Gloating renters… happy investors?
Tuesday, December 26th, 2006Some interesting articles have been popping up in the media lately. One theme which has been percolating is that maybe ‘flipping’s’ best days are now past, and investors need to think about buy and hold. Specifically, buy multi-unit rental properties. The main consideration in your buying decision? Cash flow.
This creates a kind of deja vu feeling, like back in 2000 after the stock market crashed, when all the talking heads suddenly started to point out that ‘eyeballs’ and website traffic growth was not necessarily as important as earnings.
Strikes me as a bit of sanity creeping in the morning after the party, as the alchohol wears off and the headache kicks in.
Another media theme is one of any number of variations on ‘the bubble has popped’, ‘the bubble is about to pop’, ‘there is no bubble’. Just read one today in the Wall Street Journal: “Renters Gloat Over Housing Slump”. Talks about how a few people who held off on buying at what turned out to be the market peak are now very happy campers.
One of these guys created a blog to torment the National Association of Realtors economist, who due to his Chief Cheerleader title may not be the only person whose opinion on the real estate market you want to hear prior to investing a huge sum of money.
My observations on the above are as follows:
- There’s quite a bit of risk in attempting to time market peaks and valleys (in this case, selling because you feel the end is near, or opting never to buy in the first place because you’re convinced of a peak). But there’s also a lot of risk in declaring that ‘this time, things are different.’ (I’ve actually seen that opinion expressed recently, which is amazing, since the last time I heard that was probably the Pets.com IPO back when Enron was still king of the world. You’re hearing both of these opinions lately, depending on who you listen to. Whichever side you happen to come down on, I’d say make sure you do your homework. And if you find yourself totally disregarding the other side’s opinion, you need to question if you’ve been drinking your own Kool Aid.
- I’m not sure that a national real estate market exists, and even if it does, how relevant is it to the smaller investor? I would make the case that real estate is inherently local, especially for the smaller end of the market. Why? Donald Trump can and does go anywhere in the world to purchase or build. His operation can cover huge swaths of territory. However, the man in the street is restricted to buying and selling within a certain range of his home. He’s not really going to buy a property 2000 miles away. So therefore, the only part of the market which needs to concern him, is the market close to home. If you’re going to talk about bubble or no bubble, you shouldn’t get distracted by what’s happening on the other side of the country.
- Fads come and go, short term profit opportunities come and go, but in the long run, cash flow really is king.
