sifer's Guide to Common Mistakes in REI

[sifer]

Hello, this is a public announcement brought to you in part by Seifer, there's something important that he wants to share with his fellow investors on sosuave.
*Siph is seen fixing his tie*

Mr. Siph started writing this article because he saw many people asking questions, questions that are nearly impossible to answer because more questions are followed after it. Then more questions. Then more. Which is good but also repetitive.

Seifer advise that nothing here written is truly his because it wasn't his idea to begin with. Seifer once said, "ideas were always leeched from other people. We see the color blue and we vary it to purple as ours. Nothing is truly ours. What was once a wooden table was really a tree."

What you will be reading is common mistakes investors especially beginners and even veterans make. This is by no means all of the mistakes, just some common ones that Seifer have seen many investors encounter.

Seifer hopes you enjoy this guide as much as he did writing it.
_____________________________________

Warning: Simple, don't make any of the mistakes here. Think positive, don't be a cynic, and enjoy life while you're at it.

This would better off as a list. Where are the guys!! They're late.

*the backstage workers are seen hurrying a large table in*

Good...

*the audience struggles to read the small letters*

Yes.. I know, they're.. small... not my fault.. *points to a random stage worker* It was his fault.
That's right! You!

"But sir, I am the one that loads the ropes and equipments."

............

Anyway!... Let's.. move on shall we?

• Mistake 1 + Thinking REI will be the answer...
  
  This is the biggest mistake, which is why I bolded it. This is also the biggest mistake beginners make thinking that when they enter REI, it will solve all their money problem.
  
  Let me say this, IT WILL NOT! It won't solve anything! The problem is YOU! Let go of your ego and admit it! Stop trying to control everything and change yourself instead of trying to change other people or situation.
  
  Once you realize that, stick to something you love doing. Something you know you will fight and die for, something you know you will see through yourself from your birth to your death.
  
  What do you want to be known for? What do you want people to write down about you?
  
  Your passion is what should drive you, push you, reason you. Without passion, you're just a potential. And when they say "he is full of potential", it means you ain't done yet!
  Like a flint waiting for the shock from a stone before it can give any spark of fire and warmth.
  
  If your passion is in land, in the architecture of the building, in the beauty of the world, then go ahead, read on. If it's drawing or dancing or designing a new shirt, STOP. REI will NOT solve anything! Please don't blame anyone when it doesn't work for you.
  
  Honore de Balzac puts it best, "Passion is universal humanity."
  
  Just get this straight, REI will NOT solve anything, it is a profession, a very profitable one nonetheless a profession. You can NOT get rich or wealthy off of any profession if you do not have a passion in it. I don't care if you're a professor, I don't care if you're the President of Microsoft, you won't get rich or wealthy if it isn't in your greatest interest.
  
• Mistake 2 + Not working with the right people...
  
  Unfortunately, many people will not be the "right" people for you. Too bad. Move on and get with it. Keep finding it. Find the right people.
  
  If your lawyer doesn't make you feel good or comfortable, drop him like you say no to that girl the other day and find another one!
  Always be willing to walk away and you will move on in life quicker.
  Don't waste time trying to change your accountant, you can't.
  Change yourself by finding someone else.
  
  Let's pretend you found someone who claims they can do it.
  Just be careful, like when you get a tattoo, do you immediately have the artist draw on you?
  No, you ask for their portfolio and have them show you their work. Same here, if your construction contractor says he can do it cheap, ask to see what house he has worked on, speak to people who has used their help. You will find out much, maybe it was cheap because they don't work very hard on it or use bad materials, the reason are many, you just need to spend time.
  
  If you have used his help, thank him!
  Write a letter of thanks to his workers.
  
  The next time you buy a property, use him again!
  
  Find the right people and you can move any mountains.
  
• Mistake 3 + Not planning...
  
  I think this should be a separate subject in itself.
  
  Make your own plan! Plan plan plan! This is what many famous people do when every average people are sleeping, they plan. While many sleep and dream, they plan and plan hard. They visualize and think about what they want. They want it so badly that it becomes a form of vibration. They essentially "think and grow rich".
  
  PLAN! A plan is a must, and failing to prepare will prepare you to fail. PLAN!
  
  Stop playing game and wondering how people got rich, PLAN! Stop reading the DJ Bible, drop that phone and stop wasting your phone bills on her, PLAN! Plan until you are tired of planning. Then plan more! Plan so thoroughly that it becomes a mathematical certainty.
  
  Just do it. If you don't! I-
  *the security rushes to hold Siph back from jumping on the audience*
  
• Mistake 4 + Not written down...
  
  Phew... I almost wanted to kill you! *points to a random audience* You better be planning..
  
