Posted by Anne_ND on May 19, 2006 at 07:54:36:
I often recommend The E-Myth. It’s a great book. Thanks for your comments.
Posted by Anne_ND on May 19, 2006 at 07:54:36:
I often recommend The E-Myth. It’s a great book. Thanks for your comments.
Booms & Bust post Internet age - Posted by John Corey
Posted by John Corey on May 18, 2006 at 07:00:24:
I was posting something on the Phoenix market and thinking back to the 1980’s when we had the S&L problems. Phoenix definitely suffered then as well as a lot of other locations.
My thinking then drifted to the ‘dumb’ CA money heading to other markets. People investing in the hope of appreciation but not generally too worried about cash flow. Will they bail when the appreciation slows dramatically as that is all they are in it for?
Then a light went on (a dim light?). We have not really had a fully] RE cycle since the world discovered the web. We have not had a really negative market since the web. How will the access to information on the web change how a down market plays out?
I invest in the US and in the UK. In the UK people favor investing at a distance and hiring out the property management. Very little conversation about ever being a landlord. Historically in the US market the RE investing books say to stick with a property you can drive to in 1-2 hours. Stay close to home. Most investors talk about being a landlord and tenants with the cost or property management rarely put into the cash flow calculation. Conclusion - many (most) US investors stay close to home when investing in RE.
With the web investors are much more able to compare markets, to shop for deals, to check tax records and to monitor a property’s maintenance or other activities. Hence people seem to be more open to looking further from home. They appear to be comparing the merits of one city to another.
In the past when a local market had hard times or crashed investors would suffer through the situation while remaining focused on the local market. They might sell but they did not really switch to another city hours away.
With the web, with the reports of the 10 best cities, the 10 worst cities for appreciation I sense we will see investors looking more nationally.
I speculate that the speculative money that is only in a deal for the appreciation will have a great tendency to move on to the next city. They will want to know where the next hot spot is and shift there.
Any views for or against this line of thought? Will it matter in the big scheme of things given that most residential property is owner occupied (ignoring vacation areas)? Will the web help cause a fundamental shift (drift)? If such a shift happens (or has already happened) what will be the impact when we see RE fall out of favor and a number of markets go down in value?
Re: Booms & Bust post Internet age - Posted by John Vosilla
Posted by John Vosilla on May 19, 2006 at 11:51:59:
Very interesting topic. One think I can’t understand is how the discrepancy in values between various bubble markets versus non bubble markets at this recent top seem to be greater than at any point in modern times even with all the liquidity, readily available information via the internet and ease of travel like never before.
I do feel that the gaps in current prices have to narrow between the haves and have nots. Not too many investors/speculators seem to be taking advantage of that mispricing which can give you a big advantage versus the locals stuck into their myopic rear view mirrow beliefs. Too many long distance investors seemed to be looking at appreciation and price momentum more than anything else and those left holding the bag in overvalued non cash flowing markets get crushed.
Someone mentioned folks going cross country attending auctions. I find that amazing and way too risky to psin your wheels like that. Like Ed Garcia says you are competiting with the local base of long time flippers and investors plus systems and operations that differ dramatically from market to market and even county to county.
I do think the instantaneous real time information and access to this information and forums never before available to the general public might make speculative/overvalued housing markets behave more like stocks on the downside in the future.
Clarification - Booms & Bust post Internet age - Posted by John Corey
Posted by John Corey on May 19, 2006 at 04:33:10:
I wanted to clarify something that Ed, David and to a smaller degree Jeff referenced.
A local investor who does their homework is certainly going to more able to watch for local opportunities. In addition a person who has one property to manage will certainly focus more than a property manager who has an inventory to get leased. A property manager might have more traffic so might have better reach into the market.
I was not saying that investing at a distance is the same as investing locally. I was saying that the web does make it a lot easier to learn about a location, check the building code and tax roll, view what is on the MLS in that market, track improvements if the contractors/property manager are on the web, etc. Hence some of the disadvantages of being remote are reduced or removed. Maybe the playing field is not level but the scales are less tipped towards the local investor.
