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Top of the Market?

July 23, 2017

Unemployment in the US, according to the Bureau of Labor Statistics right now is at 4.4%. WOW. Some people think that we are at the top of the market. Stock market is at record highs.  Everything is great in the US. Rates for everything right now are so low that you can get a home loan for under 5% interest rate. What can go wrong?Everybody is working. Life is good. WHY is Rick even questioning things. Leave things alone and lets buy a new car, new house, lots of stuff.

If you agree with the last part of that paragraph, you have to be in your 20s, do not know the cyclic nature of markets or you are just plain stupid. Yes, I said it, you may be stupid. This is the time to build up your emergency fund, pay down all of your credit card debt to ZERO and pay off those brand new cars that you bought last year. Most people are pretty ignorant to the markets and do not see the herd mentality that most Americans have. I have to admit it, I was very stupid AND ignorant to the economic happenings all around me. And I have a bachelors degree in finance. Hopefully I am less stupid and less ignorant now. I could site all kinds of statistics that say we are in a great time right now, but I think everybody knows that. What most don’t realize is that the road goes on forever, but the party does end. Sorry Robert Earl Keen. It will end, but when will that happen? Maybe in a few months, maybe in a few years, I don’t know exactly, but I do know that it is getting pretty close.

I hope that I can give you a little insight into market cycles and get you out of the herd mentality.

When Apple stock comes out on the news that it hit $600 per share, everybody wants to buy it, WHY? Because it might go higher. Everybody is buying Apple and so should I. WRONG!! I would rather have bought it when it was $100 and rode the wave up to $500 or $600. Then I could sell off part of my holdings, take a little profit and still have some stock to ride the wave if it goes up even more. If it comes down, I already got all my money back anyway. People want to be a part of groups or herds because they want to be like others. This is the safe route. If you want to get what everyone else gets, be just like everyone else. Personally, I cant do that. I want more. More money, sure, but I want more freedom, more of a lifestyle than others. I don’t want to sit in an office for 50+ hours a week doing something that I don’t want to for a boss that I don’t like (more on my rant later).

Have you heard the phrase what goes up must come down? Are you old enough to remember what happened in 1986 with banks, oil and real estate? I sold a house in the late 90s, ouch. I had to let the buyer take over my payments and he gave me a second on the house so that I would come out even. Then in 2008 I was rehabbing and my last couple of houses that took forever to sell. I ended up making about $100 on the last two. Now we are about 10 years later and what is everyone doing? They are rehabbing for the great and robust market that we are in right now.

Please don’t get me wrong, I am rehabbing right now too. I am doing it with much more caution than before because I have lived through the cycle a couple of times. Not only am I rehabbing, but I am selling with owner financing, I am buying non-performing notes at super discounts and I am marketing like a rockstar. I find deals. Some deals don’t work for me, but I can find someone who will buy that deal and be able to get me a few thousand dollars also. That is wholesaling. I have multiple avenues that will make money if rehabbing goes away for a little while. Believe it or not, I teach people about real estate for FREE. I do whole heartedly believe in Karma. If you give good blessings out into the world, you will get that back in multitudes.

It seems to be that the latter part of the decade is when things kinda go bad. When we start a new decade we are pretty much at the low point and things can only look better. I so wished that I had bought 50 houses in 2010 and held them all for about 5 or 6  years or maybe even forever. Let me give you a little example of what good has happened and knowledge I have gained instead of just telling you the bad.

My wife and I purchased a home and rehabbed it in 2011. Real Estate market was down. We were definitely NOT at the top of the market. Great time to buy, but I really only knew rehabbing. Well, we rehabbed the house and could not sell it. Everyone knew the market was bad so why would you buy a house in 2011 or 2012, Duh. We ended up selling with owner financing at a decent rate and a 5 year balloon. Roughly we had about 70k in the house. We sold for about 95k. The down payment was almost all gone with closing costs and realtor’s fees. We basically worked our butts off to manage contractors, put in some sweat and a bunch of money to come out with nothing to show for it, at least in our simple minds. What we had was really more spectacular than we had ever imagined. We mostly banked the payments that our buyer paid us over the 4 ½ years that they paid on the loan. Now keep in mind that we were into the house for low 70s and had loan payments coming to us from the loan that had a balance of mid to upper 80s. The payments were over $600 per month for 4.5 years which totaled over 30k. When the loan was paid off, the balance was still about 80k. Not too bad after all!!!

I love being the recipient of payments when the loan is based on a 20 or 25 year amortization. After 5 years, the balance does not come down that much. It is a great scenario. In this case we felt that we had to do a 5 year balloon to get our money back and keep going with our real estate career. Had we not had a balloon, we would have eventually collected over twice the price that we sold the property for over the 25 years. Payments would have totaled over $180k.

But that is not the biggest take away that I had with this property. Coming out of the slump that we were in was that the house was now valued at over $140k. How does a house go up 75% in 5 years??? And the bigger question is: Will it go up more??

Have you heard the phrase: Buy low, sell high?

If you notice, it is not buy when the market is at its highest and hope and pray that it goes even higher. Buy low, sell high. OR maybe not even sell, just hold. If I would have rented that house and I had a mortgage on it, I would make (gross) about a $200 per month. Not bad. Over time, rents would have gone up and I would be making about $400 per month. That would be in addition to depreciation and pay down of the mortgage that the tenants were doing for me. After the 5 years I would owe about 62k instead of 72k due to paydown of  the mortgage, I would have about 10k in monthly cash flow saved up and now my property would be worth over $140k. So would I have been better off holding? Sure, but I did alright anyway. You will stress yourself out if you feel like you have to make “the BEST deal” or you need to get “the BEST interest rate”. Good is good enough. As long as you are moving forward in your real estate career and learning, you are doing great.

So what do you do in between the top of the market and the bottom? Just like Joe Dirt says you gotta just “Keep on keeping on”. Keep doing what you do. Meet new friends and learn more everyday.  If you like rentals, keep looking for good deals on rentals. If you rehab, keep rehabbing. You might like other ways of passive investing. As always in your business, you have to buy right and buy from people who are motivated to sell.  Keep in mind that this is not a get rich quick scenario, real estate is a get wealthy over time lifestyle.

Keep on keeping on my friends.