Astute investor or lucky idiot?

Question

I was thinking about the real estate bubble and there being experienced investors out there who saw it coming and called it "obvious." On the other hand, there were also very experienced investors who were completely blindsided. My question, for investors who have seen more than one market cycle and came out of the last one alive, is what kind of analysis did you use to see it coming? Price to replacement cost; Price to rents; Transaction volumes; Mortgage qualifications? Or were you just what economist Nassim Taleb calls a "Lucky idiot"?

Michael Zuber · Answer

I follow affordability index. When it gets below 20% I look to sell my houses

It saved my butt in 2006-2007

Account Closed · Answer

I think part of what we saw were the pigs going to the slaughter.  I still remember the stories about Florida condos that were never even lived in but were being bought and sold sometimes in as little as a week.  These investors were speculating and while the boom was on they did very well.

I remember numerous real estate agents patting themselves on the back because they bought great properties that would appreciate even if they had to ride some negative cash flow for a few years.  I doubt that many of these investors are as appreciative of their investments today.

Regardless I think there are opportunities in almost any market.  IMHO it is more about understanding your market, buying right from day one and looking for ways to insure success in your purchases.

At times it will be hard to find good investments and at other times it may be very easy.  Learning to find a great properties when the picking are slim, can be a great tool at least it has worked for me on a number of properties.

It fascinates me that some call real estate investors today, speculators.  While those investing before the boom where not so often called speculators.  Perhaps its the herd mentality.  It is easy to get caught up in the moment when you are following someone.

Michael Zuber · Answer

The 11 was focused on my market in Fresno CA Not CA wide

For Fresno I reference the local paper Fresno Bee who publishes a monthly metric

Z

Alan Mackenthun · Answer

Good question and some real good answers.  We heard all the hype through the early 2000's and were interested, but simply weren't interested  buying real estate and managing property simply for appreciation.  For us, there has to be some reasonable cash flow to make the property management worthwhile.  There was no way we were going to buy property with rent not even making the payment on the property.  Besides, it was obvious that a bubble was inflating.  Prices can't rise the way they were long term.  Long term real estate rises at about 4% annually.  Loan terms were unreasonably generous.  It simply couldn't last.  Long term metrics like the affordability index are great to look at, but you simply run the numbers trying to take into account all expenses, make conservative estimates for maintenance and appreciation and see if the projected result is worth your while.  For us, we love it.  We bought our 1st 2 rental properties in 2008 and now have 10.  We'll keep buying as quickly as we can raise down payments and long as we can continue to find deals that makes sense for us.

Michael Zuber · Answer

Jon K - my strategy is to buy as many cash flow houses as I can and then let affordibility resort to the mean

I invest in California and Affordibility got down to 11 in the last cycle

Mike

Ophelia Nicholson · Answer

I remember watching MSNBC in 2005 and there was a guy on there- I can't recall who he was or is but I remember him telling everyone that oil would go to $120 a barrell- The entire panel looked at this guy like a total idiot- He has absolutely no clue what he was talking about- Not sure why that interview stuck in my head all these years.

The key is he saw it coming- There are always people who saw/see it coming.

I've been working in mortgage for 12 yrs and I kep't telling my family don't worry it will come right back down- Just like I'm telling them now that it will go back up. 
We were doing mortgages with pick options and people were paying the minimum payment like it was a credit card- People were mega greedy and bought property they couldn't afford. Everyone was greedy and like the Tulip bulbs of Holland- There is great depression following a giant run-up.

The people who didn't see it coming - Didn't want to see it. Noone ever wants to believe the gravy train has stopped until they have no choice but to believe.

Amazingly enough- Not by choice to be honest- but my buying habits started in 2001- 2003. Sold mostly everything by 2006 and stood still until 2010 and then started the buying again.

Ziv Magen · Answer

I feel comfortable in Japan, which is a low risk environment, so I look for areas netting around 15% rental yield pre-tax. If I compare it to Australia, where I get app. 4-5% rental return and hope to get 10% cap gain (maybe, if things go downhill and I'm very, very lucky)- ill take the 15% in the bank any day - not relying on capital gain means, for me, freedom from a lot of the economic speculating (gambling) and uncertainty.

Yan P. · Answer

Ziv Magen, I'm in the Marks, Munger, and Buffett camp as well. I believe there is absolutely no way to predict the future. But, all of them agree that you should have a fairly good understanding of the current environment.

When you buy for yield, you are still using a ratio to determine its attractiveness based on something (such as historical returns). So, you could say, "I buy when yields are above X%" and "If the yields drop below x%, I'm not adequately rewarded for my risk and don't buy." Same thing as Michael Zuber does except his is the affordability index.

As tradition, I did a poor job of asking the question. How about, what metrics do you use to determine if you are a buyer in the current market? And what is the actual number (for example: I don't buy below a 10% yield, or when I see blue pigs fly instead of pink, or...when the government says everything is fine) I was joking on the last two...

Ziv Magen · Answer

I would label myself an astute idiot in this regard- knowing there's no possible way I (or trump, or buffet, or bloody Stephen hawking for that matter) could predict what's coming in today's economic environment, I completely forsake capital gain predictions and speculations, go for utmost cash flow, spread geographically to hedge risk, and get the best property managers I can get my hands on, to ensure maximum vacancy regardless of market conditions at any time. Buy small middle class units (there are always middle class masses, in every economy). Been working like a charm for myself and my clients.

John J · Answer

Michael Zuber Can you tell me where you got the 11 from?  The lowest I can see for the past few quarters with San Francisco being the lowest at 22 in Q4 2010.  http://www.car.org/marketdata/data/haitraditional/

Thanks!

Astute investor or lucky idiot?

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