Beating the Bubble Mentality

I recently talked to a real estate investor friend online who I have known for about 4 years. He started investing in the height of the housing bubble, and now I think he’s finding it difficult to shed the “bubble mentality”. In our conversation I did my best to cause him to question his perspective and his investing strategy.

I’ve pasted our Instant Message conversation below (with the screen names changed for privacy). I didn’t correct capitalization, punctuation or spelling errors, so you’ve been forewarned.

I thought this would be a useful post because of how tightly this gentleman seemed to grip onto his investment strategy he’d been using since 2004. How tightly are you gripping onto your investment strategy?

[19:00] re_investor: HI Jeff
[19:00] re_investor: How are you buddy?
[19:00] jeff_nabers: Hey there
[19:01] jeff_nabers: I’m doing good. How are you?
[19:01] re_investor: How have you been doing?
[19:01] re_investor: Im alright!
[19:01] jeff_nabers: How’s the RE market up there?
[19:01] re_investor: OH its tight!!
[19:01] re_investor: Its flat and declined over the pervious 6 months
[19:01] re_investor: TOUGH
[19:02] jeff_nabers: what about cash flow?
[19:02] re_investor: Its cashing …
[19:02] re_investor: but, its still tight. I actually was in the process of buying another one
[19:02] re_investor: I stoped canceled the purchase/sale
[19:03] jeff_nabers: how did your previous investments turn out?
[19:03] re_investor: Oh great actually..
[19:03] re_investor: I sold the one in Fairview park
[19:03] re_investor: I got a cash buyer
[19:03] re_investor: The other three are turning out fine
[19:04] re_investor: The one house I have I have 67K in equity right now
[19:04] re_investor: I am currently renting it for 1K
[19:04] re_investor: but, I cant do anything with it until the maket comes back
[19:04] jeff_nabers: Sounds decent
[19:04] jeff_nabers: how’s the cash flow return?
[19:04] re_investor: Its about 300 dollars
[19:04] jeff_nabers: renting it at $1k what do you net per year?
[19:04] jeff_nabers: i see so 6k per year
[19:05] jeff_nabers: how much money did you put into it?
[19:05] re_investor: I was just in the process of refinancing it
[19:05] re_investor: and the mtg company I was using closed up
[19:05] re_investor: so the refi stoped
[19:05] jeff_nabers: how much money did you put in tha tone?
[19:06] re_investor: I was bummed out
[19:06] re_investor: I put in 15K
[19:06] re_investor: to fix it up
[19:06] jeff_nabers: and the down payment was?
[19:06] re_investor: It was alot
[19:06] re_investor: I cant remember…
[19:07] re_investor: I am trying to do something with the equity.. but, I dont know what
[19:07] re_investor: There is not much I can do
[19:07] jeff_nabers: you don’t remember how much you put down?
[19:08] re_investor: why are you wanting to no such details?
[19:08] jeff_nabers: i’m curious what your return is
[19:08] jeff_nabers: cashing out would only decrease your cashflow
[19:08] re_investor: I got into it on no money down
[19:08] re_investor: I had good credit
[19:08] jeff_nabers: well then i would never refi it and never sell it
[19:09] jeff_nabers: you are making a 40% annualized return on the cash you put in
[19:09] re_investor: yeah. Its only worth so much you know
[19:09] jeff_nabers: why would you ever want to take an asset like that off your books?
[19:09] re_investor: To use the equity in the house
[19:09] jeff_nabers: with 10 – 15 of those you’d never have to work again
[19:09] jeff_nabers: to use the equity to do what? continue working real estate like a job?
[19:10] re_investor: right. I just need 9 – 14 more of them
[19:10] jeff_nabers: do your other properties cash flow like this one?
[19:10] re_investor: to use the equity to buy another house
[19:10] jeff_nabers: yeah but if you that equity you’ll lose your cash flow
[19:10] re_investor: No the others dont cash like this one
[19:10] jeff_nabers: *if you USE that equity i mean
[19:10] jeff_nabers: well i’d be worried about selling the others and keeping this without refi-ing
[19:11] jeff_nabers: borrowing to buy properties makes sense when the market is appreciating
[19:11] jeff_nabers: it’s depreciating
[19:11] re_investor: right, but If I dont refi I wont have any money to do anymore houses
[19:11] jeff_nabers: if you borrow equity to buy more in this market, you’ll lose the bit of wealth you have