  If it's not written down, STOP!!!
  Everything MUST be written down in words on a piece of paper signed.
  
  This is almost worse than not planning. Not planning won't get you started and not getting anything in paper won't get you moving and is a bluff.
  
  Plan! I mean er.. get it in papers!
  
  Example, if a mortgage company says they'll lock your interest rate but doesn't write it down, ask for it to be written down. If they reject, next!
  Remember, always be willing to walk away! This will tell them you have other companies willing to lend you the money. And do have others ready!
  
  Get it down on paper, plain and simple. It's like planning, you know every details and what will happen if you do or do not do something, whatever it is that you're doing.
  
• Mistake 5 + "I don't have time..."
  
  This is a problem not only in owning a business and REI, but everywhere/everything else as well!
  
  Want to learn to breakdance but think you don't have time? Sell your TV.
  
  Want to learn to build a new computer? Sell your porn DVDs and start buying parts.
  
  Want to assemble that model plane? Sell your games and start coloring that plane.
  
  Want to learn to manage time? Drop whatever you're doing, go take a deep breathe, then look around you and start thinking. Maybe organize your room? Maybe clean your house? Maybe fix the toilet?
  
  Then plan.
  
  That's right, plan your time. Plan every hour, literally.
  
  People spend so much time on TV, in fact, it's known people spend an average of 3 hours per day in front of the TV, even more on weekends. Or 1 hour on porn. Or playing so much game, saying "but, but, I gotta get my level 49 shaman to 50 in World of Warcraft so I can get this new ability!" And they end up wasting over 6 hours to gain a new level. Then what? Then they waste not only $20 and they don't even get to keep their account! Essentially paying for nothing.
  
  I am not against watching porn or playing game or anything, but people spend TOO much time on it and I speak from experience, I've been addicted to games before.
  
  So sell that VCR and you'll have all the time you need. Take that time to invest, go apologize to your landlord for not paying for 2 month and get to work.
  
• Mistake 6 + "This won't work in my market..." or "I'm waiting for the right market..."
  
  Listen, you can't wait that long for the right market time and if you believe it wont' work in your market, then I'm not going to put too much effort to tell you it will. Unless you live in Chernobyl it does work.
  
  If you're going to wait, you will never finish waiting. It work, trust me, maybe differently from your place to another but it will. There are investors making money in every market, every day of the week.
  
  Learn about your market, the rents, the trends, who's who, the customs and laws, bankers, title companies, then tailor your plans to your market.
  
  I'm an expert on Brooklyn, and maybe the other four borough if I must. I can tell you the current rent level, the general laws, what Brooklyn title company is good comparing to another Brooklyn title company.
  
  You must know your surrounding and incorporate this to your plan.
  
  Don't wait for the market either, learn to invest in bad time and good time. If today is the wrong time, then yesterday should've been a bad time for investors who invested yesterday.
  Today a property cost $100,000, if it was a bad time to invest, then the future will be even worse!
  
  Deciding on when to sign that closing deal is like having sex with *****s or masturbating. The more you hesistate, the more you'll learn that you're only nailing yourself. In fact, many great deals are killed because investors waited too long.
  Interest rate jumps up, then the investor get discouraged.
  Or the seller decided he wants to take another offer, then the investor get discouraged.
  Or the mortgage company lender feels that you are not up to par, then the investor get discouraged.
  Then the investor say it doesn't work.
  
  Go out there and make things happen.
  Don't be the person who watch other people make things happen.
  BE that person that make things happen.

 

[sifer]

• Mistake 7 + Signing too fast...
  
  READ. Read the entire paper! Tell the seller/lender "I need a few hours to read this paper please, thanks." and go and read it. They will and should be more than happy to! The most successful investor I know reads every single inch of the paper. When I say this, this man I know, what he would do is take the paper he is about to sign, look inch by inch for small prints. He would make sure there are no hidden fees (notary, document preparation, etcetc). Failing to do so can result in hundreds or even thousands of dollars expense at closing.
  
  Who said it was easy to read 100 pages to make sure that everything is in compliance?
  
  You see a statement on the paper you don't understand? Now ask. If I have to kick you in the butt so high that I'll have to get someone professional to pull it out, I will. Ask! Don't let your ego get in the way. Just ask. "Sir, what does this statement mean?" Who cares if he laughs? Your money is more important than your vanity.
  
• Mistake 8 + "I have no money."
  
  Like before, I think this should also be a subject in itself.
  
  When I first invested, I was telling my partner, "I don't think we can do this, I mean, seriously, get real now, where are we going to get the money? Seriously don't give me any motivational crap."
  
  When I said this, he almost killed me.
  
