Timeless Real Estate Strategies
from
"Top Secrets of the C.I.A." (Creative Investment Advisor)
by Marc J Goodfriend and M Jane Garvey
August 1987, Vol III, No 8
Learning From Adversity
We hear the success stories all the time – folks who travel from rags to riches in real estate virtually overnight. And that certainly does happen. Unfortunately, the road to real estate success is not just a one-way street. In the last year, we’ve had the opportunity to meet several investors who have made money in the real estate marketplace and then lost it, too. Not just ordinary money, either. Truly extraordinary amounts. Two of these folks have lost over $1,000,000. Did they do anything wrong?
First, a little background. One of these investors was in a one-industry (oil) town. The other was in a seemingly diversified area – mining, forestry and agriculture. Each of these investors was investing mostly in single family homes – the most liquid end of the real estate market and, in theory, the easiest from which to “bail out”. Each of these investors had a highly leveraged portfolio. Despite his losses, each of these investors remains extremely “bullish” on real estate. Each of these investors is starting over by following nearly the same investment strategy he used the first time around. What lessons can we learn from their adversity?
Lesson 1: It CAN happen anywhere. Whether in a one-industry town, a diversified economy, or just by being on what turns into the “wrong side” of town, values can go down. The investor who fails to recognize that every area can turn into a “two-way” street will also fail to protect his assets. We should invest in areas with diversified economies to the best of our ability. We should invest in the “path of progress” within the areas. But, most of all, we should recognize the risks involved in any investing.
Lesson 2: High-leverage investment strategies have more potential – and more risk. The investor who saves enough for a large down-payment (or exchanges-up with a low loan-to-value ratio) will have more of a cushion through hard times. Unfortunately, he will also be slower to start investing, show lower growth rates during good times, and be slower to recover from hard times. The high-leverage investor pays for his improved performance with a significantly higher chance of losing his net worth.
Lesson 3: “ Cover your assets” if you don’t want to start over from scratch. Try to get some of the property free and clear by using rapid amortization techniques or substitution of collateral. Protect this property by using non-recourse financing on the rest of your portfolio or by transferring the “keepers” to your children or a trust. Diversify at least a portion of your portfolio into other assets – cash, precious metals, stocks and so on.
Lesson 4: Don’t lose sleep over it. The most important thing we have learned is an old lesson – they can’t take your education away from you. If you have learned to invest using low down-payments, you will easily be able to start over again if you must. In fact, one of these investors, having lost over $1,000,000 in paper profits and another $200,000 in cash, tells us that he will have completely recovered in 12 to 24 months! The lessons he learned the first time are making the second time much, much easier. “After all,” he says, “how many people would have even had the million dollars to lose in the first place?”
|
