Don’t Lose Perspective

by FI Fighter on July 24, 2015

in Real Estate Thoughts, Real Estate Updates, Thoughts

homes - 1

We all have big dreams and goals. Every one of us aspires to achieve more in life than we do even in our wildest dreams. It isn’t always easy. The going will get tough from time to time and seldom does anyone take a straight-shot ascent to the top.

You will invariably take some bumps and bruises along the way. That’s just part of life.

When it comes to investing, I’ve always believed that lady luck has a lot of influence in determining your outcome.

Last Night’s Dinner

I met up with some close friends (and investment partners) last night for dinner. Over the course of our meal, we of course made time to joke around and laugh it up. For the most part, everyone was in good spirits, which is somewhat to be expected given the present situation of things — Everyone is employed, healthy, making a ton of money investing, and for all intents and purposes, THRIVING!

When it comes to GREED, I try to be as cognizant of it as possible. Even so, I will admit that it has gotten the better of me on occasion, and I am definitely not immune to its reach.

As a part of our discussions, not surprisingly, the subject of Rental Property SH #1 and Rental Property SH #2 entered into the conversation and we started to reminisce about the “good old days” (just 1 short year ago).

Investment Partner #1: “Guys, can you believe that we won SH #1 for just $50 over listing???”

IP #2: “That was insane, man!”

Me: “Yeah. Just recently a good buddy of mine was able to rent out his unit for around $3,340/month. And the next door comp sold for $630,000 (we purchased SH #1 for $490,000 and SH #2 for $521,000) only a few months ago.”

IP #3: “It’s going to keep going up! I’m still waiting for some developer to come in to buy us out!!!”

Me: “Guys, you do realize that we’ve made over $100,000 on EACH property, right? In less than 1 year…”

IP #3: “It’s time to jack up rents!!!”

That’s roughly how the conversation went… For the most part, I believe that each one of us is grateful for the opportunities that were presented to us last year (and that we capitalized on it), but somehow I also got that uneasy feeling that some of us are salivating for more…

More cash flow.

More appreciation.

More ROI…

More. More. More.

It never ends… No matter what, when times are good, you’ll always wish you had MORE! GREED can be so insidious, it’s no wonder why many investors never stop chasing after another deal.

Success breeds more success, no?

So, go out and buy some more properties! Leverage it up! And let the good times roll…

Yeah, like it’s really always going to be THAT EASY to make $100,000 in appreciation gains on EVERY single property that you buy…

Sigh.

Perspective

When I first started off my career in engineering, it was right before the 2008 market collapse. I will never forget the day the Dow Jones fell 7% on September 29. Watching that spectacle unfold from my lab bench was like witnessing a train wreck in real-time.

The air was sucked out of the entire building. My co-workers were speechless. Tensions were high. And you could tell that FEAR was starting to become contagious.

Over the course of the next six months, everything would change. People were no longer smiling and having fun at work. The company started announcing hiring freezes, layoffs, and forced time off. Employees were just grateful to still have a job, and demonstrated their gratitude by working themselves into the ground. Although I had very little to lose amidst this unwinding market collapse, I knew my place as a rookie and quickly fell in line. Yes, just like my peers, I switched gears into overdrive and worked from dust until well passed dawn.

So, I learned from very early on what FEAR was….

Now that I’ve been able to witness both GREED and FEAR, I know this much for certain — GREED is like boiling a frog in hot water. It happens slowly… So you never feel like you’re doing yourself any real harm. Just keep turning up the temperature. Just a little more. It feels good even. A tad more… Until it’s too late.

With FEAR, it’s quite the opposite. Events don’t unfold slowly. By the time you’re ready to react, it’s too late. Kind of like falling out the window of a skyscraper. Look out below! It ain’t going to be pretty. You can only brace for FEAR by being proactive in advance.

As the saying goes: “It’s better to be a year early than a day too late.

