Super Smart?..or Super Sucker?..Riding a Great Market Cycle?: 1-Cycle Investors, Leveraging RE, & Feeling (Too?) Good?

[J. Martin]

“You can only tell who is swimming naked after the tide goes out.”

Are newer investors as smart we think we are? Or are we just riding an amazing market off a bottom?

This post is to get:
1) The honest truth from investors who have lasted – OR MORE IMPORTANTLY – HAVE GONE BUST -in prior cycles- Tips? Are we stupid? Lucky? Both? How to avoid tragedies we haven’t seen with our own two eyeballs?.. (don't just tell me to stop borrowing! lol)
2) Investors who started investing in the last market cycle, during the downturn, like myself – Share how much you think your success is attributable to the market vs. your own skills and cunning…

When the real estate market is doing well, it’s hard to lose. And it feels GREAT! :)But are us “first cycle” investors not quite as smart as we think we are?

This is a counter to my last post on how great the last few years has been...

AND HERE’S THE STORY…

I started investing during the last downturn, biding my time for a couple years, until the real estate market started reverting in 2012, buying my first property on New Years’ Eve of 2012. *Confetti trickles across the blissful New Years’ sky, backlit by *sparkling fireworks* *A passionate kiss* at the stroke of midnight, etc, etc.. I’m now an INVESTED real estate investor. My entire life “savings” of $12K that I slowly built while I increased credit card balances almost equally (forced savings? Lol).. bought me my first 4plex for under $400K, in the good ‘ol US of Bay! (Thanks FHA, Bernanke, etc..)

I had conviction. I’d seen so many get wiped out by the market in my day job, but a lot of signs pointed to this being an historic opportunity. There was blood in the streets. So after I saw the market bottom out, I decided to get more aggressive and truly bid to buy. The $3,500 in rents I got after rehab on the 3 other units, while I was living for free, was a bit better than I had budgeted! (even for one of the most marginal locations in the core Bay Area, like Richmond).

Many told me I was an idiot for investing in the worst real estate market in living history. For investing in a low-income area with a bad reputation (..that it turns out most have never visited). For MOVING THERE with my (then) girlfriend [different, unrelated story..]. For borrowing on a credit card to buy real estate. For buying a 4 unit vacant REO. For leveraging at 96.5%+ LTV. For buying a property that looked so ugly, and kinda smelled like piss.

For me, THOSE WERE ALL GREAT REASONS TO BUY (for this deal at this part of the cycle ;)

I’m an investor that believes in the long-term appreciation of land-constrained, job-filled, commuter-friendly, good weather, NIMBY building-hater areas. So I went back and bought another 2 houses with a partner, another 4plex with a partner, and another duplex with a different partner. All with high leverage, but even better cash flow…

But when the real estate market is doing well here, it’s hard to lose. In the Bay Area, the longer your flip project gets delayed, the more money you make from the market’s escalation for the last nearly half decade. I have seen even big mistakes recently be rewarded by the rising tide of the market. And those who are more conservative sitting on the sidelines watching others making a killing on what looked like unprofitable deals, as the market rises. You can see the same “impossible to lose” philosophy in the Banking Sector. For example..

NOT A SINGLE BANK IN THE UNITED STATES OF AMERICA FAILED/CLOSED IN 2005 OR 2006 - $0 Loss to FDIC. Regardless of amazingly risky loans, fraud (later found out), or just pure costly mistakes, lax internal controls & theft, etc, not a single bank could lose in this market. There was always another bank willing to buy them for a premium. Aka – sell to the next exuberant buyer.. It didn’t matter how low your trunks were, or whether you were swimming naked. No one really cared to know or look, because they were looking at the multiple and volume they planned to sell to THE NEXT GUY.

IN 2009, A SHORT 3 YEARS LATER, 157 BANKS FAILED - ~$40B Net loss to FDIC. (I personally helped close one bank my first year on the job – a $10 Billion Institution w/ ~$2B in govt/FDIC losses by public estimates). Talk about finding out who was swimming with their shorts off! (And who was playing lifeguard? :-/ )

In 2015, there have only been 4 closures, for a total of under $1B in estimated loss. Hard to lose in this market. Except for the very few that were still unwinding from a slow death from the last crisis, where it still hasn’t recovered..

Like banks, we are leveraged investors, exposed to the vagaries of the real estate market and consumer and investor sentiment. (But investors take first loss in equity position when banking is normal). And the wind is at our backs right now. @Account Closed , @Brian Burke , @Aaron Mazzrillo , @Jay Hinrichs , @Gene Hacker , @Kathryn M...

How much of our success is purely due to which way the winds are blowing? (the young “1-cycle investors” who have only read about prior cycles in books.)
 Are we really that smart? Or just lucky? (with luck favoring the prepared? ;)
Without the benefit of another huge upswing, how many of us will continue to be successful in the future? (including myself?!..)
Advice to weather the storm?