At some level it is not about the absolute value of local knowledge and hands on management. It is being close enough. Many investors are part time investors so have less time than someone who is also local but a full time investor. That is no reason not to invest. Just a fact that the part time investor might be at a disadvantage (small or large?).
As Anne points out direct property management is a natural brake on the volume of deals one can handle. If we were to look at the large property owners across the US (local or not) above some level the ‘investor’ is not hands on when it comes to many aspects of the overall process. As is noted in the Weekend Millionaire, hiring out the property management can be a great way to free up the investor to look for more deals. The authors make the point that you make most of your profit from doing deals and holding long term. You do not make that much from the management. Note that the authors believe you should focus locally and they still make the point to hire out the management.
How about the following.
We agree that a local focus is more likely to let an investor really know the local conditions and what might be a great deal.
Property management is not a way to make money as much as a way to limit losses. Good management means you earn what you expected while bad management make the investment a nightmare and a money pit.
If we can more or less agree the above I am still interested in people’s views as to if the web shifts the playing field.
Re: Booms & Bust post Internet age - Posted by David Krulac
Posted by David Krulac on May 18, 2006 at 15:19:25:
There’s a later post complaining about out of state investors in PHX.
I’m not so sure out of state investors are more sophisticated. From some that I’ve seen they are well funded, but not necessairly smarter. Some friends sold a their house to an investor in CA who had never seen the house and out bid other bidders. The sellers were pleased and thought that the selling price was higher than they expected. Good for them. Thye moved out of state and bought a nicer, bigger home for less in another lower priced market, so they were doubly pleased.
Another example is foreclosure sales which are attracting people from NYC, FL, GA and a bunch of other places. I talked to several bidders, who didn’t bother with title searches, didn’t bother seeing the properties and didn’t know if it was the first or second foreclosing. One person told me that they thought that they got a good deal, because they paid less that they would have in their out of state hometown. I missed the logic on that one.
One time I went to Las Vegas on an organized house buying trip with several hundred of my closest friends. Most of the people were from CA, and many thought that everything was a bargain because the prices were 50% of CA prices. They wanted to buy everything. I ended up buying nothing. As it turned out they probably made out extremely well.
Maybe I’m too conservative or cautious, but I prefer the close to home approach. Though you can learn different markets. I’ve bought property in 7 states and have looked at property in a bunch more states. You can learn alot about values in a short period of time partiularily using the web. But there are still things that take time to find out about. Things like sewer & building moratoriums, special restrcitions , new roads, and employer hirings and closings.
You can definately hire property managers for a fee of 7-10% and for weekly beach property its up to 24%. Nobody will manage as well as you. Some are awful, some are so-so, some are great. Combine an awful manager with a high management fee and you’ll be likely to be seeing red ink on your P&L.
Re: Booms & Bust post Internet age - Posted by Ed Garcia
Posted by Ed Garcia on May 18, 2006 at 11:47:12:
Like Anne, I find your post interesting.
There is no doubt that because of the internet, the world is a smaller place.
We use to joke about the 3 major sources of communication, telephone, telegraph, and tell a woman. Today, it?s television and the internet.
I find it interesting when you discuss the differences in the US and UK people favor investing at a distance and hiring out the property management. Very little conversation about ever being a landlord. Historically in the US market the RE investing books say to stick with a property you can drive to in 1-2 hours. Stay close to home.
Now I?ll give you my take. Of the two ways of doing business, a person would be a fool to think that they could buy a property from a distance and properly protect their investment. I just sold a 207,000 sq. ft. Distribution Warehouse in Columbus, Ohio that I might have kept if it were closer and I could manage it myself.
