Time to Buy or Time to Sell ?


#1

“The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.”
– John Templeton –

Generally, I would not even consider selling a home at this time. A home which I sold on a lease plus an option about four years ago, for a five year term, is still producing religiously. I would gladly offer the purchaser a financial incentive to default on our agreements. This was not a ‘Lonnie deal’. This was one of my first three land/home packages I developed which sold within three weeks of completion. Two have been returned to the rightful owner, voluntarily. As a greenhorn in the M.H. business, I followed the model of the perceived experts: ‘Sell the home and keep the land’. In retrospect I realize that the advice was well meant, but also that most was based on recent experiences. Major socio-political and economic trends that were already in motion were not commonly recognized. Of course today, many fear the future with trepidation of possible recessions, if not a depression, and inflation as ramifications. Pessimism and apathy is prevalent and is increasing. I am convinced that I do not want to be lender within these times of major uncertainties. But, I am equally adamant that my continuing efforts will bypass the inevitable wall and payoff on the other side. Historically, in other countries after a currency collapse, those who received the newly printed money first experienced the greatest profits and could take advantage of unheard of opportunities. Tangible, income producing assets, conservatively financed, or perhaps free and clear, have always survived political mischief, in this country. It seems to be a good time to trade any fiat currency or paper assets for tangibles that cannot be printed at whim.


#2

Bernd,

If you had a limited amount of cash, would you place a higher priority on paying down debt or acquiring hard and/or income-producing assets?

Michael(KCMO)


#3

Michael, a limited amount of cash is common to all of us. Your options seem to depend of the quality of the debt. There is the kind of debt that is like a millstone around your neck and might deprive you of sleep at times, a debt that consumes your future earnings to satisfy a present want, such as a new car you don’t need. Or debt that is difficult to eliminate because of previous miscalculations or commitments. Sometimes it pays to take a small loss on unrealized profits and thereby eliminate a specific debt and go on with your life to achieve more desirable goals.
On the other hand, you could have a debt which you could serve comfortably from the cash flow of your investment. It is also my very biased opinion that if you have an income- producing property that is reasonably financed, perhaps privately, that your obligation will be minimized, if not eliminated, by rampant inflationary effects during the next few years. The bottom line: aim for personal freedom and prosperity will follow.


#4

Excellent string of posts Bernd, thank you.

In some areas I can absolutely see the reasoning behind buying positive cash flow properties as the prices and rents justify doing so.

I have seen other areas where this is not currently the case. I do see a few investors beginning to stick their heads out from under the shelter so many of us sought after 2008.

Some investors have moved on to other niches, businesses and jobs. Some have held their ground, some downsized as I did and others yet continued to expand.

My mind tells me that those expanding into net income producing properties are going to make it very big in the next few years. My inner voice still wants to limit me to my comfort level. I believe this inner voice advice to be incorrect but no one likes leaving their comfort level, especially during such large scale uncertainty.

Many of us are learning how to trust our guts again as well as learning how to do so under new economic conditions, lending rules and honestly … learning how to balance old school knowledge and tactics with these new conditions to create a successful business plan.

Tony


#5

And hostile regulators

Out of curiosity I recently noticed and attended a WA state/county seminar that was basically aimed AT us investors, owners and landlords. One of gov agencies hosting the seminar was WA AG’s office !

If I’d set forth to write down all the ways gummint could get hostile to our industry I wouldn’t have been able to “improve” on that seminar’s agenda.

So now we’re not only having to contend with those market forces mentioned by Tony but now having to deal with the 800# gorilla the leftist/lib/consumer advocates have lined up against us.

Suggest you guys might want to add an occasional internet check on your state AG’s website to see what you/we may be getting accused of.


#6

Whoa, hold on

I’'d like to follow up on Michael’s question about debt vs. assets.

First, let’s agree that personal debt is undesirable and, other than your personal residence mortgage (or maybe including it), it should be eliminated.

I did not major in business, get an MBA, have any family member who has ever been in business, nor do I have a business mentor. You are it! If there are known guidelines out there that I have missed, please advise me of them.

So let’s talk about managing business debt:

I know it is all about one’s comfort with debt. Ideally, one would be able to boot-strap their profits and have no debt. Unfortunately, there is this nagging issue of feeding one’s self, spouse, and children. So we full-timers are constantly eating some of our profits. This makes it hard to plow money back into the business and continue to grow, so we borrow money.

