Real Estate blog

Archive for the ‘Cashflow’ Category

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Ok, so I’m in the middle of a 1031 tax deferred exchange, the result of a New Years resolution to cash out of a high-end townhouse that had generated some equity and reinvest into a property(ies) that generates better income.

Lots of ink has been spilled on how our jittery market is impacting homeowners. But it’s hard to find anyone writing on the question that looms largest in the minds of most investors: what do I do now?

There, of course, is no single right answer to this questions – it will depend you’re your risk appetite, your local market, your time horizon, and your view of what the market is going to do next. But from where I sit I see five basic paths forward for investors in 2008:

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The media scares me. We all rely on journalists to make a big world small and help us digest current events, but whenever I see an article on something that is within my area of expertise – like energy policy or real estate – I’m often appalled at how badly some publications mangle the facts and principles in order to spin an entertaining story.

The worst offender among the popular press, hands down, is USA Today.

Successful real estate investing is a long term game. Following the right strategy with discipline and perseverance will allow smart investors to weather the market’s cycles and build equity. Time and leverage are your friends.

But don’t underestimate the importance of the time part of the equation. In the past I’ve compared the performance of the real estate market with the stock market. For the disciplined investor, real estate performs favorably to the stock market over any reasonable period of time, but you’ll need a few years for the strategy to be effective. If you’re only going to stay in the game a year or two you might as well buy a mutual fund and call it a day. But investors with perseverance will see their wealth grow much faster by pursuing a prudent real estate strategy than they will betting on the stock market.

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A reader who goes by the handle “Max” made a comment the other day that got me thinking. There’s a concept in pop business theory called the Peter Principle which states that managers tend to get promoted to their point of incompetence – taking on bigger and bigger responsibilities until they eventually get to the point where they’re over their head. And this, ironically, is the point where they tend to stick.

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As investors we’re not out there spinning the roulette wheel; we’re looking at the underlying fundamentals and taking measured risks. That said, investors do need to take a view of the future in order to make decisions in real time – and BusinessWeek’s recent cover story gives the housing market a timely and even-handed overview.

You’ll see some of the boilerplate that you’ve read before, but pay attention to a reference to an influential paper written by Harvard economist Gregory Mankiw which back in 1989 predicted a precipitous decline in housing prices. The premise was that a shrinking body of first-time buyers along with a glut of downsizing baby boomers will collectively pull lots of demand out of the market, leading to an excess of supply and a sticky plunge in prices.

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Being a good investor is all about having a vision for where you want to be, taking a view on the market, and running the numbers. When these three elements don’t line up then smart investors stay on the sidelines.

A reader who goes by the handle “Max” made a comment the other day that got me thinking. There’s a concept in pop business theory called the Peter Principle which states that managers tend to get promoted to their point of incompetence – taking on bigger and bigger responsibilities until they eventually get to the point where they’re over their head. And this, ironically, is the point where they tend to stick.

In discussing the concept of leverage, where an investor builds a profitable portfolio of investment properties over the year by occasionally executing a 1031 exchange, the Peter Principle might be relevant. As Max points out, you don’t want to get in over your head.

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