[19:11] jeff_nabers: well use other people’s money
[19:12] re_investor: right. but, lenders money is more expensive then refi rates
[19:12] jeff_nabers: don’t use bank’s money
[19:12] jeff_nabers: use people’s money
[19:12] re_investor: yeah. other relatives
[19:12] jeff_nabers: no, other investors
[19:13] jeff_nabers: or relatives, sure. but don’t limit yourself
[19:13] re_investor: right, other investors want want a percentage of return from the deal
[19:13] jeff_nabers: so what
[19:13] re_investor: thats higher then borrowing
[19:13] jeff_nabers: but it doesn’t require repayment
[19:13] jeff_nabers: if you borrow your cashflow away you are paying $6,000 per year
[19:13] jeff_nabers: every year no matter what
[19:14] re_investor: yes, but, if they are wanting 20% profit when you sell the property
[19:14] jeff_nabers: don’t sell the property
[19:14] re_investor: An investor dont want to stay in the deal forever
[19:14] jeff_nabers: if you flip properties then those type of investors aren’t smart enough to be interested in a good deal
[19:15] jeff_nabers: a real investor wants to stay in the deal forever
[19:15] jeff_nabers: you should try networking with people with money
[19:15] jeff_nabers: they don’t want money
[19:15] jeff_nabers: the dollar is wasting away, they want to store their dollars in something valuable
[19:15] jeff_nabers: if you talk to people who don’t have money they just want to make money quick
[19:15] jeff_nabers: but they don’t know how
[19:15] jeff_nabers: and you probably don’t either in this market
[19:16] jeff_nabers: people with money just want something to put it in
[19:16] re_investor: yeah. I am pretty much a person who is up in coming
[19:16] re_investor: I can not afford to buy and hold without turning it over quickly
[19:16] jeff_nabers: you can’t afford to buy and sell if it doesn’t make money
[19:16] jeff_nabers: nobody can
[19:16] re_investor: I am someone who will die under the payments
[19:16] jeff_nabers: under what payments?
[19:17] re_investor: If I buy a house and have to make payments on it
[19:17] jeff_nabers: buy properties that are rentable
[19:17] re_investor: without renting it or selling it
[19:17] jeff_nabers: well don’t do that
[19:17] jeff_nabers: rent it
[19:17] re_investor: Right, but, its not something that someone will take quickly.
[19:17] jeff_nabers: what’s not something that who will take quickly?
[19:17] re_investor: I will die in a matter of 3 – 5 months time making all those payments
[19:18] re_investor: A house
[19:18] re_investor: If I buy a house.
[19:18] jeff_nabers: 3 to 5 months of positive cash flow will not kill you
[19:18] re_investor: That I can not rent or sell quickly
[19:18] jeff_nabers: don’t buy houses with negative cash flow
[19:18] re_investor: I will die 3 – 5 months time making all those payments
[19:18] re_investor: No No you are not understanding
[19:18] re_investor: I am saying if I buy a house that needs repair
[19:19] jeff_nabers: well don’t buy a house that needs repair
[19:19] re_investor: generally.. house that are in need of repair
[19:19] jeff_nabers: or just hook up with an investor that can handle the vacant months and the repairs
[19:19] re_investor: yes, but, if you dont do the houses that need repair you aren’t getting the equity
[19:19] jeff_nabers: who cares about equity
[19:19] jeff_nabers: you don’t want dollars, dollars are depreciating rapidly
[19:19] re_investor: Yes. but, if they go vacent
[19:19] jeff_nabers: you want to own real property
[19:20] re_investor: You are having to make the payments and potentail repairs
[19:20] jeff_nabers: vacant? there’s a market rent and market vacancy factor in every local RE market
[19:20] jeff_nabers: work with those numbers
[19:20] re_investor: right. I know my situation and RE market and investors
[19:20] jeff_nabers: the mindset that you used in the bubble market won’t work anymore
[19:20] re_investor: I’ve been doing it and no how it goes
[19:21] jeff_nabers: you can’t be focused on equity or flipping
[19:21] jeff_nabers: but because there’s plenty of people with your mindset there are plenty of cashflow properties available
[19:21] re_investor: right. you might be able to pick them up cheep enough to keep payments down
[19:21] jeff_nabers: if you found a funding partner and worked to find one cash flow property to acquire every 2 months and that property brought you $150 a month in positive cash flow…..