What is a good ratio of debt to value? I know, I know, the lower the better. Well then: What is a bad debt/value ratio? The higher, the worse. I’m told MBA programs don’t teach this kind of decision-making, they teach how to arrive at the correct numbers or goal numbers. But what thinking is involved in setting the goal in the first place?

Why be concerned about this at all? Well, as we saw with the 2000 mobile home crisis and the 2008 housing crisis, values of homes can fall significantly, forcing you to be stuck with a loan greater than the value of the property. Other unforeseen, uninsured calamities could befall the business, not the least of which, you could die, saddling your family with a business they don’t know and debts they can’t pay. Devaluation of the dollar would reduce the value of your collectibles, etc, etc, etc.

Some people are willing to bet the farm and take as close to 100% debt as possible. The upside is lots of income with the use of OPM. The downside is losing everything including your personal house, reputation, and respect.

I’m thinking that a fire-sale analysis is required. Analyze each asset as to what you could sell it for in a week. Clearly this would be a fairly scary-low price (20%?). Because it is unlikely you will need to unload ALL your assets in a week, figure the price you could sell it to a wholesale buyer in a month (33%?). Then figure a value between these two. Maybe leaning more toward the wholesale end (26%?) This is your debt maximum. I think this is a very conservative method nearly guaranteed to keep you out of debt trouble. But is it too aggressive? Will growth be painfully slow? Is there any historical data that would show this low of a debt/value ratio is unnecessary?

Steve


#7

Steve,I am very much looking forward to your company with some drinks ,plenty of smoking and great conversations until the early morning hours.
Some caveats as a prologue: The little I know was self- taught through reading, observing others, and trial and errors. The biggest financial disaster I experienced I had caused myself by countersigning a very large loan for somebody, though at the time I knew it was a venial sin. Consequently, I lost all my investments except my free and clear home which I liquidated to start from scratch again.
As you probably know, I am very opinionated when it comes to M.B.As. and P.H.Ds. in economics, especially the Harvard and Princeton variety(Bernanke, Geitner, etc.)who seem to be inclined to recommend the diametric opposite of what common sense economics dictates, i.e. Austrian economics. Even a second grader knows that you don’t eliminate debt with creating more debt! He also does not confuse that when he creates his own money that is not real money. The P.H.Ds. I have known always depended on government jobs, largess, labor unions, and tenure and, of course, large taxpayer’s funded pensions. Those types could not run a corner convenient store successfully. Who would hire those windbags?
My approach to investing is very simple. First, I try to be aware of the position of the general business cycle. 2000 was the end of the tech stock mania and easy money policies, and an excess in M.H. manufacturing took its toll. 2008 marked the end of the housing bubble, again created by easy money policies of the Federal Reserve(Central Bank) and our wise government. Both events were obviously predictable. During the same period, commodities experienced substantial price evaluations after a generation of stagnation. Also, I try to be aware of generational changes in social, psychological, and economic terms. If my generational observations have any validity, then today’s economic conditions can only get worse before they get better. Somebody said that a speculator places his bets on the mistakes he perceives government makes.
Fast forward to the present. In another post, I believe you rightly said that site-built homes are much more popular than M.Hs. Does that not reduce the competition for the purchase M.Hs? If I can produce a renovated d.w. home, for one quarter of the cost of a site-built home, can I possibly remain competitive in the future? If I can lock in a loan at today’s artificially low interest rates, which will in spite of the government/Fed conspiracy reach their natural free market level, then future profit is already guaranteed. In the past, and I would probably do the same today, my money constituted 25% of the cost of the investment, my d. p.; of course, a greater amount gives one more control. Historical data of debt /value ratio are only applicable to banksters and economic professors; they habitually look in a rear view mirror and are devoid of successful personal investments. (John Maynard Keynes,the redeemer in all modern American economic classes, and our leadership, died as a pauper.)Common sense and a gut feeling are more realistic.
If I would start today, then I would seriously consider Lonnie’s advice and would invest in a small M.H.P. with about 30 to 40 units that does not need much infill. My workplace would be constant, and my work would be paid well; I would be in control while my economic future would be assured. Tangible,income- producing assets will survive and prosper as the economy continues its inevitable decline.


#8

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#9

It is really hard to decide if it is the best time to buy or sell a home but whatever is your decision make sure you don’t have regrets and in a real estate you still need to get any opportunities.