Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes
One of the things I always try to be conscientious to is herd mentality. Recognition of herd mentality and the pure luck of a well timed divorce kept me from investing in real estate in 2007 and waiting until 2008 when I could get property at 20% of 2007 prices. Recognition of herd mentality also pushed me to start flipping a rental here and there in the past couple years when post sub prime fallout out, everyone thought the answer was in buying steady, secure, cash flowing rental properties rather than flipping.
There's a new herd mentality and you can see it by reading what the majority of posts assume here and any other place on real estate investing is discussed. It's the assumption of recovery. Just like everyone assumed in 2006 that every flip could be profitable (look in the old posts on here - it's in there) everyone is assuming that these new lows in real estate pricing are just waiting for a market correction to bring them back up. That may be true but it's to the point now that your barber can tell you REOs are a good investment. When your barber can give you just as good investment advice as a financial professional that's not a good thing.
What if things don't change? What if these prices are the new norm for real estate? Are you mentally ready for that? Is your business ready for that? What are you doing to be ready for the chance that the herd mentality is wrong? What's your attitude, plan and strategy going to be?
Historically, Real Estate has provided gains pretty much equivalent to pure inflation, though not along the same curve. Given the scarcity and the integrity of the underlying asset involved (land), this will most likely continue forever (in many economist's opinions).
For a long time (the past 50 years or so, inflation adjusted home prices diverged significantly from nominal prices, but in the past 25 years, the curves have started to converge, and are now pretty much aligned:
In my opinion, if you believe inflation is a given over the long-term, then you should assume that real estate will appreciate over the long-term. If you believe deflation will reign over the long-term, then you should assume that real estate will depreciate from here.
As for what I'm doing, I'm just doing whatever is profitable in today's market. Currently, that's a focus on rehabbing and flipping lower-end SFHs to first-time FHA buyers. I also have some cash invested in a couple big apartment complexes, in the case the rental market rebounds. And I'm always looking for good commercial deals. In other words, diversification on a small scale (actually, within a small market space), with a cash and effort focus on the strategies that are working today.
If tomorrow there is a more lucrative investment strategy, I'll move my focus in that direction, while still maintaining some diversification.
Or, if MIkeOH's predictions come true, we'll retire, move the family to another country and sit on a beach until we die or get bored again...
Tim, I'm not an experienced investor. I have a few rental houses, but am growing. We do have one thing in common. I, too, pay attention to the herd mentality. Right now people are scared to flip. So that's what I started doing. Almost done with one and looking for more. My strategy is to buy larger SFH's (4-5 bedrooms) at the 2.5-3% rule range. I hope this will allow me to lower my rents to adjust to any economic condition and have a niche market (not a lot of 4-5 bedroom houses in my investing area). Currently I only have one mortgage, so I'm being careful about leverage. I do plan to buy more rentals this year, but will be spending some time on flipping. Good discussion topic!
-Rich
Oh my....I think about that all the time...and I hope it's not the way it'll be...I really hope herd mentality is correct. I have just placed a big chunk of my $$ and hope in an investment that in order to be good.... R.E. has to recover by at least 10% in 3 years. But if it doesn't, it'll just be an OK investment. Only the ones buying right will be able to survive...hence the importance of the purchase price !
My strategy is to buy larger SFH's (4-5 bedrooms) at the 2.5-3% rule range. I hope this will allow me to lower my rents to adjust to any economic condition and have a niche market (not a lot of 4-5 bedroom houses in my investing area).
Very, very smart move Rich. Personally I haven't touched anything that doesn't meet the 2% rule as a bare minimum (actually 5-7% is my minimum anymore) because if gives me leeway to adjust to peoples' needs. You're also smart with flipping some. If you can, try to flip to create the cash to own your rentals outright.
Excellent article Richard and you're right. If you want early 2000s real estate appreciation it won't be found in real estate. It will be found in Insurance company stocks and healthcare service startups and the venture capital firms that buy them with big IPOs this year if the health care legislation that forces everyone to become a paid customer of insurance companies goes through. Just be sure to sell those stocks before claims start to get made. Then the money will be made by reinsurance companies (companies that insure insurance companies) for a little while before they go down unless their plan is to make the treasury the reinsurer. That's just speculation on my part.
Ana,
Find someone close to you with gray hair who's been in this business successfully for at least 3 decades and get some advice. You're saying "hope" way too many times not to. That's a sign it's time to seek the wisdom of elders.
Another way to look at the mentality is that as prices do go up (and they will) it is more likely to be because of the upcomming inflation. If your home values do not go up more than the inflation then you are loosing money!!!!!!
Many will see this as a recovery because they will compare it to previous years prices and will forget about inflation. No one will actually be giving those home values in After Inflation Values (AIV).
