“The real estate bubble is going to burst!” Those words have been burning my ears since the first day I heard them on the radio driving to work. My wife and I had been dreaming of the day that we could both stay at home and look for properties in the classifieds over coffee. The infomercials and cd’s telling of “no money down” and “buy em, fix em, flip em” were hypnotizing us. Only one more investment and we too would be “living the life we’ve always dreamed of”. Well not just yet. Sadly the market, much as it was predicted, had gone into a downward spiral. How could this have happened?
We began innocently, taking a part of our savings to invest in a summer rental at the Jersey shore. We found a one bedroom condo that needed TLC. It didn’t require much to get ready and we could ask enough rent to cover our mortgage payment. However, our timing was not very good. The renovations were completed in June and rental inquiries by then were zero. So to avoid the burden of paying 2 mortgages, we decided to list it for sale. The unit sold in 30 days for 20k more than we invested! WOW! What if we could do that again? And again? Getting bigger properties and higher returns each time? It seemed too good to be true. This endeavor would require an unforgiving time commitment to complete the whole process, but we quickly began moving 2-3 properties a year. Flips, rentals, you name it, and it was well worth it.
I am no finance expert. In fact my day job is in sales. However, I do believe that, as human beings, we have a natural inclination to do what is in our best interest for self-preservation. And when the presses started rolling a few years back about the looming real estate market crash, would-be buyers quickly zipped-up their pocketbooks. No one with a low threshold for risk would dare enter into that abyss. Was the adjustable rate mortgage perhaps too tempting? Did the interest rates maybe dip too low? The market was at a fever pitch. Of course “everything that goes up,” according to our well-educated real estate advisor “must come down.” He said “it’s all part of the market cycle.”
The only cycle it feels like now is the menstrual cycle. Once a month, when I go to the mailbox, there is this terrible aching pain. Every time that I look at what we spend in mortgage payments and utilities, then read about the down market and depreciation. Can you believe depreciation? The properties that we sacrificed blood, sweat and tears to develop, that were going to get us a dream, work-at-home job, are slowly becoming worth even less than we paid. And don’t even mention the lost costs of renovations and rental revenue.
Diversifying into rentals did help to “float” these properties for a short time, but with recent economic hardships, tenant turn-over has increased. We even had to file for evictions in a few circumstances. Savvy renters are also aware of current market conditions and have started naming their own price. After doing their homework they “can only pay such and such dollars a month”. We started renting these units at less than the cost of our current mortgage payments just to compete.
That is when everything started to make sense. The cd’s and infomercials were right. “It is easy.” And “You can do it with little or no money of your own.” How? By keeping the money in your wallet! That’s the key to making the whole thing work. Being nave, our eyes got bigger than our stomach. We were biting off more than we could chew and becoming too aggressive with our spending. The idea, we realized, is to use as little out-of-pocket as possible, from the down payment to the renovations.
So if you are considering an investment in real estate, this may actually be the perfect time. Why? Property is dirt cheap. It’s on every radio station. People are giving their homes away to get out from the threat of foreclosure. Even builders are giving things away. They are offering “free upgrades” and “the first 6 months free” mortgages. Interest rates have again become unbelievably low. If you are with the capital to invest, do it now and do it wisely, but also do some research. Learn some of the philosophy behind buying low and borrowing to buy. Look past the hype and understand the importance of managing your expenses.
My advice now is to invest in an opportunity priced in accordance with its condition and location. Make sure the payments and expenses will survive in a down market. Flipping? Do not overpay on the front end if you are going to get underpaid on the back end because renovations cost more than you expected. Renting? Paint and carpet can do miracles. Keep it simple and be sure to market your unit aggressively. Retiring? That may just have to wait for now. Obviously, real estate investments are not for getting rich quick. They can be lucrative, however, to those who manage them wisely. Lesson learned.