“This is scaled-up group-think,” says investor and author Olly Newland in “The Day the Bubble Bursts”. “The persuasive mood switches from negative to positive, gradually super-positive, then hyped-up or hysterical.” The reversal of this sentiment happens a lot more suddenly, reminding us of an old stock market saying: “the bull climbs up the stairs, while the bear jumps out the window.”
When a reversal happens, fair-weather buyers dry up while serious real estate investors see opportunity. The mature fundamentals investor understands the difference between a “cost-based” versus “spread-based” analysis and sees a downturn as an opportunity. The cost-based model looks at the price of a property, finance fees, renovation costs, maintenance and selling fees. A spread-based model looks at the difference between the best buy and improved cost and best sale price, no matter how big or small the investment.
Newland repeats, “Real estate investment is about timing. There is a time to invest, a time to hold, a time to sell and a time to gamble. Getting this right is 99 percent of the game.”
The good news? Unlike the stock market, a downturn in the real estate market is not a national phenomenon. It differentiates between markets, neighborhoods, properties and even the financing structure each and every homebuyer or investor has in place.
Those who promote traded assets (financial equities such as stocks and bonds) want you to stop comparing stocks to real estate right now.
A simple performance capital value comparison will dismiss real estate as delivering marginal returns, as well as being complex and costly. This is only possible when they ignore mortgage leverage, utility or rental income potential, tax advantages and the inflation-proof nature of rental income and appreciation. These are nearly always ignored by traded-asset promoters.
When a mortgage is used, cash-on-cash returns can be many times larger. It’s a sound long-term strategy. Look at New England; people there are still living in 300-year-old homes. How many stocks are still around from the 1940s, let alone the 1740s?
Doug DeShields is a member of Metrolina Real Estate Investors Association, www.metrolinareia.com, which provides education, mentoring, and networking for real estate investing in the Charlotte region. Doug is also Board member and President of the National Real Estate Investors Association. He can be reached at [email protected].