In the cable TV series Through the Wormhole narrated by Morgan Freeman, the amazing questions of life and the future of life are asked:
Can we travel faster than the speed of light?
Will man live to be immortal?
Is there life on other planets in the universe?
These and many more questions are asked, and more often than not when the show is over, there seems to be more questions than answers.
I just returned from a short camping trip with my son Sam, my nephews Jeremy and Jesse, their father Steve and Larry Musgrove (my boxing coach). We spent a few days at Jeffrey's campground just outside of Bishop, California. As I lay in my sleeping bag at an altitude of 8,000 feet under the stars, I saw untold stars in a pitch black sky. It was magical and mysterious, breath taking and inspiring. I was instantly transported from a world of hustle and bustle to the tranquility and solitude of the wilderness. All work, real estate and the deals in progress were forgotten for the time and true relaxation set in.
During these times of uncertainty and volatile stock markets, doom and gloom prognosticators abound. They thrive on the discussion of political unrest, economic turmoil and financial swings that can shatter your nerves.
These are the times to understand what is really important in life and spend time doing those things. Understanding the up and down cycles of the real estate business can prepare you for those crazy times when the world seems to be out of control. Your financial survival depends on understanding these cycles and preparing for them.
Here is a list of the basic skills and rules that I have lived by to succeed:
1. Understand and control the use of leverage.
2. Bulls get rich, bears get rich, but pigs get slaughtered.
3. Buy when the masses are selling and sell when the masses are buying.
4. Don't put all of your eggs in one basket.
In 1999, I bought my first condo to live in for $220,000 with $20,000 down. I flipped it in three months for $300,000 and bought a house for $540,000. I sold the house two years later for $1,000,000 and bought a house that I live in today for $1,400,000. I started with $20,000 and turned it into $1,400,000. Three years ago, the house would have sold for $2,600,000, but I intend to live there quite some time as I am content. I have a $700,000 mortgage so I still have great equity.
This is an example of leverage that can turn $20,000 into $1,400,000+ within a short time. I could sell and get $700,000 profit, but then where would I live?
The same types of deals have been made for years in all types of investment properties. However, using strategy and being conservative can be very helpful when markets change direction. Therefore, understanding leverage, risk and reward, and knowing when to sell or to pay down those loans as the cash flow is coming in, can make the average investor look like a pro. The building of equity will pay off in the long run.
I have had many clients that continued to take risk and leverage up and up without any consideration for a down market. Those clients lost properties and millions of dollars. Others that were prepared, lowered their debt even in the high times and moved forward but with caution. They are now the buyers of lost properties.
Some real estate pros, who amassed huge portfolios of all types of real estate, got greedy and leveraged their entire life's work and put the money into one deal. But delays in construction, market upheavals, the lending and finance crisis, and actual housing declines caused a crash and a loss of a life's work. Bankruptcy, default, legal lawsuits and disruptions of family dynamics are the repercussions of greed. Don’t gamble recklessly in markets that always have up and down cycles .
I am asked (especially in times like these): "What will happen to the market?". If you have been following my blog posts, you know my answer. But I feel like I’m in a "wormhole" myself, as any “answer” is only based upon an educated guess. But this time the situation is much different than anything we have seen in our history.
Real estate values will act in accordance to the basic principles of supply and demand, and depend as always on “location, location, location”. Some properties will rebound and thrive, while other properties will not. Predicting good and bad markets can seem risky for the investor. For the end user, not so much. Predicting the end user’s needs and their ability to thrive in a given economic environment is essential to every real estate transaction.
As a user, the owner of a business can predict the general trends of his market. As an investor, this can be tricky to follow. Today, location must be a priority to determine if a real estate deal is good or not. Buying a 100,000 sq.ft. warehouse for $20 per sq.ft. in Kentucky with a major corporate tenant is not a good deal if you have no chance to replace the tenant should they move or close up. The same warehouse that is $100 per sq.ft. in Vernon, CA might provide a better opportunity to re-lease should you lose your tenant. The same goes for an apartment complex in a suburb of Dallas vs. the San Fernando Valley or West Los Angeles.
At the end of the day, long term success depends on understanding location and value and predicting future needs and markets. The population of Los Angeles and Southern California continues to grow and the future requirements for housing, services, etc. will expand also. Get educated before making a plunge into a market that you don’t understand. Stay leverage safe, as if the property you just leased might go vacant for a year or longer. Can you still maintain it and hold it? If so, you can take the risk and absorb the potential downside.
Equally, but more important to me, live life as if there is no tomorrow. Enjoy family and friends as they are the most important things in life. Give of yourself generously to the next generation and to those less fortunate. After all, you cannot take it with you. Life can be a journey through a wormhole, as the next day may bring something we never anticipated. That is what makes each day a blessing and fun.
