On October 6th, 2014 the New York Times published this article, Real Estate Investing Offers Only One Likely Outcome: A Low Return, by Carl Richards. Someone sent it to me and asked me what I thought. So, here goes:

Part I:

First glance at the title made me want to disagree. But the author understands that you have to select a really sensational title to get people to keep reading. The article itself is full of common sense wisdom.
I love that he touches on timing with this quote:

… it becomes very easy to convince ourselves that we’ll find the perfect real estate deal and time both our entry and exit into the investment perfectly.

What that quote illustrates is that timing is probably the most important factor in determining the value of real estate. But to some degree, timing is almost always the one thing out of your control when buying your home.When buying your HOME, you cannot time the market. Most people simply do not have the luxury of time when looking for a place to live. I have one past client who affectionately refers to herself as my “forever” client. We looked (or rather waited and pounced) for over a year for her “dream” home to come on the market. However, the majority of my clients who are buying their homes have a limited amount of time to purchase. People who are relocating often have only one or two weekends to make a decision. Their options are limited to the inventory available when they have to make that decision.  Other people have to sell their home before they can buy their next home. Again they have a short window of time to search because they have to  find a home AND arrange for the details of their purchase so that it coincides with the sale of their current home. With the exception of the first time home buyer who is free-loading at their parent’s home, almost everyone is constrained by time.

Timing is also the key to selling. When it’s time for you to sell your home, its value will be determined by the sale of similar homes in a close geographic area at the time of your sale. But when you are purchasing a home it’s very difficult to predict WHEN you are going to sell? Will you get transferred and take a new job out of town? Will your third baby be a set of twins that literally causes you to out grow the occupancy limit of the home you are living in? Will you need to sell your home to move closer to an aging parent?

What’s happening in the larger economy and on a local scale within the 6 months of your sale will determine the value of your sale. And since those things are pretty much out of your control, don’t hang your retirement plans on home ownership. Makes sense to me 🙂

But the real meat of the argument in the article, Real Estate Investing Offers Only One Likely Outcome: A Low Return,  can be summed up in this excerpt:

And between who you know and what you hear on the news, it may be tempting to believe you can experience the same success. But as with most things, there’s a difference between professionals who’ve paid their dues and people who are just pretending. The few, very successful real estate investors I know share three things that make them exceptions. First, they’ve developed the unique skill of identifying undervalued properties. It requires many years of painful trial and error. A three-day course on “How to Become a Successful Real Estate Investor” won’t cut it.

Just in case you missed it: A Three day course on “How to Become a Successful Real Estate Investor” won’t cut it.

I couldn’t agree more! Every couple weeks I get a call from an out of town “investor” who has a “system.” They almost always start the conversation by saying something like “With your help, I can make us a lot of money.” (EEW!?!?!?)

I can usually tell within the first couple exchanges, that the person on the other end of the line has just “graduated” from one of the seminars going around the country. I find it especially irksome when the caller reveals that s/he has no intention of improving the home or the neighborhood. Their goal is to find under-valued properties. (Which they intend to do by having me submit 50-100/per week on homes I haven’t seen at half or less than half the list price). Buy them quickly with cash and re-list them at an inflated value.

Despite what the seminar taught, this is NOT a system. It’s one strategy and ultimately not a good one. When the property is listed at a higher value without any change in condition, the buyer pool is severely decreased. Rather than pricing according to market value you are just looking for that “one dumb fish” and thankfully (for the overall health of the real estate market) there are a lot fewer dumb fish out there. So you just might get stuck holding that property.

Beware of the seminar curriculum that leads you to believe you can get something for nothing. But don’t write off real estate investing all together. Despite what the title of the Richard’s article implies, real estate can be a good investment vehicle. But as he outlines in the article it takes experience, knowledge and connections.

Over the last ten years, I have worked with several experienced investors. I have learned much from each one of them. While each had their own unique strategy, there were a couple unifying threads. First, while real estate investment may not have been their full-time job, they treated it as though it was a job. Second, most were in it for the long-term. And finally, they knew they weren’t getting something for nothing. If they bought low, they invested an additional amount in the asset in order to sell high.