I wonder how long it is before some economists begin stating prices in terms of 2008 dollars.
I bit the bullet and decided to flip last year instead of hold for rental since money was getting harder to get and since everyone else I knew locally had given up on flipping. I sold both my flips very quickly and made over 20%ARV in profit on each. The third I purchased is almost complete (still need to pour a driveway and sidewalk as soon as we get out of this deep freeze) and I should do even better on it. Now with more cash I plan to pick up a couple more rentals this year but plan to flip another 4 if I can.
As far as inflation goes, I agree it will probably wipe out a lot of the appreciation (if not all) but it also reduces the impact of the debt - assuming rents rise with inflation.
With oil breaking 80 with no reason for a reversal, and inflation looming due to the fed's printing press, it's a pretty safe assumption that interest rates are going to rise, dramatically as the fed attempts to offset the false growth period of inflation. I would expect that in between 6 and 18 months, the private debt market will be flooded with asset-backed notes. A second round of forclosures in mid-late 2011 once the money becomes more restricted.... Then stabilazation! :) Now, im not an economics professor, and I can't really spell too well... This is just how I see things going.
As far as my personal investment strategy? I intend to leveredge as much as possible, on as many cashflowing properties as possible, with fixed interest low cost debt. I hope to ride the inflationary "value" spike... And sell the lot somewhere before the second round of forclosures.
If all that fails.... I'll be satisfied with cash-flow positive properties, and low-cost fixed rate debt.
Real estate has always been the investment vehicle of choice, and will reasonably so continue to be. The internal need or instinct to be in control of your domocile is not only human nature, but living nature... This unavoidable demand for security and exclusivity will always perpetuate the market foreward.
Population projections are always a good way to feel good about investing in real estate also... It is a fact that during tough economic times, people have more children. In America, we are projected to experience exponential population growth. That makes me feel a little safer in my real estate investing for retirement porposes.
This is just my mid-night rambling, I'll probably wake in the morning to read this and see that I had mae no reasonable sense. :)
Excellent topic by Tim. Real estate is NOT going to recover, any more than the price of tulip bulbs is going to skyrocket in another tulip bulb craze. The home prices reached during the previous decade were nothing more than a speculative bubble and will not be repeated (in real, inflation adjusted terms) anytime soon. In fact, as we begin to pay the piper for all the government's reckless spending by entering a REAL DEPRESSION, people will not be buying houses, cars, or any other luxuries.
I expect that EVERYONE will suffer in the coming depression, including the owners of rental property. Vacancies are already up nationally because people are moving out of their rentals and moving in with family and friends. During a depression, that will occur in huge numbers, which will drive rents down.
In my opinion, we're in for historic pain and I strongly suggest buying extra canned food, water, guns, ammo, and gold (or silver). This country and its economy is going to collapse. It's absolutely inevitable.
If you believe the Russians, that's going to happen any day. If you believe respected trends forecaster Gerald Celente, it's going to start in 2010. I suspect that it will take longer as the government pulls out all the stops to keep the mother of all ponzi schemes afloat. What's clear is that our country is BROKE, financially and morally. Such a society can not survive. We're in decline and becoming a third rate country.
What is the answer? Continue your real estate business as usual, but BUY ONLY AT A HUGE DISCOUNT and pay down as much debt as possible.
If you buy for cash flow the future of the housing market will never severely impact you as people always need a place to live, whether we are in a downswing or an upswing. I was taught years ago that the real estate cycle is generally a 20 yr cycle. If you look back historically we crashed in 1988? and again in 2008. If we never come back up your risk is minimal and your return is minimal until a recovery where you sell or your debts are paid off and cash flow increases dramatically. Flipping can work the same way as long as you invest with your head and are mentally prepared to either carry that house or lease out the house and cover your debts until there is a change - i.e. decision time. No analyst in the world can give a concrete time line prediction of when this will occur. History however tells us it will return.
For every person that profits in real estate there is generally someone that loses. It is still a gamble but a gamble that usually pays off to those that remember the cycle. If you plan for the long-term but take advantage of the short-term advantages when they present themselves I feel you cannot lose. I've watched many very savvy investors through the years buy up like crazy on short term financing hoping to flip for profits only to see them fall. I've also seen several old timers become millionaires by taking the tried and true road.
Historically, Real Estate has provided gains pretty much equivalent to pure inflation, though not along the same curve. Given the scarcity and the integrity of the underlying asset involved (land), this will most likely continue forever (in many economist's opinions).
For a long time (the past 50 years or so, inflation adjusted home prices diverged significantly from nominal prices, but in the past 25 years, the curves have started to converge, and are now pretty much aligned:
In my opinion, if you believe inflation is a given over the long-term, then you should assume that real estate will appreciate over the long-term. If you believe deflation will reign over the long-term, then you should assume that real estate will depreciate from here.
