Originally posted by Tyler McCracken on 11/10/2009 on www.askthelandlord.com
You Can’t Handle The Truth!!! When will this (real estate) elevator hit the bottom??? Part I
I’ve just come through a two week period were the realities of my world hit home as I downshifted into another phase of my real estate operations. Anyone who has been in the world of real estate merchandising (whether it be flipping, wholesaling, prehabbing, and/or rehab to retailing) who has had inventory during the great real estate downdraft and credit freeze knows that it’s been tough… The ability to move property (inventory) has been challenging to say the least. Couple these challenges with rentals and a toxic level of debt and you’ll know someone playing much more defense to stay alive then one playing offense and taking advantage of the opportunities.
Sure anyone can spout it’s a great time to buy (or we had better hope….huh?)… The Guru’s will hype that at $699… as even they have been impacted by less sales and have thus lowered their program costs from $999…. Just remember the guru’s are pushing Xerox paper not property. If you’ve been in the real estate business you’ve been affected. Whether it’s as simple as being maxed out by the 4 loan limit, a 1.25 to 1 debt ratio and/or a self employed real estate investor for commercial loans, over-leveraged rentals, loss in rent pricing power, empty inventory that cannot sell, or a plethora of other issues in our world, one cannot as easily take advantage of opportunities that may present themselves. We are challenged not only financially but psychologically too.
What no one really wants to talk about is the realities of what we’re facing. Average sales volume across America is down a good 25%. Locally we’re down some 33%+. Truth be told actual sales volume is down a good 50% since the highs of 2006. This blog should actually be Part II (but I was late to the world of blogging) as Part I should have been this time last year. You see for my area (Charlotte, NC) -it hit the fan when Wachovia fell apart at the end of September 2008. Our town ground to a halt with resulted depressed prices. It was at that moment that the elevator began its rapid decent until some friction was felt around February, 2009. The Schiller report will say our region is down some 9%….. I say that is false. Now remember everything is local, as I will state that our real estate pricing/values are down 10% to 50% depending on what market and/or neighborhood your marketing property in.
Those least affected are niche markets most correlated to entry level housing in the $90k to $190k pricing range, closer to downtown, that attract first time home buyers typically starting out in their professional careers… Those properties hit the hardest are in entry level vinyl villages (primarily targeted to sub-prime buyers), furthest reaches of the suburbs, lower income neighborhoods, and the upper end $750K+ housing market. Anyone who deals in property professionally realizes that one should move property at least within 90 days; to do that you’re looking at a downdraft in valuation on a Charlotte average of 20-25%. Yup, I’m stating that our market is down 20-25%. Know if you had inventory during this flux –sooner or later your going to have to pay the piper. Either you take the hit now and move on, be dragged down by debt, and/or lose any return on investment by hanging on for some unknown time. I’m in the camp of taking your lumps sooner, digesting the problems, and moving on to better times. Further delay only continues your misery in the world or real estate merchandising. Rentals can be a different story.
I think Charlotte in particular was hit with a double whammy. You see we really didn’t see much of a down draft in real estate until August, 2008. Sure there were some signs here and there but no momentous percentile changes. The credit/financial freeze of the fall of 08’ literally took the breath out of us…. As a result it was a free-fall.
I won’t argue that there are pockets in and/or locales that are achieving positive results (at least temporarily), but what I will caution is that one needs to look at their goals and how one is going to achieve those goals? Does it require debt to leverage the machine and thus volume to achieve the desired income? Then caution. To achieve any type of continuous successful volume in real estate merchandising during this time of fluctuation requires great risk both known and unknown. Hold a GURU to the same standards that one should hold a broker too. When you look at buying a business doesn’t one require financial statements let alone tax documentation? YUP! I even know those that won’t hand a dime over to a stock broker without looking at their numbers to see if they are up to par. The fact is that most can’t handle the truth. Most don’t have any success in volume (thus income) and certainly cannot substantiate it. I urge you to hold those that prophesize the secrets to unlimited wealth to the same standards any smart business man/women would put upon any other opportunity. Truth is most real estate wealth machines available on the market do not work in today’s environment. Remember: They make wealth by selling you Xerox paper and CD’s.
The same goes true from knowing all of those you seek advice from in your market! Really -trust but verify.
Don’t believe me that the headwinds of the trend are against us? Every day I am seeing small real estate investors, attorneys, appraisers, surveyors, lenders, Realtor, general contractors, and even commercial builders and developers go out of business. Done. Caput. Zip. Nada. Game Over! It is shocking and if it doesn’t have you wondering if you’re next it should if you have a high overhead requirement and/or debt level. It has certainly made me second guess my moves many a time.
Don’t let me scare you; however, if you’re not awake you need to be for fear of losing your shirt.
SO WHERE ARE THE OPPORTUNITIES!?!
Let me tell you they are out there. The greatest way to solidify you odds of success is to buy income (rental) property with the longest term fixed financing you can get. The longer you can hold…, the longer your tenants can pay down your mortgage, and thus, the improved odds of rent and price appreciation while our economy heals. Can you make money flipping? SURE! However, if you get stuck holding you’ll want to have an eye bent towards cash flowing if the flip doesn’t work; otherwise, be prepared to take a loss to move the dead weight.
You need to stay nimble. Why hold a 100K property if you can move it with a small profit, break-even, or perhaps even a loss? You could take that same $100k capital and go out and buy 1 ½ to 2 homes as a replacement –it doesn’t take a rocket scientist to figure out the cash flow greatly improves keeping it at just that simplistic thought.
So has the elevator stopped? Your guess is as good as mine. I don’t believe in market timing; although, I do believe we’ve got a good 5-10% more to fall (at least locally). And PLEASE, I hope I’m wrong. I also believe that now is a good time to buy as will the next 2-3 years. Will there be opportunities of a life time? Are they out there now? You bet they are out there. Why? Because of fear! That simple- when one breaks it down. Build your portfolio slowly and build it right with good financing. You say you can’t get a bank loan? Think owner financing!!!
Folks I’ve said it before and I’ll say it again. Owner Financing! This is the way you will acquire more cash flowing properties during a low point in the cyclicality of the real estate market. What goes down comes up and vice versa. We are at 30-40 year lows in interest rates and have hit a 20 year bust out in real estate valuation –sooner or later the trend will be like the wind at your back. Remember: Real estate is a long term game of compounding. Compounding of a mortgage pay down (with the goal of tenants doing this part), compounding of depreciation against other income (for an improved overall return after taxation), and the icing on the cake: appreciation.
The truth is we all got spoiled!!! If you participated in any of the run-up’s in valuation (no matter what asset class you invested in), then sooner or later you fell victim to the expectation of return minimums. Truth is nothing goes up in a perfect line and everything (and I mean everything) goes through up & and down cycles. Always take some cream off the top all along the road of life. Fall back to the old adage that real estate typically doubles in value every 17-18 years. That’s not so bad is it? I’d be happy to have a $100k rental be worth $200k in seventeen years. I’ve made mention of this in my blog post: A Way To Wealth with Rentals… . The truth is most wealth is created over time. Instant wealth occurs when you marry it, inherit it, win it, or receive it via stock options; all others, need to be prepared to work for it and let the amazing science of compounding create a rolling stone that’s hard to stop over time.
Focus on cash flow. Buy it right, finance it right, don’t over leverage it & eat the equity, manage it, and sit back and let time work for you. Focus on that and sooner or later you’ll realize that elevator stopped its decent and perhaps, is moving on up for you.
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