I don’t mean to be a preacher of doom and gloom, but c’mon guys, let’s be realistic here! Let’s not lose touch with reality. Prices go up… but they always go back down again. No investment goes up in perpetuity every second of every minute of every hour of everyday. We made some wonderful investment deals last year, so sure, let’s pat ourselves on the back and have a nice dinner (from time-to-time). We deserve that. But when that’s over and done with, let’s be shrewd investors and figure out a way to protect and preserve our investments.

Let’s form a solid and robust backup plan. Of course, just like you guys, I hope that we’ll never have to use it. But the same applies to life insurance, car insurance, fire insurance, flood insurance, etc. Just because you don’t ever plan on using insurance doesn’t mean it isn’t a wise investment!

If you’ve got the insurance in place, then yeah, let’s go celebrate some more good times! Because when the game of musical chairs finally stops (and it ALWAYS does), there will be mass chaos and devastation in the streets. If you’re well prepared and “jacked up and good to go” then we will be able to immediately make our triumphant return into the marketplace. When goods are being sold off for pennies on the dollar, real fortunes will be made. That’s when you really want to emphatically declare to the world that you are an investor!

They say lightning doesn’t strike twice. Definitely not, if you aren’t well prepared.

Let’s prove them wrong guys…

{ 12 comments… read them below or add one }

1 No Nonsense Landlord July 24, 2015 at 12:16 pm

Greed trumps fear. That’s why people hang onto their investments way too long. Bulls make money, bears make money, and pigs get slaughtered…

Reply

2 FI Fighter July 25, 2015 at 7:42 am

Eric,

That’s true, greed does trump fear and it leads to the downfall of many investors. I personally much prefer to invest in times of fear.

Yes, you can definitely make money playing a bull or a bear… There’s a time and place for each strategy.

Take care!

Reply

3 Debt Hater July 24, 2015 at 5:54 pm

Good perspective to have. A lot of the times I will always fall into the trap of being greedy. Once you have some success you always seem to want more, even if really was “enough” at one point. I guess it comes with wanting to strive to be better? Sometimes it’s tough to break out of that cycle though.

Reply

4 FI Fighter July 25, 2015 at 7:44 am

Debt Hater,

Agreed. Success is a funny thing isn’t it? When it happens, you want more and more and more… I’m not immune to being greedy and I’ve been burned many times for chasing more highs…

Yes, it’s very tough to resist the temptation of greed. It takes a lot of effort and discipline to be patient and let things unfold and come to you… I’ve been working on this greatly these last few months.

Best wishes!

Reply

5 george puck July 24, 2015 at 10:08 pm

I love the beginning of the post.

Sounds like real estate in the Bay area is in a bubble phase. And its been fairly hot in other places in the country.

Now we know bubbles last longer than anyone thinks, and it

I mentioned this on your other post, but why not go ahead and unwind those side hustle deals. When you originally bought them a year ago, you wrote specifically that you and your partners didnt think the properties would cash flow, but that it didnt matter to you because buying the properties was about price appreciation. It seems to me you got that price appreciation you were hoping for when you bought the place. And it seems to me you are now trying to turn an investment whose goal was price appreciation into a buy and hold cash flow investment.

Look, I dont think the world is going to implode, or that we are headed for some sort of huge 2008 style market panic, but I could see a 10-20% correction. Everything you are writing says its a good time to sell and with the nice returns you have, it only makes sense to lock in those profits. Go ahead, monetize one or two your side hustle deals. cash out, sell a couple. You will have more cash to buy the next time the market goes down.

Reply

6 FI Fighter July 25, 2015 at 7:49 am

George,

Thanks for the comment and that’s a great question and definitely one I ponder about often as well… I will release a post on this very topic in the near future.

When it comes to the side hustles, that’s a tough one for me to answer. For one, it isn’t an executive decision, but you are right about the appreciation gains in a short period of time.