[19:22] re_investor: yeah, that would be great
[19:22] jeff_nabers: 7 years of that would bring you $6300 of positive cash flow
[19:22] jeff_nabers: and realistically if the dollar continues to depreciate, rents will go up during that time and increase your cash flow
[19:22] jeff_nabers: ($6300 per month of cash flow)
[19:23] re_investor: yeah. thats pretty good
[19:23] jeff_nabers: more imporantly during that time you would probably learn a lot about looking at the numbers
[19:23] jeff_nabers: and your funding partner might introduce you to other people with money
[19:23] jeff_nabers: and maybe you could get another good thing going on the side
[19:24] jeff_nabers: but, all in all, you have to be flexible and change with the times
[19:24] jeff_nabers: you should shed the bubble mentality and come up with strategies that work in other environments
[19:24] re_investor: yes. I agree
[19:24] re_investor: good points
[19:25] re_investor: The good deals in equity are still out there
[19:25] jeff_nabers: have you still been going to RE clubs, meetups, groups, etc?
[19:25] re_investor: I like to look for both in RE equity and payments
[19:25] jeff_nabers: well, if finding good equity deals is like a needle in a haystack and the numbers don’t work with today’s mortgage financing…. then they aren’t really out there for you
[19:25] re_investor: I here you about the extra cash flow and thats great
[19:25] re_investor: I am not saying anything bad about that
[19:26] jeff_nabers: yeah, but you are being a real estate dealer
[19:26] re_investor: but, I still think the equity potion is importantt oo
[19:26] jeff_nabers: it’s like a job
[19:26] jeff_nabers: it’s like you have two jobs
[19:26] jeff_nabers: when you buy for cash flow to hold…. it’s investing
[19:26] jeff_nabers: and it puts your money to work for you
[19:26] jeff_nabers: instead of putting you in a gambling mindset
[19:27] jeff_nabers: the equity portion is only important if you are dealing real estate
[19:27] re_investor: Its not gambling its based upon market values
[19:27] jeff_nabers: market values are based on factors outside of your control
[19:27] jeff_nabers: you don’t control insurance & mortgage costs, or mortgage availability
[19:27] re_investor: yes. marketing values are outside your control
[19:27] jeff_nabers: and you certainly don’t control the buying/selling mindset of others
[19:27] jeff_nabers: putting your money on things outside your control is no different than gambling
[19:28] re_investor: I said. I agree with you
[19:28] jeff_nabers: focusing on rents instead of sales prices is less volatile
[19:28] re_investor: The cashflow is great
[19:28] re_investor: I am not disputing that factor
[19:28] jeff_nabers: what i’m saying to you is that you might benefit from completely ignoring equity
[19:28] re_investor: I see.
[19:29] jeff_nabers: in fact, if this whole time you had been investing for the past few years you might have 15 properties
[19:29] jeff_nabers: especially if you bought a lot more when mortgage financing was more readily available
[19:29] jeff_nabers: you could be retired right now if you had been acquiring income properties rather than dealing
[19:30] jeff_nabers: but dwelling on the past isn’t the idea here…. it is understanding how beneficial it investing for income is
[19:31] jeff_nabers: and, truth be told, here pretty soon the market to buy income properties just might get really good for people like you and i
[19:31] jeff_nabers: aside from a complete economic collapse, there’s always people with money out there that need to invest it
[19:32] jeff_nabers: and opportunities for sound-minded investors are only increasing during this correction from the gamblers
[19:32] jeff_nabers: so that’s some food for thought

[off topic conversation was removed]

[19:56] jeff_nabers: i’m glad we could catch up a bit
[19:56] jeff_nabers: i’ll talk to you later
[19:56] re_investor: good night

———————

I hope this can be insightful to you. I think many residential real estate investors are not actually investors at all; but dealers and gamblers rather. The fantastic thing is that each of us has the ability to adjust our thinking and investment behavior at any point in time. Have you been acting as an investor, gambler, or dealer?

Comments appreciated.

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