Monthly Letter for July 2016
“Politicians are people who, when they see light at the end of the tunnel, go out and buy some more tunnel.”
Well the economy continues to muddle through a market of mixed signals. The rest of this year, like the whole recovery, should be good but not great. But by traditional standards, it has been a long upturn, however irregular. For the first time in a long time I am hearing whispers of a downturn coming. At the same time, the people in the trades are all VERY busy. Many working around the clock to keep up with the demand. On a recent visit to the barber I was reminded of something my dad had said. He said, “When they’re trading stock tips at the Barber shop, it’s time to be out of the market.” This was brought sharply to my attention on my last visit when the guy in the next chair and his barber were exchanging commercial real estate tips.
To further bolster this iceberg warning, take a look at this chart.
The San Diego Regional Chamber of Commerce reported that their business outlook index had a sharp drop. Respondents cited, unknowns related to minimum wage increases. It takes a lot of courage to own a business; fear of the unknown is understandable.
Speaking of the unknown, we are entering the political season with both party’s conventions this month. Fasten your seat belt, drop your goggles down and hang on for a wild ride. Whatever the outcome, it does not portend well for the stock market and indirectly to the real estate market. Take a look at this chart and its massive correlation to presidential turnover.
For those of you who remember the children’s story, “The King has no Clothes,” I think we are playing out this story in our economy and what I now call quantitative failure.
If my prediction is right and we see slowing next year, what can be done? Wise investors, tenants and brokers plan for the worst.
Treat each property (or even each tenant) as a standalone business, each its own profit center. You can further that strategy by boosting reserves and contingency funds. These safeguards prevent soft markets turning into loss of income or worse a liquidation event.
Besides the above advice, I thought I would share these 18 pieces of advice for real estate investors.
18 Pieces of Advice for the Real Estate Investor
- It’s not how much money you make that matters, it’s how much you keep.
- Don’t let friends, family, or co-workers talk you out of real estate investing unless they have more money that they know what to do with. If that’s the case, do what they’re doing.
- Free contracts are worth what you pay for them. Have your contracts approved by an attorney who will defend them in court. If you have to ask why, you’re new to the business.
- If you own real estate, it’s not a matter of “if” you go to court, it’s only a matter of “when.”
- Inspections are not an expense, they’re an investment. We have spent money to repair hidden problems that an inspection would have uncovered.
- You will pay for education, either ahead of time from a mentor or by the mistakes you make as you go through the process.
- We’re in the problem solving business. Find out what your customer needs, then craft a solution to their problem.
- Know your exit strategies (have several) before you buy.
- Manage your tenants, don’t let your tenants manage you.
- If a potential tenant doesn’t have enough money for their deposit and first month’s rent they won’t have enough money to make the monthly payments.
- If a potential tenant says, “the Lord will help me make my payments” you can be pretty sure you’ll end up evicting them both.
- A millionaire makes $500 per hour so if a job (painting the walls and repairing a toilet) can be done for less than $500 per hour, hire it out.
- Never get greedy. The best deals are the ones where everybody wins.
- In real estate, there is such a thing as good debt.
- Don’t wait until you know it all to get started. None of us know it all.
- It’s always a great time to be in real estate, you simply have to pay attention to the economy and real estate fluctuations to know how to direct your investments.
- Don’t wait to buy real estate, buy real estate and wait.
- Set up your real estate investment entities (LLC, S-Corp, etc.) early in your career to best protect you and your investments as well as to prepare yourself to take advantage of all the many tax benefits real estate offers.
Elephants have long memories and just keep plodding forward, like all of us in real estate. Just remember to not be lulled into a false sense of security…hope you enjoy the story.
In 1996, Peter Davies was on holiday in Kenya after graduating from Louisiana State University.
On a hike through the bush, he came across a very young bull elephant standing with one leg raised in the air. The elephant seemed distressed, so Peter approached it very carefully. He got down on one knee, inspected the elephant’s foot, and found a large piece of wood deeply embedded in it. As carefully and as gently as he could, Peter worked the wood out with his knife, after which the elephant gingerly put down its foot.
The elephant turned to face the man and with a rather curious look on its face, stared at him for several tense moments. Peter stood frozen, thinking of nothing else but being trampled. Eventually the elephant trumpeted loudly, turned and walked away. Peter never forgot that elephant or the events of that day.
Twenty years later, Peter was walking through the Chicago Zoo with his girlfriend. As they approached the elephant enclosure, one of the creatures turned and walked over to near where Peter and his girlfriend Misty were standing. The large bull elephant stared at Peter, lifted its front foot off the ground, then put it down. The elephant did that several times then trumpeted loudly, all the while staring at the man.
Remembering the encounter in 1996, Peter could not help wondering if this was the same elephant. Peter summoned up his courage, climbed over the railing and made his way into the enclosure. He walked right up to the elephant and stared back in wonder. The elephant trumpeted again, wrapped its trunk around one of Peter legs and slammed him against the railing, killing him instantly.
Probably wasn’t the same elephant.