Everyone wants to get into the game.
Real estate is the new darling topic at cocktail parties
and from your hair
dresser. People are quitting their jobs and running after
real estate riches. This frenzy is being fueled by lenders
who are giving anyone who can fog a mirror a loan- with no
money invested. Loan requirements are being relaxed to Prozac-like
standards. Teaser low rate and negative amortization loans
are everywhere. Appraisers are appraising at way over market
values. Why buy just one when you can get 5 and make even
more money? After all, if my manicurist can do this, why
can’t I?
What could possible go wrong?
After 20 years in this business, I
can tell you what can go wrong. Everyone is saying that
low interest rates are
fueling the market and that when interest rates rise, that
will be the end. In my opinion, interest rates don’t
have to rise one bit for things to collapse. Millions of
people have adjustable rate loans that are just starting
to adjust. I just got an increase of $100 on a loan that
I took over subject to. This is with interest rates at 5.5%.
What do you think is going to happen when interest rate actually
do rise? Fed chairman Greenspan has recently expressed his
concerns about the loose credit requirements and has hinted
that he will try to stop some of the excesses by reigning
in some of the lender abuses.
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 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 are hypnotized by all the hype that is 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 are pouring their money into real estate. There
just does not seem to be any other place to put money. What
the real estate market needs is for the stock market to get
hot again so these fools will take their money out and put
it back into stocks and leave our market ALONE..
These people are 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 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 different. 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%.
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 part of the country,
so when one market is up, the other one is down. Well, what
if all 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.