As for what I'm doing, I'm just doing whatever is profitable in today's market. Currently, that's a focus on rehabbing and flipping lower-end SFHs to first-time FHA buyers. I also have some cash invested in a couple big apartment complexes, in the case the rental market rebounds. And I'm always looking for good commercial deals. In other words, diversification on a small scale (actually, within a small market space), with a cash and effort focus on the strategies that are working today.
If tomorrow there is a more lucrative investment strategy, I'll move my focus in that direction, while still maintaining some diversification.
Or, if MIkeOH's predictions come true, we'll retire, move the family to another country and sit on a beach until we die or get bored again...
I know the world is ending now! I voted for a post by MikeOH AND J Scott,,,,in the same thread! I really never thought I'd see the day.
I can't disagree with much of what either said. That is way cool, but does scare me a bit. Good job. Rich
Tim,
I thank you for your advise. I am a person who thinks 10 times generally before making a move..and if the numbers make sence I go for it. But I also very much believe in God and a little good luck...so I'm always going to be hoping...even after my numbers give me an assurance. :)
I received a couple e-mails asking why I didn't add my $.02 worth. I thought I did. I very much believe in trouble coming . I'm as firm a believer in preparing for the worst as anyone. I have TONS of food, water, funds, metals, SOAPS, cooking apparatus, etc. When I had kids to worry about, I had a 20 acre property next to national forest with solar, 60' windmill, 12' deep pond with rubber liner, bomb shelter, guns , ammo etc.(as well as 50 additional pillows and sleeping bags for other parties)
I also bet on inflation, but also hedge my bet on deflation. I own a lot of Financed real estate in a separate entity that doesn't lead to me.Runaway inflation like in the 70's will be ok by me. Been there and done that. I also have enuff free and clear real estate that is a cash cow in a separate entity. In deflationary times, hard assets, metals, etc might hold up, and I'd hope some rent would still come in.
I'm not as active in buying RE currently, not because of fear of the market, but I'm simply not as motivated and prefer to use my time to play. My assets funnel into a GST for benefit of grand kids, and there is enuff there for several generations.
My buying real estate might change again in the future. I thought there were some great posts in this thread. I've had many threads or posts in more detail in the past, so if interested in more thoughts. look them up. Have a great day. Rich
I hear you Mike. I'm definitely on the focus of getting as much of what I own as free and clear as possible in the next year. Based on what I've seen in life I believe that personal decision are much more important to your financial situation than leader or market decisions. The irony is that what you are suggesting for people as a response to world decisions is a total mindset shift in personal decisions for a fast food, credit happy populace. Even if your predictions don't happen, can you imagine the position of financial strength people would be in by following your suggestions?
I just noticed this thread and it is a good one. You know the feeling when you have a flu? You're laying in bed, your body ache, you have no energy and you feel that this is it. You'll never recover. You feel like you are going to spend the rest of your life in this bed.
Well, this is pretty much the same. If you told most people in 2006 that by the end of 2008, the country would be on the verge of economic collapse, they would laugh at you. (Look at some of the TV financial shows of those days such as Fox news' "The cost of Freedom" or Jim Kramer on CNBC). They all though that the party would never end. The bed news about good times is that eventually it will end. The good news about bad times is that it destine to end as well.
With regard to RE prices, for us buy-n-hold type I would say, who cares! If you cash flow, you cash flow!! As long as you buy within the right parameters, you're fine.
I know the world is ending now! I voted for a post by MikeOH AND J Scott,,,,in the same thread! I really never thought I'd see the day.
I can't disagree with much of what either said. That is way cool, but does scare me a bit. Good job. Rich
And THAT is why I like having the politics threads in a separate sub-group...because when we stick to real estate (and probably other non-political stuff), I'm guessing there is a lot we all agree on...
I know the world is ending now! I voted for a post by MikeOH AND J Scott,,,,in the same thread! I really never thought I'd see the day.
I can't disagree with much of what either said. That is way cool, but does scare me a bit. Good job. Rich
And THAT is why I like having the politics threads in a separate sub-group...because when we stick to real estate (and probably other non-political stuff), I'm guessing there is a lot we all agree on...
...
With regard to RE prices, for us buy-n-hold type I would say, who cares! If you cash flow, you cash flow!! As long as you buy within the right parameters, you're fine.
Eddie,
I have heard of investors in Detroit who bought a few years back, who had cash flow, only to find that cash flow dwindle and disappear as rents declined. Their cash flow might have continued if they did not have to lower their rents in order to compete with the landlords who did lower rents; but my guess is that their tenants would have seen the lower rents elsewhere and moved on, leaving them to find new tenants in a market where rents had fallen to the negative cash flow value.