A management company has a fiduciary responsibility to all of their clients, so when a potential renter or lessee should contact them. They will show your property as well as other properties that they have available, giving the potential renter or lessee the opportunity to pick and choose, not wanting to lose that client . I understand that, if I was a property manager I would do the same thing.
But you know that if you were to work that same potential renter or lessee, you would do what ever it would take to put them in your property. You wouldn?t say, hay look if you don?t like my property, there is a nice one down the street or around the corner.
I can?t tell you the crap I?ve gone through with management companies, and John when you hire them, you seek out the best. So it?s not just I had a bad experience with one management company, it?s an observation I?ve gotten through the years that a management company will never have your best interest at hand as you do. They?re what I call a necessary evil.
Secondly, there is no substitute for knowing your own turf. As far as I?m concerned, if you buy in an area that is not you own back yard, you?re a fish out of water. Now don?t get me wrong, people do it every day, but you?re at a disadvantage in doing so. I?m currently looking for deals all over the country, but I?ve been doing deals for 35 years and have a vast amount of experience.
One day I had what I thought was a sweet commercial deal right here in California. I went to a heavy hitter I knew named Richard Lewis. Now you have to know that the Lewis family at the time were one of the biggest home builders in the country. They had built thousands of homes in Las Vegas, Arizona, and had land banked here in Southern California where they first started and built 10 of thousands of homes here.
In those days I was running around in my own private limo and Richard would borrow it from me from time to time. He also offered me his airplane when ever I needed it which I never took him up on because I had no need for it.
So on this day I called Richard up and said. Richard, I have this sweet deal that I want to see if you?d consider doing with me. He so egotistically said, if it?s in the Inland Empire, I?ve already seen it. I said, I don?t think so Rich, let?s go to lunch and I?ll run it by you.
John, during lunch, I pulled the deal out of my briefcase, and as soon as Richard saw the name on the folder, he proceeded to tell me all about the deal.
I?ll never forget that John. It then made me realize that the shakers in any given area have already seen the good deals in their back yard. So who are we the think that they can?t recognize opportunity as we do.
John, you?ve been to several of my workshops and I know you?re going to the one we’re doing in June. I hope you?ve learned something from me every time you?re around me because I can assure you; I?ve learned something from you.
My message here is, we can never think that we?re smarter then the next guy when doing deals. When we purchase a deal out of state, we’re on someone else?s turf.
John, when I call on a deal in another state, I hate to tell them I?m from California. I already know what they?re thinking.
I love it when one of my students from California or any state for that matter will call me up and say, hey Ed, I?ve got this great deal in Texas and you should see the numbers on the Performa, they?re awesome. I?ll ask, why do you think they?re using a Performa instead of Actual numbers? The first thing they?ll tell me is poor management. Now John, you?ve seen it at the workshop on Saturday night when were breaking down deals and an out of state investor is buying in another state tells us this same answer time and time again, so poor management is a catch all. To ad insult to injury, if you ask them where they?ve gotten their information on the deal, they?ll usually say from the principal or broker who is trying to sell them the deal. Oh that?s just great, that answer always gives me a warm and fuzzy feeling.
How can we think that the Texan who is managing his own property on a daily basis is doing a poorer job then a management company or if they felt that they couldn?t do the job? Hire a local management company themselves. So we feel as an out of state buyer, we can properly manage a property via a management company and do a better job. I think that?s naïve thinking.
In conclusion, yes the internet is making the whole world available for us to invest and do business in. But you?ve got to know that the principal or broker whose turf you?re dealing on has the advantage. So NEVER, and I?ll say it again, NEVER THINK YOU?RE SMARTER then the person whose turf you?re dealing on.