  When we worked together and invested, I found out he was right, you find a good real estate deal, the money will find you. Any real estate investor will tell you this, especially successful ones.
  
  Lack of funds is never an issue, there's always subtitute and ways to get that fund, it's the lack of good deals that is!
  
  If you can find a good deal, somehow money have a funny way of coming at you. Find that property first. You will find the money easily. It's the good deal you will have a much harder time with.
  
  And those who still doubt, even if you had $5,000 or $10,000 to invest, let me tell you this, the more you use your own money, the less you leverage. The less you leverage the less your ROI. Essentially if you paid the entire house with all of your own money, your ROI is 0%. Means you made nothing.
  
  Leverage is what you're looking for, not $5,000 or $10,000 down payment or $1,000 closing fee.
  
• Mistake 9 + Recession...
  
  Ok, bad time is coming, so?
  
  "But I won't be able to sell or rent then!"
  
  Yes you will. Tell "I won't be able to sell [insert product]" to any salesman that's worth his salt. He'll tell you you're just a bad seller.
  
  You can sell. Plain and simple.
  
  Example, sell cheaper. Or more attractive terms.
  
  What happens when Gateway wants to move computers? They lower the price.
  
  What happens when GM wants to move cars? They give no interest financing.
  
  "Imagination is more important than knowledge", says Albert Einstein. How true.
  
  

  Anna Freud says...
  Creative minds have always been known to survive any kind of bad training.

  Edward de Bono says...
  There is no doubt that creativity is the most important human resource of all. Without creativity, there would be no progress, and we would be forever repeating the same patterns.

  Albert Einstein says...
  Reading, after a certain age, diverts the mind too much from its creative pursuits. Any man who read too much and uses his own brain too little falls into lazy habits of thinking.

  This is the same as vacancy, just a different way of selling. If vacancy goes up, offer free satellite TV (25$/month which I'm sure you can afford) or free DSL (40$/month). When people doom and gloom, it's just clearing out competitions, more for you. There are always people doing great in bad market, and even better in good market.
  
• Mistake 10 + "It doesn't work..."
  
  I can go on.
  
  "The late-night TV stuff doesn't work."
  
  "No-down is impossible, even with excellent credit."
  
  "None of this works, because there's too much competition."
  
  This is hard to argue against, because Henry Ford once said, "Whether you think you can or think you can't, you are right."
  
  The only thing I can tell you is this, it work. It work for me and it has worked for many others.
  All we did was spend nothing but time and effort.
  
  I personally am still waiting for an associate to scan his paperworks so I can show it to you.
  He's a living proof that Carleton Sheets work and has purchased over 40 properties.
  
  Those living in NY, check out Tyler Hick's "How to Make Millions in Real Estate in 3 Years Starting with No Cash". In his book (albeit shameless) he talks about being able to do no-down easily. Don't waste your money, just read this in the bookstore, look for his phone number in one of the pages, jot it down.
  
  The reason is this, he said he'll prove it to anyone with testimonies. I called him up myself and asked, met up with him face to face, and yes, he did indeed prove it. Not just with one piece of paper but with many. See for yourself.
  
  That's all I'm going to say. It work.

That should be some of the most common ones.

The worst advice you can get is this, "take the money you have as a down payment and learn as you go".
Invest in your education first, then invest with OPM. Money is easy to get, down payment is easy to get, closing fee is easy to get, it's knowledge that's tougher to get. I guarantee this, the more knowledge of REI techniques, acquisition, your marketplace, etc, the less risky your investments will be. Guaranteed.

My advice would be to get your feet wet first. Investing in real estate is a career, you promote yourself, you get up at your own time, you have to do all the paperworks, footworks, and talking. It's tough, but it pays. It's simple, but it isn't too easy.

 

[aBAzLLnA]

Wow...abazllna hates people who refer to themselves in third person.

And what's the deal with flowering the post with useless **** like:

Warning: Simple, don't make any of the mistakes here. Think positive, don't be a cynic, and enjoy life while you're at it.

This would better off as a list. Where are the guys!! They're late.

*the backstage workers are seen hurrying a large table in*

Good...

*the audience struggles to read the small letters*

Yes.. I know, they're.. small... not my fault.. *points to a random stage worker* It was his fault.
That's right! You!

"But sir, I am the one that loads the ropes and equipments."

............

Anyway!... Let's.. move on shall we?

Also, enlighten us, what's REI, I assume you aren't talking about the outdoors store...

 

[sifer]

Originally posted by aBAzLLnA
And what's the deal with flowering the post with useless **** like:

Nothing, it's fun.


Also, enlighten us, what's REI, I assume you aren't talking about the outdoors store...

Real estate investing.

