Caught Up in Real Estate Fever
“Successful people turn everyone who can help them into sometime mentors.” — John Crosby
With my real estate investments, I’ve practiced the buy and hold strategy. This is something that I learned from my oldest sister with her rental properties. She owns several in their midwestern town and as a stay-at-home mom; she doubles as landlord and chief marketing officer for their investment properties.
I tease her because their home voice mail often provides the stats of the latest available property. After the customary greeting it usually goes something like this: “If you are calling about the house for rent at 260 Walnut Street… that’s a 2 bedroom, 1 bath, with a washer/dryer, hardwood floors, etc, etc. It rents for $595/month and pets are negotiable.”
I’ve learned over the years that in her playbook… pets are always negotiable. What I’ve also learned is that I don’t have the time and patience to be a landlord so I’ve never managed any of my own properties. Since mine are all out of state, I don’t have the choice but to entrust them in the hands of a good property manager. The key, I’ve learned, is to manage the manager and all has been fine.
Back to buy and hold… my sister has never sold a property. All of them are cash flow positive and most will be paid off within the next 7-10 years. She is 43 years old and in my opinion, is definitely Sitting Pretty with her finances. She has been my real estate investing mentor.
But my portfolio is a bit different than hers. My rentals are also cash flow positive (but it is minimal $100 – $200 / month) and all but one are now in 30 year fixed rate loans… so I’m following the “formula”. The big difference is that mine are located in higher appreciation markets: Phoenix and Las Vegas, which by the way these markets have cooled off and are back to normal appreciation or could even lose value. But I bought at the beginning of the current upswing and could cash out with a nice chunk of change.
My plan was never to flip properties. But I’m reconsidering and here is why. Jonathan Clements at The Wall Street Journal wrote an article this week called: When to Sell an Investment Property In a Cooling Market for Real Estate and he believes it’s now time to skip town.
“Got caught up in the real-estate fever? Let’s start with the painfully obvious: If you have no choice but to sell, then you ought to sell — and you should probably sell quickly. To find out if you’re in the ‘no choice’ camp, simply run the numbers. Take the rental income on your investment property and subtract your costs, including the mortgage, property taxes, insurance and maintenance. If the house or condominium is a sizable cash drain and there’s no way you can keep covering the shortfall, you’ve clearly got a problem.”
“Maybe you are collecting a healthy amount of rent or you have a small mortgage, so the property’s income is covering your costs. Even then, you may want to sell. The key question: Could you earn a higher return by investing your money elsewhere?”
“Over the past 30 years, home prices have outpaced inflation by two percentage points a year. But over the past five years, that inflation-beating margin has jumped to seven percentage points a year. The implication: Recent returns are unsustainable — and modest gains may lie ahead.”
Any “mentors” want to offer a few ideas? Do I continue to hold or cash out?
The WSJ excites me to think that there actually people out there that were stupid enough to purchase rental properties and not do the simple math that he points out. Good lord, there is a lot of money to be made by cash investors in this down turn when it’s time to pick up the pieces from these wannabe investors.
Buy and hold works! I’m 43 and retired. I have 20+ units in Florida (mostly near FSU). Some are fully paid off and my overall loan-to-value is less than 50%. Cash flow is great. I’ve been investing since 1989. I’ve never sold a single property. The longer one can hold, the better the income becomes.