See you in Atlanta,
Re: Booms & Bust post Internet age - Posted by JeffB (MI)
Posted by JeffB (MI) on May 18, 2006 at 10:33:32:
Good post. I agree with your line of thinking. This is something I’ve been pondering for a while now. A couple thoughts come to mind. First, the OO residential real estate within a given market may not be subject to the same influences as those properties owned by investors. These are two sets of people with distinctly different motivations and thought processes. So to whatever percent extent a local market is investment property, really only that percentage is subject to the whims of investor speculation. I have family in Phoenix and have been following that market very closely, and have heard various conflicting reports of the percentage of properties there owned by investors (anywhere from 25% to 33%). My brother-in-law, who is a broker and investor in Phoenix (and recently sold nearly all his rentals BTW), has been telling me for the past few years how many calls he gets daily from california investors, looking to pay cash for properties that do not cash flow. To me, this is pure speculation. They say things like “Only $350k for a four-plex, THAT’S CHEAP! It would cost $750k here!” These calls are getting less and less frequent as the Phoenix market begins to soften and those same investors are trying to get out and move onto the next hot spot (Albuquerque, SLC, whatever).
Certainly I agree, the web has played a big part in all this. As more and more information becomes available to the public (and easily accessible) one would think that creates a more perfect marketplace. But I think we are not always dealing with rational people here and the RE marketplace is far from perfect.
Much has been written about the “national RE market” versus “local markets”. I really do feel that RE investing is falling out of favor with many – one need only witness the size of this year’s CRE convention compared to past years). This national trend, I think, will have some impact on local markets everywhere, but how much?
Lastly, one thing I have noticed is that when one suddenly has some idea of “what’s going to happen”, it is all too easy to look only for proof of YOUR idea while ignoring any conflicting facts or statistics. It reminds me of debate team – find a position on a topic, THEN search for the evidence to support that argument. A perfect example is all the bubble theory people. Certainly there is no shortage of good points to support that hypothesis. But I think when we get these “ideas” in our head, we put on blinders and cease to be objective. My brother-in-law (referenced above) is a classic case of this. He’s been predicting a Phoenix market crash for two years now, and sold all his properties way too early (missing out on about 60% appreciation on most of them). I’m not saying he’s right or wrong, but his lack of objectivity has cost him a lot of money.
All this rambling is just the random thoughts of a simple minded mobile home investor, so take with a grain of salt.
Re: Booms & Bust post Internet age - Posted by Anne_ND
Posted by Anne_ND on May 18, 2006 at 08:15:20:
Interesting post. I thought that the reason CA investors moved out was that they DID care about cashflow, that’s why they were investing in places like the backwaters of the midwest (and it doesn’t get any more brackish than ND)- BECAUSE they could buy so cheaply that cashflow was still a good possibility. When I advertised a few properties in ND for sale on craigslist I got quite a bit of interest from people from CA. There is very flat appreciation in rural ND, no one could fool themselves into thinking otherwise. These were both owner-occupied buyers as well as investors.
But to address your larger issue- I think that people who are willing to invest far from home are probably more sophisticated investors. And I say that as someone who is pretty hands-on, so I’m talking about a real stretch for myself. But as much as I like to be in control of my properties and know that I will do it better than the next person, I also know that to move to the next level I have to put systems in place and make this a business. The only way to grow this business is to let go of a little control and invest more widely. The fact that many people are able to do this was really brought home to me at this most recent convention- and I’m sure it’s been said before but I wasn’t in a place to hear it.
Without the web I would be a buy-and-hold investor, but never would have looked at mobile homes, and certainly would not have understood the appeal of mobile home parks and mini-storage.
So I would say the ability to invest from afar is cultural (i.e., ideas that one is exposed to as opposed to being inherent- hence the difference between the UK and the US), and that people who are willing to invest from afar are facilitated by the web. So the web has allowed more investors to reach beyond their comfort level in addition to providing them with the information resources to do so.
I think we are already seeing a shift away from real estate by dilettants, the markets I know well are softening up- longer days on market, lower prices.
Question is approach and limitations … - Posted by Frank Chin
Posted by Frank Chin on May 19, 2006 at 07:26:48:
Summarizing what you’re trying to say:
I consider myself a keen observer of business management practices, being a “samll” RE investor, and owning a small business. I came to the following conclusions about the “common man’s view”.
