OfflineKnowing what to buy or build during each economic cycle is crucial to making money in good times and bad. I am a real estate developer and started my career in Southern California where the real estate market goes way up and way down depending on the dynamics of the economy. Fortunately, when I first started investing in speculative building, the economy was heading up. It was the early eighty’s and the last recession was just ending. I would buy a building lot in the exclusive areas of Rancho Santa Fe, and design and build an estate home to resale. During the building period the land value would go up by 50k – 75k just because the economy was heating up. But also the cost of land and building a home was much less than the appraised value of homes being sold on the market. The market value of homes was going up 15-20% annually, but building costs were not. Because of this, I was able to buy a vacant lot, design and build a home appropriate to the neighborhood and sell it for a nice profit, usually between $250k and $500k. Yet, when the property market values started to drop, as they did in the early 90’s, the profit margin disappeared and I found myself having built a home for a price higher than what I could sell it. In fact, I took a large loss on that particular spec house. I have experienced a loss on three houses during my career, each one during one of the three recessions I have lived through since becoming a real estate developer. So, what can one learn from this? It is important to know the direction of the economy when deciding where to invest, especially in real estate. High-end homes don’t pan out well during a real estate recession. During this last four year recession, my partners and I had built a home in Deer Valley, Utah, a high end resort community. We started the project while real estate was skyrocketing, but by the time I completed building the 8000 sf home which should have sold for 4.2 million, and made us a profit of 1.5 million, the economy had tanked and prices were dropping and no one was buying. We sat on the property for 2.5 years and finally sold it for 2.6 million taking a 300k loss after paying commission and closing cost. Knowing what to invest in during certain economic times is crucial!
Now, on a positive note, while we were sitting on this spec house, paying 10k per month in interest on our construction loan, we also saw opportunities to purchase homes out of foreclosure in certain areas around the US for extremely low cost where we could rehab them and receive a good income stream from rent. We purchased several hundred homes from tax lien auctions and bank foreclosures, mostly for under 5K each and put 7K-8K rehabbing them and then received 600 to 700 a month rent. This created a great cash flow return on investment during the worse economic recession in my life time. What was the difference? Even during hard times, people have to have a place to live. Thousands of people lost their homes to foreclosure because their property value dropped below what they owed on the property and after losing jobs, many stopped paying their mortgage payment. Though they lost their homes, they still need a place to live, and thus must rent. We were able to buy homes for 15 cents on the dollar and rent them for a lower amount than people in those communities were being charged in the past, thus creating affordable housing. We also fixed them up to standards better than they were used too, thus helping neighborhoods maintain their value and stop deteriorating trends. This was positive for these communities, positive for the real estate market in general, and positive toward our profits. A ‘win win’ situation based on knowing what best to invest in during economic hard times.
Forget the multi million dollar houses; fixer uppers, here I come...
Where to invest in good economies and bad.
Posted on: Sat, 07/27/2013 - 00:25
Where to invest in good economies and bad.
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- by jcplumb123
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Thank you for the post.
It takes a real strong person to acknowledge that some past decisions were not as successful as you had hoped.
Being a person that can look back at past decisions and see how to make different and better choices for the future puts you way ahead of many others.
I want to wish you the best of luck with your future real estate investments.
Stay focused
Dean invests in hundreds of fixer uppers a year. If he takes a loss in a fixer upper he will lose 50k-300k depending on the area. If he takes a loss on a huge multimillion dollar project he will lose millions. Play your odds, Millions is too much to loose on one deal. HARD WORk!!!
The posts above provide some really great information on finding properties that weather the ups and downs of real estate well. I'd like to share another thought in identifying the properties that are the perennial best-sellers among properties.
They don't call it the Median Price for nothing. Median means middle, the price point at which a property sells where 50% of the properties are sold above it, and the other 50% of properties are sold below it. Every Real Estate agent should be able to tell you the median price of properties in a specific area.
Starter homes for people using FHA loans are near the median price, usually just below. The majority of rental properties in an area are priced at or a little below the median price. Upwardly mobile people move through this median range as they are building their fortunes, "empty nesters" move to this range in downsizing. These properties are sought by people coming out of financial difficulties, and by people who seek seller finance deals, or lease options. Because of their overall popularity, these properties are also sought after by investors, and because they are more likely to produce positive cash flow, they are sought after by landlords.