 

[aBAzLLnA]

Ok, that makes more sense lol...

I've been thinking about getting my license.

 

[Bonhomme]

You missed the biggest one

Mistake #0:

Thinking in terms of gross, rather than net.

For example, if you buy a house with an after-repair value of $80,000 (I'm talking Detroit, not Brooklyn, here, obviously) for $30,000, and it costs $30,000 to repair, do not expect to make anywere near $20,000 on the deal.

You've got closing costs on both the purchase and sale ends, city inspections, utilities, property taxes, possibly a commission on the sale, gas mileage, and especially -- if you're working with borrowed money -- the cost of the money itself. For such a house as above, such costs could amount to over $10,000, and all of a sudden it doesn't look like so great a deal.

 

[Page]

Originally posted by aBAzLLnA
Ok, that makes more sense lol...

I've been thinking about getting my license.

If you are just wanting to invest in RE, fvck the license. It's actually a hinderance.

Bonhomme is right. You have to do the math first and see how much you are going to really make on the deal. (by money you make, I assume you are talking about equity plus money saved)

Now, I failed High School alegebra on multiple occasions, but even I can do the simple math that can save anyone's a** in REI.

Although I have yet to buy my first property, I have already done the hardest part, which is to reprogram myself and change the way I think about cashflow and money in general.

I'm going to get started as soon as I get out of college, b/c I do want to have a career to fall back on in the first few years if I get unexpected expenses or carrying costs. Once I get most of my income from my assets, I won't need that job anymore.

 

[Pook]

Hi! I have a question.

I like to think when the people on the bus and shoe shine boys (figure of speech) get into the market, then it is time to get OUT of that market.

Just like when I see in the newspaper says that X market is "hot", I know it is time to get out.

My issue with REI is that everybody and their dog is doing it. It's gotten so bad that realtors will add into their sales pitch: "And this property will make a great rental house!"

Of course, REI is all local. And with the growing population (in America), RE will probably rise in value. But is the RE boom similiar to the Stock boom earlier? I don't see much interest in people renting houses, I do see a lot of interest in people buying houses, even if they can't afford it (such as for themselves).

How do you know when to get out of the RE Market?

 

[Oxide]

Pook, you are worried about the RE bubble bursting.. and that is a good thing to worry about..

I found this to be somewhat helpful, but i would really like some advice on this as well.

http://forum.richdad.com/forums/tm.asp?m=437456&appid=&p=&mpage=1&key=&tmode=1&smode=1&s=#438551

 

[TooColdUlrick]

now is the time to sell, not buy. long reply, but there's a lot of talk here about real estate and i think people are chasing Fool's Gold right now.

although there is no national real estate "bubble", and therefore we will not have a national real estate bubble burst, many local metro markets are outrageously overpriced, due to an outrageous speculative dynamic, both empirical and anecdotal.

this is very much like the real estate bubble burst of the early 90's. to wit...

--real estate IS NOT a liquid asset. but when you see homes that are sold the day they are listed, it's a very bad sign.

--when you see homes where buyers are bidding the price up, it's a bad sign.

--when you hear people say (or think), "i gotta get into a property because i will make a lot of money quickly", it's a bad sign.

--when you see home prices escalate by 200% (or MORE!) in five years, it's a bad sign.

--when you see ROIC (return on invested capital) of 1,000%, it's a bad sign.

--when you see people "flipping" properties, it's a bad sign (of speculation).

--when people obtain interest only loans, it's a bad sign.

--when you see mortgage finance companies offering 120% financing (yes, 120% LTV), it's a very, very, bad sign.

--when you see people "buying up" two or three times within a few years, it's a bad sign.

--when you hear real estate agents (who are typically very dumb, sorry, but its true), say, "prices won't go down", it's a bad sign.

--when you see people re-fi'ing, yanking equity out of their houses to purchase RV's, cars, boats, vacations, or still ANOTHER property, it's a bad sign.

Pook is correct: when people start talking about a downturn, it's already happening.

with a stock market crash, you see it happening before your eyes. prices of assets (equities) are "uniformly" priced. that is, MSFT stock is MSFT stock whether you are in new york or los angeles. further, equities markets are efficient, in terms of information being capitalized into equity prices (nearly instantly).

with real estate, it's a whole different dynamic. it's an inefficient market. it takes time, 6 - 18 months, for people to even realize there's a downturn. you can't just "look up" the price of your home. you can estimate, but you don't know until you put it on the market.

the main reason why this is happening is that the current round of people who are investing in real estate do not remember the last crash (early 90's). the people who are driving this bubble (regional bubbles) are ones who are thirtysomething. in the last crash, you were in college, getting drunk, oblivious to what was happening.

a new crop of investors = a new crop of suckers.

happens like clockwork. for more info, i would suggest you read "A Random Walk Down Wall Street", Burton Malkeil of Princeton, on how bubbles occur, and how they burst. it's a classic in investment circles.

just about 12 months ago, i stated (in my classes and to my clients, and in public print, etc) that the real estate market will start to burst in 12-18 months. it's beginning to happen!

