| Everyone wanted to get into the game. Real estate
was the darling topic at cocktail parties and from your hair dresser. People
were quitting their jobs and running after real estate riches. This frenzy was
fueled by lenders who were giving loans to anyone who can fog a mirror a loan –
with no money invested. Loan requirements were being relaxed to Prozac-like
standards. Teaser low rate and negative amortization loans were everywhere.
Appraisers appraised at way over market values. Why buy just one property when
you can get five and make even more money? After all, if my manicurist can do
this, why can’t I?
What could possibly go wrong?
Well the bloom is off the rose.
After 20 years in this business, I can tell you this is no surprise. I have been
telling people this since 2005. Everyone was saying that low interest rates were
fueling the market and that when interest rates rise that will be the end. Well
interest rates have actually gone down and still real estate is collapsing.
Millions of people have adjustable rate loans that are adjusting. Banks have
swung the pendulum in the other direction and are over cautious about who can
get loans and how much they have to put down. No one wants to buy the junk
sub-prime loans that were created so they could be sold to hedge funds, other
central banks and unsuspecting pension funds.
The real estate market is flooded with newbees who are really speculators – not
investors. These are people who are ruining it for the rest of us. They don’t
bother to educate themselves; they don’t go to real estate clubs to network;
they don’t buy tape sets; they don’t go to seminars. They depend on the advice
of people who have something to gain from their actions. These promoters do not
care whether they are giving good advice or not – as long as the promoter is
making money. Everyone has something to pitch – new construction bought before
the shovel is in the ground – ideas that are just ideas.
These speculators don’t bother to find the right places to learn about what is
happening in the real estate market RIGHT NOW! They were hypnotized by all the
hype that was going on about how the real estate market will go up forever and
that this time is different – there won’t be a downtown. Sound familiar? Just
like the stock market hype in the year 2000. Everyone swore that things had
changed and that history no longer repeated itself. It seems that all these
ex-stock investors were pouring their money into real estate. There just does
not seem to be any other place to put money. However, even the stock market is
scary and lately, so is real estate.
These people were under the delusion that what goes up will continue to go up
forever so all they have to do is buy anything at full market price, take out a
no money adjustable rate loan and rent it and hold onto it for a few years and
make big bucks. Well some of the people who ran to Vegas and tried to do that
already found out the hard way that there were thousands of others doing the
same thing and they could not rent the house. Even if they could, renters don’t
always pay and sometimes they destroy things. Think that can’t happen elsewhere?
Now the difference between these people and true investors could not be more
dramatic. These people are learning the hard way that what goes up will
eventually come down.
We investors were taught to buy below market for appreciation and cash flow
through improvements to the property. I was always taught that you make money
the day you bought the property. If you have this philosophy, you can never get
hurt. No matter what happens to interest rates or prices, I bought right. If it
appreciates, fine – that’s only the gravy. The meat and potatoes were the price
I paid. I don’t care what happens to interest rates. I only keep properties with
fixed rate loans under 6%.
It is more important now than ever to become educated. All the people I trained
with say the same thing; buy below market and make your own appreciation, buy
for the long haul and let your tenants pay off your loans, or buy for cash flow.
DON’T BUY FOR APPRECIATION!!
The scariest thing about all this is that usually real estate markets are
regional as well as cyclical. After all, economic conditions are different in
different parts of the country, so when one market is up, the other one is down.
Well, it looks like the markets across the county had the same bad thing happen
to them at the same time – like rising interest rates and teaser rates
adjusting. Things could get ugly for the whole national economy. Not a pretty
thought!
Well, that’s when the fun begins for true investors like me and I hope, you. It
is imperative to get educated so you know the difference between investing and
speculating or the school of hard knocks will educate you.
Phyllis Rockower, REIC of LA founder
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