I'm curious how many people here have any income stream that doesn't involve real estate. I know a couple buy gold...though that seems more of a hedge than an actual income stream. How many of you have something else operating?
If you are saying will RE prices ever make it back to 2004 level? My answer to you is "Why worry?" is your RE Portfolio losing gobs of money? Sell it off and start over.
Better yet you'd better check your 401K which is supposed to be the answer to the fact that maybe Social Security might fail is bleak. Most folks 401K has lost approximately 50%. Mine exactly lost 47%, but you say you only lost the company's contribution. Hey, I liked the company's contribution because I didn't put it in. Better self direct your 401K to Bonds to stop the bleed.
Gas prices are going up (were going up - be there again I'm sure), food prices are going up, health insurance is going up (at least my wife and I are paying more and the company less) all insurance is going up.
I mean everything is going up including the jobless market. Wow, anyone know the jobless percentage now versus The Great Depression. We are now at 17.5% jobless rate. In The Great Depression unemployment in the United States rose to 25%. It took from 1929 to 1941 to bring the unemployment below 10%.
The only thing going down are home values. Anyone above water in their LTV. Is there any equity left out there? Anyone with equity left in their home raise your hand !!!!! :D
Did you know that there are more homes foreclosed on today than were in The Great Depression? Well of course you say there are more homes today. I wonder what the ratio of foreclosed homes to available single family dwellings is today compared to what the ratio was in The Great Depression.
Also did you know that more millionaires and billionaires were created in The Great Depression that in any other period in US history?
So what brought us out of the Great Depression in 1941? Answer is we had to win a war. Wait that's what we need is a war! Holy Mackeral we're in two of them! So why aren't we recovering. Case in point the other war was a World War and we sold war goods to everyone. We are the only one funding these current wars. And might I ask what brought the USSR to it's knees? Answer is their war in Afganistan. And where are we today?
When we look back on the current situation (if we can) we might call it "The Great Recession".
But I digrees the question was, "WHAT IF THERE IS NO HOUSING RECOVERY?". I have heard this answer to the condition of the weather in places where there are mini climes, "If you don't like the weather wait five minutes!".
When the jobless rate sinks back below 5%, the stock market improves (Opps it has) and is stable, and all the foreclosure inventory is obsorbed (but by whom will it be obsorbed Americans or foriegn countries - I wouder how much oil money owns American soil now) then recovery will start.
You must also reaIize that this started because of all the ARMs adjusting in 2005 now those were the 3/1 ARMs, then in 2007 we had the 5/1 ARMs adjust and lots of unemployment, well the 7/1 ARMs adjusted in 2009, but my friends if you add the last 7/1 ARMs written in 2004 that would mean that 2011 has to close out the ride. Please look back, google Adjustable Mortgages and The Great Depression. We haven't looked at the commercial real estate environment foreclosures. How far out after 2011 will there still be housing inventory to clear out I would say another two years after that.
Between now and say 2012 / 2013 you'll either be wealthy or dead broke and the housing recovery will have started. Will it ever make it back to 2004 levels? Answer let's talk again in twenty (20) years (opps I'm dead because I'm a Baby Bommer). Baby Boomer those folks born in the US between 1946 and 1964. No I was not born in 1964. If the Mayans are correct after 2012 it won't matter.
So my answer is wait twenty years for the housing recovery from the time The Great Recession started in 2005. And will it ever be like 2004? Well history has a tendency to repeat itself.
...
With regard to RE prices, for us buy-n-hold type I would say, who cares! If you cash flow, you cash flow!! As long as you buy within the right parameters, you're fine.
Eddie,
I have heard of investors in Detroit who bought a few years back, who had cash flow, only to find that cash flow dwindle and disappear as rents declined. Their cash flow might have continued if they did not have to lower their rents in order to compete with the landlords who did lower rents; but my guess is that their tenants would have seen the lower rents elsewhere and moved on, leaving them to find new tenants in a market where rents had fallen to the negative cash flow value.
Steve, those were the key words. "A few years back" Of course, if they bought those properties on the high and depended on a mortgage to finance them, they are struggling, but today, when I buy a property for $10K cash , put another $7K in rehab and rent it for $600, even if I have to lower the rent, I'm still good. I can rent it for half of that and still be at positive. Not a great positive, but positive nevertheless.
Tim, after being let go two years ago re has been my only means of income. Can't tell you how thankful I am for that. I've had to tweek the lifestyle a little bit, but not much.
Ken, you and I are the same page!! The 20 yr cycle does repeat - just gotta catch the right wave.
I'm curious how many people here have any income stream that doesn't involve real estate. I know a couple buy gold...though that seems more of a hedge than an actual income stream. How many of you have something else operating?
I have investments in other industries as well, outside of RE...mostly in technology startup companies...