The Anatomy of a Bubble & Burst:

The Bubble--
for whatever reason, prices escalate. people see other people making money. YOU have to get in, so you buy. demand increases at a greater rate than supply, and naturally this causes prices to escalate. this continues, as people are making MORE money (paper or real).

finance (investing) is forward looking. you buy based upon the expecation that you can sell the asset for more, and make a profit. when you see real estate appreciation of 30%, and you expect it to continue, there is a "buy at any price" mentality that develops. you can't lose! especially so when you've seen 30% annual compound returns for the last five years.

if you own a property and you see it appreciating to this degree, of course you will not sell it. why? you're making a ton of money (on paper). this causes supply to decrease, even more. at the same time, potential buyers also see this appreciation, so demand increases even more.

big decrease in supply and big increase in demand = big increase in price.

The Burst--
fools rush in. you can't lose. you'll make a lot of money. get into a house, ANY house, at ANY price, with an interest only loan, five year conversion to conventional.

the problem is that eventually you run out of fools. it's called, "The Greater Fool Theory" (just like the dot com crash when aunt sally buys into Yahoo! at any price).

a tell-tale sign of a bubble burst is when prices continue to escalate while volume declines (unit sales). for stocks, this is an easy read (e.g. dot coms). for real estate, it's not an easy read, for the reasons mentioned above.

and this is exactly what is happening, regionally. last quarter in San Fran Metro, Los Angeles, San Diego, Miami, Boston, and others, we have seen a large escalation in prices with flat and even declining unit sales. BAD SIGN.

foolish owners think the appreciation will continue. foolish potential buyers do too. owners don't sell. buyers rush in at any price.

when the fools are "cleared out" as they say, you ain't got no buyers left! people are priced out of the market, and/or are leveraged to the hilt already.

prices begin to fall because "excess demand" is cleared out (the Fools). when people see this, and again, it takes time for real estate, those fools who bought on the expecation that they will make a lot of $$$$ put their houses on the market. there's a "get out now" mentality. in other words, Sell At Any Price, to save your shirt.

and of course, the smart money buyers will also see this price depreciation. they will wait for prices to fall further.

and NOW you have the properties of a bubble burst, real and psychological.

owners dump their houses to get out, causing SUPPLY to increase. potential buyers wait for prices to fall, causing DEMAND to decrease.

developers, who were trying to cash in, and have a ton of properties in the pipeline, don't help matters, because this creates even MORE inventory that will be dumped on the market in the next 6-12 months. it is UN-FUKKING-BELIEVABLE the amount of development that is taking place in LA.

soooo...

big increase in supply and big decrease in demand = big decrease in prices.

if you think prices can't decrease by as much as 50%, think again folks. it happened in numerous places in the 90's. it can happen again, easily.

smart money is getting out. this particular dude sold his pretty bad azz condo for a very handsome DEEP 6 digit profit. i am now a very very happy renter.

i personally would not consider buying a house at the present time.


Dot Com Analogy:
back in late Q4 of 1999 i advised all of my clients (institutional investors) to sell and/or short the market. equitiy prices were absolutely insane. people were buying complete junk at any price. 99% of the dot coms had no resonable expectation of ever turning a profit---uh...because how can you if you DON'T CHARGE ANYTHING for your services. it seemed that the MORE that companies were losing, the HIGHER the prices! it was prestigious for companies to LOSE MONEY!

most of my clients did sell/short. Q1 of 2000 rolls around and NASDAQ escalates EVEN MORE! phone calls abound. "hang tight folks, it's gonna crash".

EVERY PARTY MUST END!

March of 2000, KABOOM. clients made a ton of money on the downside--TON OF $$$$.

them: should we buy...should we buy...
me : hang tight for a while, enjoy your riches
them: ok

03 rolls around, "go ahead and buy, folks" (quality stuff of course)

--ton of money on the dot com upside, through 1999
--ton of money the downside short, through 03
--dust settles
--ton of money on the upside as the junk is cleared out

same thing is happening in real estate. but because of the lead/lag time with real estate, it's more of a slooooow train wreck vs an airplane crash.

for what it's worth. i have a PhD Economics, Finance specialty. i teach corporate finance/investing in Exec Mgmt at a university that you have heard of. i have a management consulting firm, mostly equity analytics/strategy, venture cap, private equity stuff.

just watch out, people!

