Real Estate Investment: Phyllis' Words of Wisdom

Everyone wants to get into the game. Real estate is the new darling topic at cocktail parties and from your hair dresser. People are quitting their jobs and running after real estate riches. This frenzy is being fueled by lenders who are giving anyone who can fog a mirror a loan- with no money invested. Loan requirements are being relaxed to Prozac-like standards. Teaser low rate and negative amortization loans are everywhere. Appraisers are appraising at way over market values. Why buy just one when you can get 5 and make even more money? After all, if my manicurist can do this, why can’t I?

What could possible go wrong?

After 20 years in this business, I can tell you what can go wrong. Everyone is saying that low interest rates are fueling the market and that when interest rates rise, that will be the end. In my opinion, interest rates don’t have to rise one bit for things to collapse. Millions of people have adjustable rate loans that are just starting to adjust. I just got an increase of $100 on a loan that I took over subject to. This is with interest rates at 5.5%. What do you think is going to happen when interest rate actually do rise? Fed chairman Greenspan has recently expressed his concerns about the loose credit requirements and has hinted that he will try to stop some of the excesses by reigning in some of the lender abuses.

The real estate market is flooded with newbees who are really speculators-not investors. These are people who are ruining it for the rest of us. They don’t bother to educate themselves. They depend on the advice of people who have something to gain from their actions. These promoters do not care whether they are giving good advice or not- as long as the promoter is making money. Everyone has something to pitch- new construction bought before the shovel is in the ground- ideas that are just ideas.

These speculators don’t bother to find the right places to learn about what is happening in the real estate market RIGHT NOW! They are hypnotized by all the hype that is going on about how the real estate market will go up forever and that this time is different- there won’t be a downtown. Sound familiar? Just like the stock market hype in the year 2000. Everyone swore that things had changed and that history no longer repeated itself. It seems that all these ex-stock investors are pouring their money into real estate. There just does not seem to be any other place to put money. What the real estate market needs is for the stock market to get hot again so these fools will take their money out and put it back into stocks and leave our market ALONE..

These people are under the delusion that what goes up will continue to go up forever so all they have to do is buy anything at full market price, take out a no money adjustable rate loan and rent it and hold onto it for a few years and make big bucks. Well some of the people who ran to Vegas and tried to do that found out the hard way that there were thousands of others doing the same thing and they could not rent the house. Even if they could, renters don’t always pay and sometimes they destroy things. Think that can’t happen elsewhere?

Now the difference between these people and true investors could not be more different. We investors were taught to buy below market for appreciation and cash flow through improvements to the property. I was always taught that you make money the day you bought the property. If you have this philosophy, you can never get hurt. No matter what happens to interest rates or prices, I bought right. If it appreciates, fine- that’s only the gravy. The meat and potatoes were the price I paid. I don’t care what happens to interest rates. I only keep properties with fixed rate loans under 6%.

The scariest thing about all this is that usually real estate markets are regional as well as cyclical. After all, economic conditions are different in different part of the country, so when one market is up, the other one is down. Well, what if all the markets across the county had the same bad thing happen to them at the same time-like rising interest rates and teaser rates adjusting? Things could get ugly for the whole national economy. Not a pretty thought!

Well, that’s when the fun begins for true investors like me and I hope, you.