).

Happy investing.

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Lisa Phillips February 3, 2014 at 11:11 pm

Lol, thank you Greg! I am a Amazon Reviewer fanatic, so I will definitely see what I can educate myself on before actually purchasing the book. Thanks for the info, i’m curious about the other 6, but at least its an actual DISCUSSION, not just speculation.

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