PS: for a comparable property, the after-tax cost of owning is roughly 30% - 40% MORE than the after-tax cost of renting. yes, this is true!

 

[Oxide]

TooCold, all i got to say is it is great that we have people here that actually have the experience with stuff like this.

So what would you suggest from someone who wanted to make his living on stocks and real estate? I am in college for another 3-5 years, but after that im looking forward to building a capital in order to get started. What would you advice? Not buy any real estate till the prices drop significantly?

 

[STR8UP]

All this talk of a real estate bust makes me laugh.

The people who are ONLY buying because they see everyone else making money will likely end up losing when things cool down a bit. But those who buy wisely can make money in ANY market (same with stocks...they don't have to go UP only to make money!).

I admit that as we speak my eggs are mostly in a quasi-specualtive investment market. I say "quasi" because the majority of my recent purchases have small negative cash flows, but I'm not throwing money recklessly into an ordinary market. The area I am in has been undergoing an urban redevelopment. The basic infrastructure is already in place to allow thsi area to take off. They are building 1000's of residential condo's and apartments, two new colleges, several office buildings, a new transportation hub, the improving nightlife, all led me to believe in the market I am in.

Could I lose money? Sure, but I doubt it's going to happen. If I did I wouldn't go running with my tail between my legs, I would simply learn from my lesson and move on.

Bottom line- if you are "investing" to try to make a quick $50,000 to subsidize your already poor spending habits you might want to reconsider. But if you are serious about investing and making it a part of your life indefinitely, you can make money even when others are losing it. Don't let anyone tell you different. Start out small and learn from your mistakes. It is the way you deal with these mistales that determines your level of success or failure.

 

[Bonhomme]

Bad Signs

TooColdUlrick's points are well taken. I've decided to liquidate, except for one 2-family flat in which I can effectively live for free from renting the other unit + a room or 2 in the 3 bedroom unit I'll be living in, plus possibly 2 positive cash flow rentals.

One thing that will exert downward pressure on prices will be if interest rates increse. I should actually say when they increase, because they have not been so low in the last several decades. As interest rates go up, the payment on 30 year mortgages will go up almost proportionally, as most of the early payments goes to interest.

The main thing too look at is the cost of renting vs. the cost of owning. In Detroit proper, one can still own for less than they can rent. But, as TooCold mentioned, in areas such as SF, it is much, much less expensive to rent. In those areas it is indeed foolishly speculative to buy as an investment. When interest rates go up, that disparity will probably get worse, the emperor's clothes will be seen for what they are not, and prices will stagnate or drop for a long time.

Bear in mind interest rates were decreasing and home prices still stagnated during the 90s after the last bubble. Given the even greater imbalace in the economy, plus the lower current rates, expect the coming adjustment period to be even longer and more painful in cities that are riding a speculative boom.

 

[TooColdUlrick]

Originally posted by Oxide
TooCold, all i got to say is it is great that we have people here that actually have the experience with stuff like this.

So what would you suggest from someone who wanted to make his living on stocks and real estate? I am in college for another 3-5 years, but after that im looking forward to building a capital in order to get started. What would you advice? Not buy any real estate till the prices drop significantly?

it's just too risky to buy real estate right now. don't be one of those fools, for when the market falls, it can wreck your life for a good 7-10 years when you walk away from the home (foreclosure). you would be getting into the area of timing the market, and market timers are, on average, the biggest losers of all.

if you wish to make a living investing in stocks and/or real estate, i would strongly suggest that you first order a couple of cases of Pepto Bismol.

for stocks, unless you really know what you are doing, AND you have the personality for it (Type A, rah rah rah), don't do it. that is, don't become a day trader. you'll get yourself sucked into The Matrix. you also have to consider your opportunity costs in your total return (which people don't do). that is, if you could otherwise make 30k per year, but instead day trade, you have to make up for this 30k!

for real estate, the way to make bank is developing or owning rental properties. for the latter, it's the deductability of expenses in addition to the depreciation allowance that makes it very worthwhile. HOWEVER, the market is way overvalued in the large metro areas. like i said, i wouldn't touch it. SMART MONEY'S CASHING OUT!

sit tight for a couple of years, save your coin, get in on the cheap.

my advice to a younger chap starting out? it's not continuous-time stochastics. it's very simple, and i still practice it to this day...

