Real Estate Investors Fail When They Falsely Relate History to the Present and Future

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Many believe a studious real estate investor, -heck, an investor in anything, can study history to ensure investment success.

“Since this is the way it’s been in the last generation or two, logic says that’s the way it’ll be now.”

I was literally taught that, face-to-face in many seminars in the ’70s and the ’80s.

A couple of those guys had been incredibly successful. Later on they all either changed their tune or got it changed for ‘em by reality -ugly reality!

What I later learned, often the hard way, was the difference between so-called history, and the little details that made it so. History repeating itself is often not akin in any way, shape or form to the remake of a movie. In other words, check the fundamentals. More on that later…

Speaking only for myself, investing has proved NOT to be like history. The belief that we can learn the history of real estate investing backwards and forwards then embark on a never-ending winning streak has turned out to be very mistaken.

Related: History Doesn’t Repeat Itself but it Does Frequently Rhyme

I’ve met folks who believe that to the bottom of their souls. ‘Course, they don’t believe it any longer, as they had their butts handed to ‘em not long ago. You no doubt heard about the busted bubble, as it was in all the papers. ;)

Those who’ve studied the history of real estate investment often come up with can’t fail formulas. The only reliable factor found with most investment formulas is that most of ‘em work like crazy, ’til the day they don’t.

Here’s a real life example where learning from history turned into a bad joke.

Details matter. Fundamentals matter. Sometimes history isn’t repeating itself, it’s just the surface results that are the same — for awhile.

The first 33 years of my career were spent confined to the boundaries of San Diego County, mostly the southern half. Beginning from late 1975 through about early fall of 1979 we saw for the first time ever, what the OldTimers (of my time) called runaway inflation.

The appreciation on both local real estate values and rents took your breath away!

For instance, a duplex selling for around $35-40,000 in late ’75 sold for around $100,000 just 5 years later. Enter the horrible recession of the early ’80s and that came to a stop the same way a car stops when hittin’ a brick wall! Not like the most recent recession -No sirree!

If you wanted to buy a home or an investment property in 1981 or ’82 you were gonna be payin’ roughly 16-18%. It was THAT kinda recession.

But then things turned around. By late 1985 we saw the return of value appreciation and rent increases, with a vengeance. Prices skyrocketed. Builders built like trees were about to become extinct. Homebuyers — literally — camped out at new projects so they’d be able to pay a lower price than the next phase of the same project, which was already having lots graded.

It was that crazy. Not only did the prices set dizzying new heights at a truly scary velocity, but real estate investors were noticing something else. The rent/price ratios were becoming laughable.

“The investor who’s heedless of the signposts will pay the price. Only the fool ignores what’s consistently in front of them.”-Benjamin Graham

Low interest, very attractive rent/price ratios and new/young properties in blue chip locations will not be the eternal norm. Perfect storms are incredibly rare. They don’t last, as they’re….you know, storms, not the norm. Storms are what ‘blow into’ a region. Normal doesn’t ‘blow in’. :)

There is no divine right to the currently available combination of very attractive RE investment factors we’ve enjoyed for the last few years. What investors must never forget is that the chart goes both ways — not always up trending or down. Duh!

I’ll never forget the predictions in San Diego by those with access to barrels and barrels of ink (not to mention what TV and radio ads were sayin’) who maintained that the local market would act as it always had. They were dead wrong, of course.

But so many of us seem to have short and far-to selective memories. And there’s the rub: history, contrary to the majority view, was not repeating itself regardless of recent events!

What The Details Really Were Telling Us

Let’s put the punchline first, okay?

The key difference in the most recent cartoonish run up in real estate prices was loan underwriting.

Double-Duh, right?

Sometimes folks gimme too much credit for figuring that out in real time. Also, I clearly wasn’t the Lone Ranger either. But those who knew they recognized history ‘repeating’ itself couldn’t buy enough real estate income properties.

My local market was especially on fire, though not even in the same league as some. I don’t deserve any real credit for recognizing the difference for two reasons. First, it was as obvious as water being wet. :) Second, serious analysis simply outed that very conspicuous difference.

Fundamentals don’t try to hide. They’re always there to be found in open sight.