Those properties did start off as “appreciation plays”, but over time we’ve learned that they might be even better “cash flow plays”. They just make for absolutely great rentals — wonderful tenants, fabulous location, substantial rent appreciation, etc… I could really see myself regretting this decision later down the road if I exited out too soon.

As usual, it’s tough to have everything and the kitchen sink at one time in life. To help promote my defensive strategy, I’ve turned to liquidating stocks and hoarding more cash… With the real estate, the amount of taxes, commissions, fees, etc. would take off too much of the bottom line right now to really make it worthwhile… A 1031 exchange would be better for tax shelter, but when the rest of the market is inflated, it’s like trading an expensive item for an equally expensive item. Net result is zero.

But I’m still keeping the door open for all ideas. And if the market wants to keep going bonkers and higher and higher, my partners and I may have to have more future discussions.

Hope that clarifies my stance a bit.

Best wishes!

Reply

7 Hristo July 24, 2015 at 10:15 pm

Hi FIF,

Prices can up for a very long time. And I would be completely fine with that if there is strong fundamentals that support the outlook. For instance, this is what had happened in the period 1949 – 1965. DJIA was in the stratosphere with a 5-fold increase at that time. But these had been some of the best times for the economy. Right after WWII, USA get it’s place as a world leader, exporting goods to all around the world, especially to Europe, significant technological achievements at home and prosperity overall. In such kind of environment, I can accept the prices to double, even triple.

However, in my opinion, this is not the current situation. We are in the seventh year of so called recovery process and yet waiting to get out of it and return on the way of robust and sustainable growth. The US is still suffering deflation and if the interest rates go up that would not help the trend to turn around. Unemployment might be officially close to 5%, but the labor force participation is going down year after year. During that recovery the debt increased by 80%. And most important to me, the country had its last balanced budget in 2002, all years after that there is a deficit.

Don’t want to make it more theoretical, but I wanted to support my view of the topic. In essence, having a back-up plan is definitely the right way. I am doing it the same and hope the next severe crash might not happen. It might be different story this time and to go out of this mess fairly clear but the history tends to prove that is not the usual case.

Regards!

Reply

8 FI Fighter July 29, 2015 at 9:01 am

Hristo,

Agreed, I’m not too confident on this Fed “recovery”. The data clearly doesn’t support it and things are shaky at best.

Since this doesn’t inspire full confidence, as an investor, I’m looking at ways to best mitigate risks and protect from worst-case scenarios.

Likewise, I don’t hope for a market crash, but if one does happen, I want to position myself to benefit as best I can.

We will find out soon enough!

Best wishes!

Reply

9 Financial Samurai July 25, 2015 at 7:45 am

Feels like the end is near for the Bay Area.

Reply

10 FI Fighter July 29, 2015 at 9:02 am

Sam,

The real estate market in the Bay Area definitely feels outstretched… but I’ve been proven wrong many times before.

We’ll see…

Take care!

Reply

11 Dividend Hustler July 25, 2015 at 7:47 am

Thanks for the article FIF. Definitely, a great reminder for us. I don’t mind a pullback and a decline in prices because that’s when to buy. I think you just gotta be realistic and have patience. Some people just want it all now. If you spread yourself too thin and leveraged to the tee, well that’s putting yourself in a sticky spot if something were to happen. What’s the Rush? There will always be opportunities out there and when it comes and happens, be ready to take advantage.
I hope you’re relaxing and recharging. Thank you for the post and take care my friend.

Reply

12 FI Fighter July 29, 2015 at 9:03 am

Tyler,

Thanks for stopping by. Agreed, just like you I welcome pullbacks and opportunities to acquire cheaper investments. In my case, I am highly leveraged so having ample cash reserves is essential.

Investing takes time and there are no shortcuts… Patience is key but I do understand how tempting it can be to jump in all the time and feel the need to keep making more and more moves.

We are near or at a market top. Time to tread more carefully.

Best wishes!

Reply

Leave a Comment

Previous post:

Next post: