The Monopoly Man is Back

The other day I got into an argument with Ian. He’s my business partner in our home buying company. Ian and I are about as harmonious as a shaved bear in a bee hive. It’s not uncommon for us to disagree. We have opposing personalities. While this keeps our business in check, it can lead to some very heated dialog.

This conflict was a bit different. It was different because I’m the one who ended up being wrong (depending on who you talk to, it wasn’t that different). The conflict resulted from a disagreement on the type of properties to pursue for investment over the next several months.

A Time for Every Season

There was a time when I got hot and heavy for rentals. I thought I was the Monopoly Man, top hat and all.

In 2008, and even well into 2009, I couldn’t, or wouldn’t, believe that the crash in the market was as deep and lasting as its proven to be. I expected a modest price drop, but anticipated a full recovery in a few years. To me it looked like there were a ton of properties put on the discount rack. I wanted to grab as many as I could while everyone else fled to the sidelines. I bought a few houses for my portfolio and the prices kept falling. So I bought a couple more. But when I saw values continue to slide, it was time to get out.

For the past couple of years I have not added to my rental portfolio. I’ve been flipping. Many, many people have told me my strategy is counter intuitive. “Flip when markets are high. Buy and hold when they’re low,” they say. Yes it’s more difficult to find qualified buyers, and yes margins have declined.

Every month I meet prospective management clients that come to me for help. When we sit down and open up their portfolios, the stories are often the same. Their properties aren’t worth what they owe. Every month they’re losing money because of expensive repairs, delinquent tenants, unpaid utility bills, and so on. I’m thankful to say that my rentals are performing just fine. But I’ve had a difficult time balancing a few extra bucks with the risk of the significant financial peril I see so frequently in this unsteady market. I’ve found better potential in flipping contracts and houses.

Before I start getting emails and nasty comments from all of you filthy rich landlords, let me get on with my story.

Know When to Hold Them

As my conversation with Ian escalated, something about his tone got my attention. The tone wasn’t off-putting. It was just different than our typical back and forth. I stopped arguing and started to listen.

There are a lot of people that made crazy money in the last Real Estate boom. If that’s you, congratulations! But a few hundred thousand dollars pales in comparison to how the “Dinosaurs” made out during that same boom time. If you’ve been around Real Estate long enough, I’m sure you know the type of investors I’m talking about. These were the guys (and girls) who started buying properties before it was sexy. As a result, they were buying at deep discounts at the market bottom. They made their money when they bought each property. The crazy appreciation was just an added bonus.

I personally know an investor that had 97 rental houses before the boom. By 2006, he owned none of them. He saw the opportunity to cash out at the top. Believe me when I say he made a killing!

These are the facts Ian reminded me of.

Next he showed me some numbers he was tracking on the market. Rental property prices have become fairly stable over the last several months. We might be heading for another price dip. But it won’t be a big one.

Risk vs. Reward

I quickly realized I’d been missing the huge upside to buying right now for the long term.

Prices are down. I looked at a duplex yesterday with a $1500 per month rent roll. The asking price is $45,000. I’d probably put $35,000 into repairs before it’s all said and done. I made an offer at $35,000. Those numbers work all day long, and my offer isn’t a huge stretch from the asking price. Ready for the kicker? That duplex is only 1 of three properties I looked at just yesterday with similar price point ratios.

Cash flow is nice. Yeah, it’s a few hundred dollars per month. But it’s nice to have other people pay for my investment. That I like.

Experience can trump risk. Risk can be minimized by buying low and building hands-on experience. If the numbers don’t work, walk away. If you’re unsure, offer less. We’ve all heard the saying, “You make your money when you buy.” It’s true. Buy low. But above all, don’t be frozen by the fear of making a mistake. The best lessons always come at a price.

The biggest upside to buying rentals in this market is the future. One day we’ll look back at this time in history with appreciative reflection. There are people going through really tough times. Maybe you are one of them. But it won’t always be like this. When the economy recovers and prices rebound, I’ll be ready. I want to be the “Dinosaur” when that day comes.

Until then I’ll be dusting off my white mustache and top hat. The Monopoly Man is back.