The Risks of Being a Fearless
Real Estate Investor
During the late stages of a California housing boom, one of the things I've noticed that occurs over and over again is that real estate investors (and developers) tend to get complacent and over-pay
As long as housing prices are still rising, very few know when
to stop putting their money at risk and take their money and run.
During the 1980's, I was spec building 8-16 unit apartment
projects in North Park, San Diego. Because I was netting about
$100,000 profit per project - which was a lot of money back then -
I would have loved to keep building (and selling) projects like this
for a long, long time.
However by 1988, the price of multi-family land had nearly doubled from 5 years earlier - and I decided to stop spec building apartment projects because it had become abundantly clear to me that the level of risk had changed from low to high.
Then the 1990-1996 real estate downturn hit ....
.... and I subsequently learned that roughly 25% of the apartment buildings that I sold to investors were eventually re-possessed by the bank.
Why did those foreclosures happen?
Not only did property values fall, but so did the San Diego economy and so did rents.
In other words, San Diego apartment buildings that were purchased late in the cycle with a small (but positive) cash flow turned into buildings that now had a negative cash flow.
Owning Real Estate "Alligators"
Back then, we called negative cash-flow properties
"alligators" because they eat up your money.
And most investors like feeding an alligator "investment"
property (with a depressed price!) with fresh cash every month
just about as much as former husbands like making alimony payments to their ex-wifes.
As many of you know, I've been around (or in) the California real estate business for practically all my life. And now that I'm 70 years old, I think its safe to say that not many people understand housing cycles and the risks they bring like I do for the simple reason they have not observed what I have observed over the course of the last 60 years.
In a rising market, it’s easy to get caught up in the speculation.
But you must remember that there are two sides of a full-market cycle - the upside and the downside. As a real estate investor - and this is especially important for those of you who invest in California - you want to participate in the first-half of the cycle as prices rise, but avoid the devastation that occurs during the second-half.
Coming soon in my July 15, 2017 Timing Letter: How far are home prices likely to fall during the next housing downturn? This is not just a wild guess, but if the historical pattern for the last 50 years continue to repeat, the decline could be more severe than 2006-2012.
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Comments/questions are always welcome -
and you can send them to Robert@RealEstateTiming.com