SPEND ONLY X AMOUNT OF YOUR AFTER-TAX INCOME.

for someone just starting out, i'd say spend no more than 80% and bank the 20%. discipline baby--it will pay off, trust me.

by doing this--spending only a percentage of your AT income--you will always live within your means. when you make more, you spend more, on an absolute basis.

for myself, i live very, very, comfortably, but only spend 1/3 of my after tax income. 2/3 is banked.

what to do with the banked coin? drop most of it (or all of it) in a NASDAQ index fund, say 70% of it and FORGET ABOUT IT. for the other 30% play around, invest in good companies...

my personal portfolio is thus, about:

25% NASDAQ Index Fund

25% SPX (S&P500 Index Fund)

25% in the following six companies: GE, Toyota, Walmart, Intel, Microsoft, Citi. sounds boring huh? think about my return over the last 10 years. i've invested in these companies because they will get me 15% annual returns (at least). it's a nice diversified portfolio, and i rarely even check up on them. no fuss, no muss.

25% for special situations. this includes options on SPX, futures, shorting to hedge, interesting companies that i think will pop (e.g. in on google for $90.00, out the other day for $300.00)


i also have consulted for many start up companies, taking a percent of the company (usually 2%-5%) in lieu of payment. obviously i do this only on companies that i think will be cashed out in some way, within a 5 year period. this has proven to be quite profitable

as a side note to those starting out:

do not buy a new expensive car, or any new car. DON'T DO IT! it drains you.

in short: Save Your Money; Think 10 years, not 2.

 

[TooColdUlrick]

Originally posted by STR8UP
All this talk of a real estate bust makes me laugh.

But those who buy wisely can make money in ANY market (same with stocks...they don't have to go UP only to make money!).

real estate is very different from stocks. there are two ways to make money.

1. buy low, sell high (long)
2. sell high, buy low (short)

both are easy to do (administratively) with stocks.

not so with real estate. you can't "short" real estate. you won't make money buying into a bear market. you can make money selling into a bear market, but not with real estate, since you have to actually OWN the asset before you can sell it, unlike stocks. sure there are exceptions, but you're really riding a razor's edge of super duper risk.

 

[Pook]

Originally posted by STR8UP
All this talk of a real estate bust makes me laugh.

I am referring to cashflow, not flipping properties. In areas around me, such as Austin, there are more landlords than there are people who want to rent. The house salesmen are giving the 'this will make a great rental house!' pitch. Even the illegal immigrants are happily getting houses. These are red flags to me.

My concern is not a 'RE bust' but rather the people themselves. How do you gain cashflow when there is noone who wants to rent? And with the RE boom, most people are buying houses, even if they can barely afford it. I don't see too many people who want to rent a house.

If the local market has more landlords than renters, then what do you do?

If everyone is making lemonade stands, it stands to reason that the demand of lemonade will go down, hence the cashflow. What are your indicators to know when to EXIT the real estate market in a local area?

 

[Bonhomme]

If the local market has more landlords than renters, then what do you do?

Stay out of it, and wait for the glut of properties being unloaded by desperate amateur landlords. Then start buying.

Not an ideal situation to be in if you already have the properties, obviously. The only ways for such a situation to correct itself are for rents to decrease or a lot of the properties to be sold or lost to foreclosure.

Even if there are a million lemonade stands, the one who gets the rep for having the best lemonade is likely to still sell a lot of it if they promote themselves properly.

Therefore, one possible strategy for one who has the means (either in the form of remodeling skills or money to work with) is to make your property better than similar properties, and direct your marketing to the best tenants who are on section 8 or some other sort of public assistance, and charge them top ot the market rent. They have the pick of the place, and since they're paying little or none of the rent themselves, they will be focused on quality, rather than price. Run paid ads in the Sunday paper. That way you can get the tenants who don't see fit to fork out for one of those property locator services. But get on their lists, too.

The key is to make sure you check them out very thoroughly, and visit them in their current residence to see for yourself how they keep it. No need to bother with trying to show up unannounced. If they can get their place looking good on one day's notice, you'll be able to do so when they leave, unless unforeseen circumstances arise. But almost always people remain more-or less consistent in their housekeeping.

The other strategy is to buy very low and rent low. If prices are inflated, wait it out, and be patient. There will always be someone who has to sell.

What are your indicators to know when to EXIT the real estate market in a local area?

You've already hit on one of the big ones, Pook. Some others:

1) Property values are leveling off after having increased sharply,

2) Prices are a peak compared to rental rates

3) Properties are staying on the market longer at "market prices."

4) Extraneous factors (such as interest rates, economic condtions, etc.) are, or worse yet, have recently been, conducive to inflated prices and/or rents.

5) For rentals, the economy is not doing well for your typical tenant. This situation is very pronounced in Detroit for low-income rentals, where the bottom is falling out of the economy, and it's very difficult to find people who can afford the rent.