I observe these limitations at work speaking to the staff at my business, neighboring shop keepers, and investors, just about every day.
I own a small business where I hire help for our activities, namely repair cars, and retail and wholesale tires. And I’ve been consistently asked “why I’m doing this if haven’t spent years and years fixing cars, or years and years selling tires”??
This is the common man’s view. Mentioned to a co-worker about my doing rentals and she asked “how much experience” I had doing rentals before I started. When I reply “none”, she went on to say that’s why “she’s afraid to do it since she never did it, and because of the inexperience, tenants would not pay rent”.
Because I have staff to manage “day to day” activities, I’ve concentrated on advertising, business development, on my investments, because I consider my job is the “business of business”. I beleive my time and effort greatly improved and expanded the business.
Yet, I run afoul of conventional wisdom which says that for a retail business “I have to sit and watch the cash register”. In other words, while I’m busy developing business, people are busy stuffing their pockets with cash from my “cash register”. Worst yet, when I go out to attend to business, customers and staff would say “leaving so soon”??, or “half a day”?? In other words, conventional wisdom is I fall asleep watching the “cash register”, till closing time.
On a nice day, I go down the street where “shopkeepers”, with hands folded, standing in front of their businesses, waiting for customers, and watching the cash register. This way, they are happy that nothing is stolen. I’m sure we see this every day.
Do we see a limitation here??
Going “somewhere where no one has gone before”, or “ceding control to others” goes beyond the comfort zone of most people.
BUT, are there valid arguments here?? YES. For instance, I agree that there’s numerous horror stories about managment companies. But that doesn’t mean you cannot devise strategies to solve the problem.
This is that same answer I tell people “that there are ways to watch the cash register without sitting next to it”. I stopped discussing my business with my mother in law because she was shocked that I’m not “sitting next to the cash register”. The former owner of the business was shocked that I was making and taking phonecalls, working inside my office for a good part of the day and “not watching the cash register”.
I attended one Saturday seminar where the speaker who lives in NYC, and at the time invests in Austin, TX. He explained that after he purchases a property, he find a local “retired couple”, who can help do small repairs, and follow up on the rent.
And why a retired person??
Because, the fee you pay him or her will supplement the social security check, and be a “large part” of his retirement income, particulary if he manages two or three properties.
How does this compare to management companies??
If they manage 5000 units, what percentage is your fee for a SFR, or even a small apartment building?? Whereas for the retired couple, they have all day to manage the “one to three” properties, and maybe the one or two phone calls a month, not hundreds that come into a busy mangement office each day.
And the retired couple will “show your place”, not the other “cheaper one”, or “better one” that they also manage, as Ed Garcia has pointed out.
John, while the internet certainly will expand the abilty to invest far and wide, “conventional wisdom” on investment strategies, and management practice will be the “brake”, or limitation, for most.
Think of the small shopkeeper hands folded on a slow afternoon. What is certain is he won’t build a business empire standing there, BUT nothing is stolen from the cash register!!
Local knowledge vs. skill - Posted by John Corey
Posted by John Corey on May 21, 2006 at 10:58:38:
I started to write a reply to Berno’s response to your post. It might be better if I post it after your message.
I think people need to be careful about assuming the local person is better equipped. Someone who is not competent is no better off when the deal.
Many investors who are local will have the deal stolen from them you Ed were to come to town. Given your years of experience there are certainly a lot of local investors who could not work a deal the way you can work it (local or remote).
What you lack in local knowledge can many times be made up for by seeking local advisers (agents, property managers, lenders, appraisers, etc). How a deal is structured can make what appears to be a bad opportunity a home run. As a mentor to people in the Lenders Workshop and as a mortgage broker you see a lot of information and can deal with a local of issues that are not local in their nature.
