The Reality of Real Estate

"The real estate bubble is going to burst!" Those words have been burning my ears since the first day I heard them on the radio driving to work. My wife and I had been dreaming of the day that we could both stay at home and look for properties in the classifieds over coffee. The infomercials and cd's telling of "no money down" and "buy 'em, fix 'em, flip 'em" were hypnotizing us. Only one more investment and we too would be "living the life we've always dreamed of". Well not just yet. Sadly the market, much as it was predicted, has gone into a downward spiral. How could this have happened?

We began innocently, taking a part of our savings to invest in a summer rental at the Jersey shore. We found a one bedroom condo that needed TLC. It didn't require much to get it ready and we could ask enough to cover our mortgage payment. However, our timing was bad. The renovations were completed in June and rental inquiries by then were zero. To avoid the burden of paying 2 mortgages, we decided to list. The unit sold in 30 days for 20k more than we invested. WOW! What if we could do that again? and again? getting bigger properties and higher returns each time? It seemed too good to be true. It would require an unforgiving commitment of time to complete the process, but we began moving 2-3 properties a year - flips, rentals, you name it, and it was worth it.

I am no finance expert. In fact my day job is in sales. I do believe, however, that humans have a natural inclination to do what they are told, particularly when it comes to self-preservation. When the presses started rolling a few years back about the looming real estate market crash, would-be buyers quickly zipped-up their pocketbooks. No one with a low threshold for risk would dare enter into that chasm. The adjustable rate mortgage was perhaps too good. The interest rates maybe dipped too low. The market was at a fever pitch. And "everything that goes up," according to my well-educated real estate advisor "must come down." He said "it's all part of the market cycle."

The only cycle it feels like now is the menstrual cycle. Once a month, when I go to the mailbox, there is this terrible aching pain. Everytime I look at what we spend in mortgage payments and utilities and read about the down market and depreciation. Yes, depreciation! The properties that we sacrificed blood, sweat and tears for and were going to get us that dream work-at-home job are slowly becoming worth even less than we paid - not to mention the lost renovation costs and rental revenue.

Diversifying into rentals was helping to "float" these properties for a short time, but with recent economic hardships tenant turn-over has increased and we have had to file for evictions on others. Current market conditions have also lead to savvy renters naming their own price. They are doing their homework and "can only pay such and such dollars a month". We even tried renting these units at less than the cost of our current mortgage payments. It is very hard to compete.

That is when it started to click. The cd's and infomercials were starting to make sense. "It is easy." "You can do it with little or no money of your own." How? By keeping your money in your wallet! That's it. That's the key to making the whole thing work. Our problem was that our eyes got bigger than our stomach. We were biting off more than we could chew. We were becoming overly-aggressive with our money. The idea is to use as little of your own money as possible from the down payment to the renovations.

So if you might be considering an investment in real estate, this may actually be the perfect time. Why? Property is dirt cheap. People are giving real estate away to get out from under the threat of foreclosure. Even the builders are giving things away. They are offering "free upgrades" and "first 6 months free" mortgages. Interest rates are again becoming unbelievably low. If you have the capital to invest, do it now and do it wisely. Do some reading. Learn some of the philosophy behind buying cheap and borrowing to buy. Look past the hype and understand the importance of managing your out-of-pocket expenses.

My advice is to invest in a project that is priced in accordance with its condition and location. Make sure the payments and expenses will survive in a down market. Flipping? Do not overpay on the front end if you are going to get underpaid on the back end because renovations were more than you expected. Renting? Paint and carpet can do miracles. Be sure to market your unit aggressively. Retiring? That may have to wait for now. Real estate investments are not for getting rich quick, but can be lucrative to those who can manage them wisely. Lesson learned.

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