Fires, Trucks and Your 401K
You may be shocked that my typical comments on the stock market have come a day late. Yesterday’s stock market fiasco was the worst in nearly 7 years…and you thought real estate was bad. The point, I try so hard to make with investors is that real estate is often more “secure” than your standard 401K and IRA options. This is counterintuitive to what you may believe and is certainly counterintuitive to what you hear from the media. When I discussed with my dad early on in my real estate career, my vision was simply to do something I loved, while being profitable. My original visions of becoming a custom home builder never happened, largely because my dad convinced me that the low end was far safer, which I now believe to be true. I could never leave the comfort and safety of low end real estate. If you can’t sell your $1M spec home, chances are you’re stuck. As a builder, you need to constantly acquire new land and build new homes to make money, while being an investor, you can buy 1 project and make money for a lifetime. I wanted to create enough wealth to retire extremely young and enjoy life during the process. While being licensed to sell insurance and mutual funds, I never felt that I could sell the product because I didn’t believe in it. I did not see anyone getting rich, or even getting a decent return except for the asset managers. On the contrary, I see many of my real estate investors doing very well. See, the particulars of our success are extremely fundamental. Everyone needs a place to sleep. Does everyone need stock? No. You can’t rent your stock out and you’ll have a hell of time using a bank’s money to buy stock, so the beauty of leverage is out for the most part.
The most idealistic investors focus on the flip, but their eye is not on the ball. My program has been rooted in the HOLD since I started. If you want to make a quick buck, flipping is a neat concept. I’ve flipped before, many of you have as well. That is a great little injection of capital from time to time, however if you’re like me, you’re likely trying to replace your income with rents. That’s right, the good old fashion landlord routine. And yes, it involves a little risk and a little work, however the rewards can be incredible. If you’ve met me before, you’ve probably heard me say that Donald Trump is not a flipper. He’s an investor. While I’m not a huge fan of Donny’s, the point helps new investors realize that the old fashioned hold is not all that bad after all. True investors hold and recapitalize at the right times. Selling in a down market is nuts, especially when you consider that rents are through the roof and rates remain relatively low. The market is dictating hold, so I hold.
The most important component that differentiates real estate from traditional investment strategies that are so ingrained in our psyche, is the fact that there is a plan B. What started out as my plan B, holding, has now become my A game. There is an inverse relationship between values and rents. Chances are that you’ve owned homes in hot markets and cold markets. This year is a “cold” market with regard to value, however my rent roll has never been stronger. Nearly every home I have rents extremely quickly and at peak rents. The 2005 hype is gone. Flippers quit, yet investors are buying with both hands. I’m not overly concerned with a 10% decrease in values. First of all, I (and my investors) have likely purchase the home for 50 - 70 cents on the dollar, so a 10% hit in value still allows us to have incredible equity positions. It’s important to mention here that my cash flow has exploded. My rents are 10 - 25% higher in this market than they were in past “good real estate” years.
The best way I can explain the root safety in my program is with a teeter totter example. When prices go up, we create equity and have the ability to sell at profits. When prices fall due to increased rates or credit tightening, our rents go up as demand increases for affordable houseing. This, of course, allows us to have the opportunity to cash flow. Provided you stay in the first time home buyer market and stick to the basic fundamentals, you likely won’t get too hurt. In fact, you’re likely to do extremely well by sticking to the basics. My fundamental teeter totter approach is basic, but it works time and time again. If there were a better way to create this much wealth with this limited effort, I would find it, sell it or invest in it. I stick with low end real estate for one simple reason, it works. It works in good economic times and in bad. It is not an accident that I have (and likely always will) stuck with “first time home buyer” homes. It is an extremely well thought out plan that has proven itself in good and bad markets.
I tell people that question the risk element of real estate, if you’re risky, keep buying stock. The last 10 year has been a good indicator that the risk associated with the stock market is extreme in comparison to real estate. All the while I’ve been buying little pieces of the American Dream and chipping away at retirement. It’s closer than you think. There are no doubt more responsibilities associated with real estate. Just this last year, I have had a home burn down, and another get hit by a truck. Both equity positions were lost. This was a stressful and painful experience, however by staying with my strategy of accumulation (or mass consumption), I have made up the loss in just 1 or 2 new purchases. Where many folks go wrong, is they stop accumulating. There are times to re capitalize your portfolio. Sell some (not now) and buy some new projects. When talking to my very first investor the other day, he mentioned that he had been stagnant for some time and that it was time to get back in. I expressed how incredible the opportunities are now. Don’t hesitate. Managing 10 properties is not much different than 3. At 20+ you’ll need assistants, management or some sort of help, but I had a full time job and 15 homes at one point. It’s doable, and I see no viable alternative with this type of return.
I’ve thrown in a clip of a home of mine that burned down. I lost the equity position which was tens of thousands of dollars. I wanted to clarify that my tag line of “Expect Maintenance, Expect Issues…” was derived from my own difficulties. In the same year as this fire, I had a home that was destroyed by a truck that smashed into it. It’s never fun to lose equity, but the truth is that my insurance kept me from losing everything. There is no insurance for your mutual funds. This business has a fair amount of hurdles, but it’s been an incredible wealth builder for me and it can be for you as well, if you’re willing to work at it. Enjoy!