Have you ever had an a-ha moment? I mean one of those moments of clarity whereby in a feat of intellectual acrobatics you question and successfully defeat solid logic that you’ve come to except as truth…
I had one of those moments a few days back. It doesn’t happen often to me since I try not to think too much (works out pretty well for a dumb landlord like me), but this time such a moment was triggered by a question from a fellow BiggerPockets member, Mehran Kamari, on another post of mine entitled A Controversial Look at Debt.
[By the way, this kid Mehran has some serious potential in my opinion. Although an opinion of a dumb landlord doesn’t mean much, Mehran seems to have it all together. I mean, if I knew what he knows when I was his age…:)]
But the bigger point is this – you newbies out there have BiggerPockets; I did not. When I was first figuring this stuff out, Josh Dorkin was a blimp on the corporate radar, and Brandon Turner was…never mind; we don’t really need to go there, trust me! The point is this – use the collective knowledge on BP to cause action and positive change in your life, much as Mehran is doing! But I’ve regressed…
The question Mehran asked me at the end of our exchange which triggered my chain of logic was the following: What do you like about Lima so much, besides the 10 CAP?
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I’ve always believed and taught that successful real estate investing lives at the intersection of Desirability and Accessibility (affordability), which is to say that, on one hand, your product has to be something that people want, but simultaneously it also needs to be something that your potential audience can afford.
I could literally write 50 pages on this topic. Suffice it to say that when I speak of Desirability, I mean reasons for which your product is desirable to you – the investor, your potential tenant, as well as your potential buyer when you are ready to sell. And the same applies to Accessibility.
This balance is quite difficult to define and even more difficult to achieve, and considerations span the gamut of everything from location, to number of bedrooms, to ease of maintenance, to finance-ability and everything in-between. Huge! The ability to successfully negotiate this maze is, in fact, what sets the pros apart.
Read Between the Lines:
This brings me to Mehran’s “read between the lines” point – surely I could come up with one or two places in the country to invest in that would work better than the little relic of industrial age called Lima, Ohio…
Firstly, I must say that having grown up in a city of 8 million (St. Petersburg, Russia), there is nothing in this world that would make me move into a large metropolis once more. I don’t need the restaurants – done enough of that. I don’t need the nightclubs – I never needed that; ever. And don’t talk to me about the culture and the arts. 99 people out of 100 living in Chicago, Miami, and Dallas wouldn’t know arts or culture if it hit ‘em in the freaking head. And anyway – I can always get into my car any time I itch, and drive to Cincinnati, Detroit, or Chicago to listen to a great performance or visit a wonderful exhibition…and I do!
So, on the very personal level, I just don’t see any quantifiable upside to big city living. In the meantime, I happen to enjoy living in a place where I can open my windows and breath-in something other than the pleasant mixture of sewer gases and car exhaust. If you enjoy that – more power to you; personally…not so much.
So – no matter what opportunities they offer, I simply would not enjoy living in a big city. However, this puts me at odds with very solid investment logic that propagates the need to buy property in vibrant economic areas. Following this train of thought, many investors choose to invest long-distance…
And as you know, or you should know by now, I would never buy property out of my geographical proximity unless it was a very large proposition allowing me the additional spreads to be able to travel and be physically present on location to manage the managers. But if I am not willing to invest long-distance, then I guess I loose…
Well – May be Not!
Investors tend to part ways with the laws of physics from time to time, one of the most applicable of which goes like this:
Whatever goes up must come down
It’s true – one of the main drivers of growth in real estate is economic; more specifically JOBS. When people have jobs, they feel good. When people feel good, they spend money and take on debt – this is what drives up value of Real Estate in a low interest-rate economic environment.
However, this creates a dangerous environment for investors in my opinion. If this growth cycle persists for long enough, people begin to get used to everything going up and up and up…forever. You know this tune, don’t you? Things are good until they are not; everything goes up until it does not! Everything is cyclical in our consumer-driven economy.
The Current Poster-Child
A lot of investors at the moment have blind faith for Texas – deservingly so. The extremely friendly corporate tax environment has been inducing a constant migration of businesses to Texas. Texas is certainly booming, and will likely continue to boom for a while…until it stops. Does anybody remember the 80’s? Texas was booming and then it wasn’t; and when it crashed, the fundamental investors came-in at cents on the dollar. This, if anything, is what I am looking for before I show-up in Texas. In the mean time:
The A-ha moment!
My area, Lima, is not going up. In fact, Lima has seen better days – this used to be a booming industrial town, but not any more. However, the same big employers that were here 20 years ago are still here and will more than likely be here 20 years from now. Even though it may be past it’s glory days, Lima just is…you know what I mean?
This is why while in a lot of parts of the country, real estate lost 40% – 50% of it’s value in the recent crash (more in some places), in Lima we lost 15% at the very top end of the market and 10% in the segment that “normal people” can afford. Stable!
The reverse to the statement Whatever goes up must come down, is – If it don’t get too high, then it won’t fall too low.
Do you like roller-coasters? I hate roller-coasters!!! I don’t need any more excitement in my life above and beyond what I already have. Relative to real estate, this means that I’ll take my stable Cash Flow at 10 CAP, and I’ll take appreciation if it comes, but I won’t chase it! I also like the affordability of life in my smaller area, meaning that my money goes a lot further than most anywhere in the country.
A simple distinction to understand is the following:
Equity = Wealth; while Cash Flow = Financial Freedom
Cash Flow, as you know, is income minus expenses. I am forever in search of financial freedom; I couldn’t care less about wealth. Lima affords me higher income and lower expenses, therefore, I like Lima.
Lima is a place I know and understand, and Lima will be here long enough for me to get done what I need to get done – without the lights and glamour of the roller-coaster that most people now-days think defines investing…
So, what do ya say guys?
How do you view your local area?