Short Term Long Term Deep Pockets and Dinghies On Small Docks

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When Grandma spoke we listened. She was tempered steel wrapped in GrandmaSpeak. Tough? Around our family, nobody, at least out loud, claims real toughness, as the standard set by Grandma is something for which we only strive. One day I was whinin’ about an upcoming American History test. She asked if I was prepared to do well. My answer, that I hoped for a good grade — not the answer she was aimin’ for. 🙂

“Hope” she said, “is not a plan, it’s an excuse being nurtured in the mind’s womb. Unless you’re referring to faith, this family doesn’t hope — it does.”

Many years later I was watchin’ a movie titled, The Rock, starring Sean Connery. His character voiced the same sentiment, but in, um, more colorful language, which won’t be repeated here. Suffice to say, he wasn’t impressed with folks who ‘tried their best’. He called them losers. Grandma was tough, but never unkind.

She also taught me to know my limitations — without limiting myself — a concept it took her more than a short time to explain to a 13 year old eighth grader. The long ‘n short of it is that we absolutely can do pretty much what we believe we can do, just not by next Tuesday. Maybe not for a couple hundred Tuesdays.

Slow down — segue zone.

Don’t wanna be right about this, but it’s my opinion we’re headed towards many years of sustained high unemployment, and all it brings to the table. Unlike the early-mid 1990’s or the same period in the 1980’s, interest rates should remain WAY low for longer than most suspect. This bodes well for serious long term investors with solid plans. It won’t hurt the feelings of the quick-turn crowd either. And there’s the snake in the woodpile.

Rehabbers are soon gonna learn a lesson, at least those who’re not as knowledgeable as they fancy themselves, or those who are, but don’t sport pockets as deep as may soon be required, or both.

I expect sooner than later the extend and pretend M.O. of so many lenders will arrive at its inevitable end. When this happens, most, not all real estate markets are gonna be flooded, relatively speaking, with super low priced REOs. Combine this price hit with the ever tightening underwriting, and you have a recipe for quick turn hell.

Short term investors without deep pockets are like dinghies tied to a small dock attached to a large ocean — with a tsunami on the way. Their only chance for survival is to find themselves safely loaded on a trailer headed for an inviting driveway somewhere far inland. The alternative is to be bashed into a floating pile of splinters.

Much as those in formerly high appreciating markets (like my own in San Diego) thought the final chapter would never be written, rehabbers without big-time experience/expertise AND very deep pockets, will become just another splinter, floating anonymously among the wreckage. Not so for the deep pocket bunch, who’ll be smilin’ as they whistle their way to the bank. They’ll be multi-tasking while there — depositing cash flows and/or profits, while acquiring the next super bargain.

Yes, the value of real estate is gonna go down in most of the country even more — how much more is anyone’s guess, but mine is it’ll be easily more than a tad.

Long Term Investors

There are a couple ways to go here. REO type product, or well located/well built property in areas relatively unharmed by this ongoing, seemingly never ending saga are pretty much it. I prefer to remain in areas in which the market correction was but an irritating set of waves, doing little real damage. Those markets have been and are still flourishing, and promise to be remarkably resistant to this next set of waves — maybe tsunami.  Of course, flourishing these days often means holding their own, which beats morphing into a floating splinter every way from Sunday, right?

Those who’ve bought in these regions the last few years, are now comfortably rollin’ down the investment highway on cruise control. For those whose retirement is down the road, they’re morphin’ the cash flow into ever increasing equity via monthly loan balance reductions. Those fortunate enough to have even deeper pockets have combined their leveraged acquisitions with a cash purchase or three, so as to fund their drive to free ‘n clear the others with the massive cash flow.

They’ll end up 7-15 years from now, depending upon the original depth of their pockets, with more retirement income than they ever thought possible. As Grandma taught so well, it wasn’t hope that got ’em there, it was eliminating their so-called limitations one by one over time. They replaced hope with doing — with knowledge, expertise, and experience — if not theirs, someone else’s.

The message I bring today is primarily aimed at those hard workin’ folks who aren’t yet playin’ in the Deep Pocket League. Simply put — either partner up with someone in that league, or tend to puttin’ your own financial house in order. If you opt for the ‘full speed ahead’ setting on your dinghy, the consequences could haunt you for quite awhile.

With apologies to Grandma, but not wanting to sound harsh or unkind — if you’re becoming fearful reading this, and not smiling with gleeful anticipation, put yourself on the sidelines — now.

As Grandma was also fond of sayin’ — “It’s much better to hold your place than to lose it.”

Think long term, at least for now — down the road, those are the folks who’re gonna be cruisin’ on calm seas. Without deep pockets, rehabbers may be headed for Splinter City. Those sportin’ pockets with impressive depth are about to kick some seriously impressive short term butt.

Again, as far as the new wave of foreclosures are concerned, and the subsequent drop in values, I hope I’m mistaken.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.