Its Happened Before and It Will Happen Again

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Most lost their houses, many went into foreclosure chasing the real estate dream of riches these last ten years. So many new to real estate investing believed that the latest guru who promised an out of area property would cash flow or a “financial adviser” knows best where to put their life savings — “Sure, we will watch you money for you because you are too busy and besides, we are experts.”

We all know what happened. Nobody watches your money as well as you do.

I have listened to many of these “masters” of wealth building, enough to know what works best for me. My buy-and-hold philosophy is invaluable because it works well in all markets. I am proof of that because I bought most of my houses in double AA neighborhoods. Because they are located close to the centers where my tenants work and close to the major highways on which they drive, my houses rent quickly and for more money—even in a down market.

“If you buy well-located real estate in high-demand neighborhoods, you eliminate the most risk in all of real estate because, in good times and bad, there will always be somebody who wants to rent or buy your house.”

I have been teaching this credo in my college classes for years and it infiltrates my whole real estate investment philosophy. I turned down many deals that, while seemingly well priced, were not located well. Others bought in those areas where I feared to tread and held houses without knowing local renter preferences. When you invest without knowing what you are doing, you are not investing; you are speculating, which is much riskier. When prices are rising and everybody seems to be making money, it is easy not to notice the mistakes you are making because a rising market bails out all fools, including the speculators.

Partly because of the speculators, the real estate market in most areas of the United States is undergoing unprecedented changes. These include:

  • The largest house price decline since the Great Depression.
  • The largest number of empty houses on the market in history, mostly due to speculators buying houses that did not rent well.
  • Record high foreclosure rates causing the largest number of bank foreclosures…ever.

Most of the houses I bought over the years, and hold in areas of high demand have not declined in value as much as surrounding areas, and they still continue to rent well. And even more importantly, my properties stay full and rent for market price, or close to it. Longer-term wealth building takes more time, but the path is well marked by the pioneers who have walked it before us.

My concept of the Buy and Hold strategy first involves finding a desirable area where you think potential economic growth will occur. Dilapidated areas, properties that are run down and cities that are financially stressed will be the opportunities of tomorrow. Many of these situations will reverse completely. Communities will improve tremendously, rents will go up dramatically and, real estate prices will skyrocket eventually

Why will all this happen? Because cities will experience economic growth, due in large part to the industries and businesses that came into the area, including manufacturing plants and information processing companies and industries we cannot imagine today. Infrastructure improvements will also benefit the area. At the same time, as industries grow and infrastructure improves, the growth of new housing right now is minuscule.

In many cities, almost everything in the area is built up, yet housing prices and family income levels remain fairly low. But by looking at certain neighborhoods, you can see that income levels will rise due to the creation of new engineering and professional jobs that would raise individual salaries and cause family income levels to rise as well. This situation created the possibility of real estate values rising along with family income.

I know this may seem to be pie on the sky dreaming given present economic conditions, but trust me, it has happened before and will happen again.

About Author

Steve is the author of three books, is an invited expert commentator for CNN/Money, CBS Radio, Fox TV and numerous other newspapers and media outlets, has been a distinguished speaker at the Harvard Business School, Harvard Law School and their Graduate School of Design, and teaches courses in investing and real estate finance at colleges across Southern California. He is also an active real estate investor and owns 27 investment houses in Southern California and around the country.

8 Comments

  1. Steve,

    This is gold, even though it should already be common knowledge :

    “If you buy well-located real estate in high-demand neighborhoods, you eliminate the most risk in all of real estate because, in good times and bad, there will always be somebody who wants to rent or buy your house.”

    It’s a good cushion for what investing really is: calculated risk!

    Thanks for the post Steve…

    -Joe

  2. Thx Joe
    It is so simple, yet so not followed. This fundamental principle is validated every day I get the rents on tine, not get tenant fixit call cause they are maintaining things. They also stay a long time; some.. Thx for replying

    • Lots of pearls of wisdom there including my favorite “Nobody watches your money as well as you do.” of which my friends don’t seem to get when they just hand it all over to their financial planners.

      However I am confused by your two contradictory statements:
      “If you buy well-located real estate in high-demand neighborhoods…”

      “My concept of the Buy and Hold strategy first involves finding a desirable area where you think potential economic growth will occur. Dilapidated areas, properties that are run down and cities that are financially stressed will be the opportunities of tomorrow”

      The second sounds like speculation to which you referred is not the same as investing.

      I follow the Buy & Hold strategy but I only buy class A & B properties in neighborhoods that are desirable today. Sure I could have made a boat load of money when I had the opportunity to get in on the ground floor of a City planning gentrification project but how much would I have lost speculating in other such deals. Nothing wrong with speculating just so long as you recognize it for what it is.

  3. Great article. This is why some areas of the country were not effected by the downfall of the housing boom. Anyone searching for a home should ask there agent what the distress level is for the area. Ask what it is now and what it was in 2003 (prior to the boom). If your agent doesn’t know what that means run!

    • Amen brother!! Agents I work with better know where the hurt is in the area in town, how much distress is likely to come, appreciation rates for the last 5 years as well how the area will perform the next 5-10 years .Managers I talk to should have insight in the best rental areas where properties appreciate the best. I look for high dollar areas, but want not to invest there but in the cheaper adjacent areas where there is better cash flow
      Thx for the post, Mr Anon

  4. I quite agree. I think the thing that we all should remember is, if we are risking huge money on an investment, it is but wise to stay on guard on the details. Know who you are doing business with, learn about the pros and cons, and be up to date.

  5. Robert
    Buying on well located neighborhoods is an art; they sometimes are not so apparent. Think of re-gentrified areas for they were once dilaptidated, now many have under gone resurgence. If you can pinpoint these areas using some of the guidelines I write about in my books, you can ride the wave up!
    Everybody else, thx so much for your comments!

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