Local knowledge has a place. Assuming that the local guy is always going to do better is assume that the local guy is your equal so it is only a difference in location. Not every investor is as skilled as every other investor.
Granted there is a saying that pride goes before the fall. Some folks over rate their skills and talents so will get into deals they should have walked from.
Ultimately I think that a local investor can beat out a remote investor if they both have similar skill levels and similar time to invest in a deal. Hence the opposite could be true (the remote investor can do better if they are better equipped and better skilled or have more time to work a deal).
To make this a bit more neutral I think Charlie Fuller could come to town and work the local market in ways that many local investors can not even dream of doing. With his wife and her team on-line back at the home office (in another state) he would likely do just fine. Maybe not exactly as well as he would do in his home market. Well enough that he can show a profit and be happy with the outcome even if the costs are different (airfare for one).
Mostly I am saying that when there is better information on line the value of being local is reduced. Not eliminated completely. How reduced is to be debated, hence my original post.
Re: Booms & Bust post Internet age - Posted by Berno
Posted by Berno on May 19, 2006 at 12:41:09:
Ed, that was a great post! It makes a person step back and think about why they assume that they can do better in a given place over someone who is already established in that area. It makes one be realistic and take a better look at potential deals. Thanks!
Re: Booms & Bust post Internet age - Posted by John Corey
Posted by John Corey on May 19, 2006 at 04:45:23:
CA investors looking for cash flow? Some I talk to are interested while others seem more concerned about getting funds out of CA before a correction. If we look at where the CA investors seems to be investing it is hard to say if they really understand cash flow.
Granted it is a bit fun to group all the investors who reside in CA as behaving like a herb even if there is no data to prove this is valid. When I started investing outside CA I know it was a rather odd feeling to be presented with deals that cash flowed and which did not require a large down payment.
More to the point of your post…
I agree that for someone to scale up to a large business they need to separate that which they could do from that which they should do. If one reads the E-Myth the book takes the view that people who start a business get trapped in who is doing things rather than thinking in terms of job descriptions. The alternative presented is a franchise where you gain scale without owning or managing all aspects. Great book if anyone is interested in learning how to grow from a start up business that reflects the founders to a large business that can afford the key people taking time off.
Another point you make is very well said. You wrote “… that people who are willing to invest afar are facilitates by the web. So the web has allowed more investors to reach beyond their comfort level in addition to providing them with the information resources to do so.”
Taking your point the web is a tool; a tool leverages or magnifies what one can accomplish for a given amount of time. The web reduces the friction or overhead associated with researching areas, deals, providers, and associates. Just look at how we use the web on this site - trading information so we are better able to move forward.
The web is neutral when it comes to accessing info so it works for the investor who stickes to 30 minutes from their home AND the investor who might be looking across state lines. The more people realize that they can use the web to research local details the more they will realize that the remote locations feel just as close for some activities.
Re: Question is approach and limitations … - Posted by John Corey
Posted by John Corey on May 21, 2006 at 10:34:20:
It left me wondering a bit as to what your real view is. Then I thought some more and decided that what matters more than knowing exactly where you stand is that it really made me think and otherwise ponder the details.
I like your point that people depend on conventional wisdom. Maybe you said the following or maybe you did not. I believe that sometimes there are opportunities to do very well by ignoring conventional wisdom if there is a reason to do so. Past conventions are not always the guidepost to future success.
Warren Buffet is a prime example. Conventional wisdom says the public markets are efficient and that the individual investor can not do better than the averages. Warren has been quoted as saying that is what Wall Street sells and authors want to promote but is far from the truth. Peter Lynch wrote more or less the same in his book.
Keep sharing your thoughts as it does make a person think. Thinking being good in my book!
Wow…your insight is amazing - Posted by Mike
Posted by Mike on May 19, 2006 at 09:52:33:
Very thoughtful comments Frank. Your writing style reminds me of Ray Alcorn. Very well thought out and informative.
Please keep the comments coming.