Where Have All The Real Estate Gurus Gone
Posted on January 18, 2008
In 1961, Pete Seeger wrote and performed the song Where Have All The Flowers Gone. In the first stanza of the song, he questioned where all the flowers had gone, and then pointed out that girls had picked them all. The second stanza questioned where had all the young girls gone and then pointed out that they had taken husbands every one.
As the song continued, he questioned where had all the young men gone, gone for soldiers every one; where had all the soldiers gone, gone to graveyards every one; and finally where had all the graveyards gone, covered with flowers every one. The refrain of each stanza except the last was, “When will they ever learn? When they ever learn?” The refrain of the final stanza was, “When will we ever learn? When will we ever learn?”
The past several nights I’ve awakened and couldn’t get back to sleep right away so I turned on the television to see what infomercials were running. After spending 30 years in the advertising and promotion business before retiring, I’m still interested in looking at ads and critiquing their effectiveness. The question I can’t ignore is, “Where have all the real estate gurus gone?” A year or two ago late night television was filled with infomercials in which one guru after another was touting his or her program to get-rich-quick with real estate. Many of the programs were so well scripted and acted out that it was hard to sit through the entire program without pulling out your credit card and picking up the phone.
When will we ever learn? When something sounds too good to be true, it probably is. I’ve watched one guru after another rise as bright as the sun only to burn up like a shooting star as they fell from grace, often the result of legal action or bankruptcy. When the real estate market is red hot, as it was a couple of years ago, anyone can make money. Even a dead fish can swim downstream. When prices are rising by double digits and buyers are willing to pay more than the asking price just to get in on the gravy train, anyone can buy properties, fix them up and flip them for a profit. That’s not investing! That’s speculating!
It’s when the market cools that we learn who has been investing and who has been speculating. It’s the same with all types of investments; sound investing strategies stand the test of time. I’ve been investing in real estate for more than 35 years and I’ve never experienced a down year. Granted, some years have experienced little growth, but those have always occurred near the peak of a real estate cycle when there were few deals to be had. It’s hard to find a bargain when the market is swarming with novice buyers, paying too much and hoping to be able to quit their jobs and retire to the islands with fancy cars, boats and planes the way those infomercials picture. When will they ever learn?
Investing and speculating are very different. You invest by putting time or money into an asset for the purpose of obtaining an income. Speculators take part in risky ventures betting on the chance of making huge profits. Buying real estate with the hopes that rapidly rising prices will assure you a profit is speculating, not investing. In fact, buying at or near the top of a real estate cycle can be financially devastating as mortgage funds become scarce, prices start to fall and buyers disappear. Many speculators suffer huge losses because they hang on too long waiting to sell with hopes the market will improve.
If you’re buying a home in which to live and it meets your needs, makes you happy and you can afford the payments, go for it. Even if you pay a little too much, the enjoyment you get can help you to justify the extra cost. But, if you’re buying as an investment, to provide a future income stream, there’s only one way to do it. You have to buy properties that produce income. If you buy a property that requires you to subsidize the purchase from your earned income, that’s not an investment. Would you invest in a bank certificate of deposit that required you to pay the bank each month to use your money? Granted properties have appreciated and rents have gone up over the years, but relying on appreciation or inflation to bail you out is speculating not investing.
Here’s a tip! If you’re considering real estate as a long term investment, you have to buy properties in a way that produces an income. To do this, start with what a property will rent for and then deduct an amount to allow for vacancy between tenants. This gives you a net rent amount. Then from the net rent amount, deduct management fees, maintenance reserve, taxes, insurance and other expenses. This gives you the Net Operating Income (NOI), which is the amount available to purchase the property or to provide a Return On Investment (ROI) if you pay cash. Any deal that lets you buy a property using only the NOI and that breaks even or provides some cash flow will probably be a good deal. It’s always been that way, always will be. When will we ever learn?
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