Joe asks "buy rental NOW?" - Posted by Ronald * Starr(in No CA)

Posted by GL(ON) on July 16, 2002 at 13:40:24:

You bring up the question of market timing. This is something I could go on about by the hour but I will try to put out some points that I consider worthwhile.

Real estate isn’t like the stock market. It doesn’t go up or down every day and you can’t jump in with a phone call. If trends last years (they do) and it takes weeks or months to find and buy one good property (it does) then trying to time the market is like trying to tell time by the second hand on a watch. Investing is more like planting a seed in the proper season and waiting for the harvest.

So we are talking about trends that persist for years. How do you know when to buy? Anytime you can get a good deal is time to plant a seed. That means positive cash flow. Any time you can get positive cash flow you can afford to buy and hang on, even if it takes 10 or 20 years.

If I have positive cash flow I don’t care if real estate never goes up. The duller the market the cheaper and easier I can buy, and the better deals I can get. If I have pos cash flow I can make a living on the rents and in 20 years the rents will have paid it off. So you can buy $1,000,000 worth of real estate in a dull market, hold for 20 years until it is free and clear and make $1,000,000 if it doesn’t go up a cent.

But we all know it will go up eventually don’t we? Especially if you have ever been a renter.

One big danger is that you will hang on through thick and thin (mostly thin) then get out as soon as you can see a profit. Negative cash flow properties are especially hard to hang onto.

My father did this. He bought an apartment house for $275,000 in 1975 just before rent control came in, interest rates went through the roof, and inflation killed all profit. There was a slump in prices and profits that lasted until the 80’s. He hung on, paying the negative cash flow out of his pocket, doing all the work on the place himself, keeping it immaculate, for eight long years while the value was less than he paid for it. Then as soon as real estate picked up, he sold it for an $80,000 profit and congratulated himself for being so shrewd. Then watched it go up another $500,000 over the next 2 years.

So don’t try to guess what the government is going to do next, or where the market is going next week. Be aware of market forces that are like the changing of the seasons, but over a period of years. When prices are low have the courage to buy, when prices are too high to carry, look for opportunities to buy and sell - this condition occurs when the market is active. When prices get ridiculously high and all the commentators stop worrying about high prices, take your profit and get out.

Joe asks “buy rental NOW?” - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on July 16, 2002 at 13:16:22:

I received the following e-mail and post here, seeing no problem with privacy, so anybody can read and respond.

-----THE E-MAIL--------*

Mr. Starr,

I have posted on the board of creonline but did not
get a response probably because I did not ask the
right way, but I’d appreciate your opinion and
direction. Judging from your posts, you must have been
investing in RE for at least 15 years and you like to
buy and hold properties. Actually this is what I’d
like to do also although I only have two houses for
renting now. What I want to ask you is what you think
about the RE situation in general. I have a friend who
went broke in the 80’s as an RE investor and he said
the situation now looks really like what it was at
that time. In his opinion, buying and holding is not a
wise decision. What’s your take on this please?

Joe

----RESPONSE------
Joe---------------

You friend had a bad experience and I imagine that he wants to spare you from a similar one. I suspect that he did not know what he was doing as an investor or used very aggressive investing approaches which were not successful when the real estate market declined. I had some rental houses both here in Oakland and over in Sacramento, CA, when we suffered the worst recession in CA since the great depression of the 1930s. I was not hurt. No problem. I kept my properties rented and fixed up and waited out the bad times.

I can only think of one condition at the moment which, were it to occur, I would suggest that a rental investor not invest in properties. That would be if there is a huge vacancy factor in the rental properties in town. If there is a declining population and growing vacancies, then I’d stear clear of buying new rentals and maybe I’d even be selling properties as they became vacant. There is virtually nothing you can do to fight the environment in which you invest. Either change your investment approach or go to a different environment to use the approach that is not working in the current environment.

Just do not pay any attention to market ups and downs, weaknesses and strength, is my advice. The residential markets have swung wildly from year to year for centuries in the USA. Just ignore it.

Now is a good time to be buying properties and refinancing your current loans because you can get low interest fixed rate loans. In 6 years, 10 years, 15 years you’ll love having those low mortgage payments when other people are getting loans with 12 and 14% mortgages and struggling to compete with you for the good renters. You’ll have the advantage of being able to offer lower rents, giving you the pick of the best renters.

Good Investing*********Ron Starr*********