In short, if you can identify the median price for your investing area, you are on the safest ground possible in reselling a property if you focus your attention on properties that are at or near the median price for the area. We usually consider those that are just slightly below the median price to be the fastest properties to move in any market conditions, because these are just good basic no-frills living accommodations that work for people who have median incomes and median taste. Good supply, good demand, you can't beat the good old bread and butter house as a stable investment with lots of options and backup plan possibilities no matter what the market decides to do. As was mentioned above, People gotta live somewhere.
Dallin Wall
Real Estate Training Team
Forum Blog Location--A collection of my
"Best of" posts:
http://www.deangraziosi.com/blogs/dwall
Thank you for sharing your past experiences! We will keep these in our bookmark for future references.
I too am from Southern CA. Thank you for sharing your experiences. My investing was primarily buy and hold, and not that many properties at that; before finding Dean's materials in 2010. I still love buy and hold and am venturing out into remote areas outside of Southern CA. I'm doing some excellent wholesale deals here in Southern CA and bought my first commercial property, but I want to be able to focus on what is going to produce the best profits for me for my time involvement in real estate.
Southern CA is a tough market for sure, but I've managed to take the bull by the horns and apply the new techniques I learned here and prove that when most everyone says they can't be done here, show them it can.
But I am ready for something new and bigger. I've failed at building out of state teams once and another one isn't going so well. I think my failure is not being the best leader, as I went on the premise of teaching techniques and having my on site person take the action based on what I taught them to do. It backfired the first time and I ended up teaching valuable information for free and losing a really good team.
I've heard the horror stories going out of state and contractors stealing materials and destroying items. I had my own bad remote experience and then one not so remote where contractors didn't show up on time or do what they were supposed to do in the time allotted because someone wasn't there to 'babysit' their progress every day. I've adjusted my ways of doing things from those learning experiences. I've taken the best course ever on out of state team building now (DEAN'S!!! ) and I'm ready to try it again.
What are some tips and tricks you can add to prevent the above from happening as I venture into a new era and focus on a high number of deals instead of fewer deals with much higher payouts?
"People gotta live somewhere."
...keep in mind people pick that particular somewhere for one of two reasons...
1) because they want to
2) because they have to
As an official coach can you provide some detail in your "Basic Info" section!
P.S. - Everything else is immaterial, irrelevant, and unnecessary.
I'm sure that Jan, who originated this string, will have some comments to add, and I look forward to reading those, but as he is on vacation for the moment, I'm going to share the two best tips on Remote investing that I have ever learned:
1) Have Trusted Eyes and Ears on the Ground--I have only done remote investing in two other areas, and they happen to be places that I have previously lived. I chose these areas not because they were the hottest spots on the globe for real estate investing, because that changes from year to year, and sometimes from month to month, but because I know some people really well in those areas--people that I can trust to deal with a problem or issue that needs eyes and ears on hand. I can pay these people on a per instance basis for the help that they provide and I know that they will faithfully assist me. If a person doesn't have this level of contact, then we need to search for, and build those trusted relationships on the firing line. I have found that a great person to have assisting me is a handy man. Many of these are retired contractors who just want to putter, but they know their business well. I use Angie's list to track down the people with the sterling reviews, and then call and interview them. I found a gem to use with some properties I own in a city that is about an hour from where I live, which makes me comfortable to invest in that area.
2) "You must either manage your properties, or manage your managers"--If the property is a rehab property, one of the first questions that you would want to ask of a contractor you are considering working with is what measures they use for security with properties they are working on. The last thing we want to do is install new plumbing and have the pipes removed for the copper, or have the tile or cabinets walk away the night before installation. Some contractors have trailers with locks, or secured yards where they park trucks, and we need to make sure that they are as security-minded as we are. Maybe your handyman (see #1) will have some suggestions as well. The employees or contractors you work with will tend only to be as security or efficiency minded as you clearly communicate to them. I learned that the results that we get are largely determined by this little rule: "It's not what you expect, but what you inspect." Your remote team is based on the integrity and watchfulness of your eyes and ears on the ground, and the measures you implement to make sure that they comply. There are companies that will rent you a watchdog that will scare the heck out of anyone who wants to break into an unoccupied house.
Ultimately, there is no way in life to completely secure anything, but a reasonable amount of precaution can greatly reduce the likelihood of getting burned.
Dallin Wall
Real Estate Training Team
Forum Blog Location--A collection of my
"Best of" posts:
http://www.deangraziosi.com/blogs/dwall