The 1975-’79 and 1985-’90 appreciation parties were mostly, at least in my home market, a product of supply and demand. From the ’70s through the beginning of the recent fiasco San Diego benefited from a net/net/net population growth of 50-80,000 virtually every year. We’d expand, then, instead of contract, we’d just rest awhile. :)

From 1981 to the peak of the bubble our median home price went from $100,000 to around $575,000 or so. But during the decades before the birth of the last bubble, the underwriting of purchase money loans made by institutional lenders wasn’t fantasy based.

Related: The Housing Bubble You Haven’t Heard of (Yet)

There were no junior high science teachers making $150,000 a year back then. That’s the ‘little’ fundamental detail that was different as we began the new century. Again, Duh to the power of infinity!

By the time the end of 2002 was looming I’d made the decision to abandon my local market. It wasn’t that I hadn’t already concluded we weren’t in Kansas any more. It was a very big decision to make. But what was the alternative? Tellin’ people that buyin’ 2-4 unit properties for 20-22 times the annual gross scheduled income was sane? Stand in front of a mirror and just try to say that with a straight face.

Those who are surest about what the basic investment future holds have historically often proven to be the ones most brutally injured financially when the market ends up surprising them. Imagine that, their crystal balls failed.

Here’s some breakin’ news: The ONLY thing we can take from the past is that the future will always surprise us.

We just don’t know when. That one very basic principle is what has guided my career since I first studied the real masters of the investment universe. At least that’s how they named themselves when mentoring me. :)

The Takeaway

In baseball we tell our kids to keep their eye on the ball. Ya can’t hit what ya can’t see.

Same with real estate investing. Brutal honesty, at least to ourselves, is the only thing that will save us sometimes.

Fundamentals can’t be faked. Fundamentals is THE BALL. I know, cuz I’ve seen me try. Each time I tried to outsmart the fundamentals I lost a property. Three of ‘em. I don’t kid myself any more, and haven’t since the mid 80s.

First learn what they are. Then keep ‘em close without fail. They don’t hide, and are easy to spot. It’s even easier to recognize when they’re not present. What most simply won’t do is walk away.

The hardest thing I’ve ever done in my nearly 45 year career, hands down, was to walk away from my beloved hometown market but it was also the best thing I ever did!

You can fight this principle valiantly for years, but in the end you’re gonna lose. Sometimes you’ll lose a lot. There’s not a rational reason in the world to predict a future contradicting fundamentals laying around in plain sight. They’re undefeated and timeless.

Just like you’ll not beat the market, you won’t win as a real estate investor tryin’ to overcome fundamentals. I’ve often wondered why folks even try.

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About Author

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.

6 Comments

  1. The fundamentals are still in place. Buy for cash flow, today. Know your expenses. Know your market.

    Many investors get on the RE hype, and get over extended. Their numbers are great, if you only put in $100, and generate $100, that is terrific cash flow. But also highly risky.

    Far too many investors were bailed out in the early 2000s, as the market appreciated and gave them a ‘get out of jail free’ card. Once prices stagnated, or went down, they went broke. BUT, there were still plenty of investors, doing it right, and made a TON of money in those days.

    Local markets are still good, but you have to look harder. Pre-MLS and Pre foreclosures are still the way to go, as they always have been. Buying properties and re-positioning them will always work. Buying run down properties, in decent areas, and rehabbing them will work.

    • Jeff Brown

      Hey Eric — From where I sit some local markets are still good. Most aren’t. Take San Diego. Please. :) The local semi well located duplex sells for around $400-500K with $30-35K GSI. And, they’re 50-80 years old. And, they come with functional obsolescence. I’ve refused to sell local investment properties here TO investors for 11 years now.

      Most local markets, in my view, simply are not worth the effort.

  2. Sharon Tzib on

    As investors, we should be letting the bandwagon pass us by, not clamoring to get on board. Good reminders, Jeff!

  3. Great article Jeff,
    I see many investors saying we are now in another bubble because prices are going up. They aren’t looking at any other factors, prices are going up so we must be in a bubble.

    In the 2000’s I saw crazy lending going on with 125% 2nds, negative amortizations, stated loans for everyone based on the hope house prices will go up.

    Now I see too few houses for too many buyers. It is is not loose lending driving the market, but string buyers with very few choices. This may not have been the point of your article, but I think investors need to look at every situation independently not assume since prices went up they must crash again since that is what happened before.

    • Mark,

      That has been a large part of our problem locally, and across much of Canada: too tight of a market which has helped fuel an almost silly increase in prices.

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