 

[TooColdUlrick]

Originally posted by Pook
I am referring to cashflow, not flipping properties. In areas around me, such as Austin, there are more landlords than there are people who want to rent. The house salesmen are giving the 'this will make a great rental house!' pitch. Even the illegal immigrants are happily getting houses. These are red flags to me.

indeed a red flag, in addition to the ones i previously mentioned. in many markets, the HOT ones, rents are going down as there is a "substitution effect" occuring.

My concern is not a 'RE bust' but rather the people themselves. How do you gain cashflow when there is noone who wants to rent?

you must be concerned about a 'bust' since your total return is a combination of your rental cashflow (positive or negative) and the capital gain (loss). you could have killer cashflow, but if the property declines in value, it could wipe it all away.

And with the RE boom, most people are buying houses, even if they can barely afford it. I don't see too many people who want to rent a house.

i'm renting! smart money is renting. unfortunately, there are few smart people in this world. i have two rental condos that i'm dumping, both purchased in 93/94. one i bought for $75,000, the other for $140,000. both have been positive CF for quite some time now, as rents have increased over the years. i don't care! i can sell both PDQ. the first one is worth about $275,000 and the other about $450,000.

BTW, the President of the Mortgage Bankers Association (i believe it was him) said on CNBC a few weeks ago, that HE is cashing out his DC house and will now rent. at the same time, the hypocrite also said that the market isn't overvalued. right.

If everyone is making lemonade stands, it stands to reason that the demand of lemonade will go down, hence the cashflow. What are your indicators to know when to EXIT the real estate market in a local area?

not necessarily, for prices are determined by both supply AND demand. you could have a big increase in supply, and escalating prices. for example, dot coms. Ibankers dumped so much garbage on the market, but the appetite for them was insatiable.

if demand is increasing (decreasing) at a faster rate than supply is increasing (decreasing), prices will rise (fall).

knowing when to exit in real estate is tricky, but look for increasing prices with flat or declining unit sales. this is indeed happening in many places.

 

[Page]

Originally posted by STR8UP
All this talk of a real estate bust makes me laugh.

Me too.

Even if real estate busts, it will come back b/c it always has in the past, and it will be higher than it was before. Just like how land is more expensive now than it was 50 years ago, it will be even more expensive a few decades from now, and that is all good equity.




Unless you buy real estate in downtown Chernobyl, land is always good b/c there's a limited ammount of it , and there are always people that need housing, which is where a RE investor comes in.

In California, there is always a demand for good housing, and I intend to provide the best, since oceanfront property comes at a premium because it is limited in availability. I live down by the coast, and I want to buy property down there (most of it is zoned for multiplexes anyway) and there is also a shytty, heavily distressed hotel down by the waterfront that I plan to buy someday. With some rehabbing, it could be the crown jewel of my assets. Long Beach also has a huge artificial breakwater, which eliminates waves on the beach and keeps the water filthy b/c tyhe barrier prevents proper water circulation. If I own commercial properties like restaurants near the beach, I will do what I can to remove the breakwater so waves will once again return to Long Beach for the first time in about 60 years. With the waves come the surfers, and with the surfers comes business for the restaurnats and shops that i plan to own at that time. However, first I must start small and build my way up to that. I eventually want to end up in development.

In the past, I have thought about doing section 8 to help minimize vacancies, but the problem with that is that in California, Section 8 tenants are the worst of the worst (the dregs of society) , and they will trash your place even if it is far above flop house standards. Section 8 is basically HUD-eligible tenants, I know someone who has done maintenance on section 8 properties on behalf of the owners, and most section 8 properties are squalid, not b/c of the landlord, but b/c of the deadbeat tenants. Even if you evict them, you get more just like them.

 

[TooColdUlrick]

just to touch upon the interest rate angle...over the last couple of years the benchmark 10 year Treasury note (UST10) as well as the "old" benchmark 30 bond (UST30), have both become rather insensitive to changes in the fed funds rate and other short term rates.

most, if not all, mortgage instruments are indexed to the UST10. but even mortage rates are becoming more detached from the UST10.

in short, changes in interest rates by the fed (attempted changes that is) have less of an effect on mortgage rates, than in the past.

i really don't forsee interest rates causing a housing bubble-burst, but rather the forces of nature clearing out speculation where it shouldn't be (e.g. where you LIVE).

and as you know, nature can be very cruel as she doesn't much care about your personal net worth, i am afraid.

http://news.yahoo.com/news?tmpl=story&cid=580&e=1&u=/nm/20050630/bs_nm/economy_fed_dc

it seems that the fed is determined to drive the economy into recession! that will definitely cause the bubble to burst, a'la 1991. crude over $60 is also problematic, as this is the point where it really starts to affect consumer behavior.