Was talking with a client today, when she brought up a common misnomer. “Shouldn’t we be buying 10-20% below market value? Isn’t it a buyer’s market?” Great question. (Thanks Brandi) The answer may surprise some. It falls under, ‘Ya can’t have it both ways’.
Though in the last year or so we’ve been able to secure clients some impressive discounts, most of the circumstances making those discounts possible have changed.
Let’s think this through. Demand for well located real estate is increasing in the regions in which we do business. This is a good thing. Take Austin — a place we no longer do business. Don’t get me wrong, we love the place, but the demand has increased to the point prices have made it relatively unattractive to investors. The rent/price ratio has degenerated to the point where investors must now put enlarged down payments in order to break even.
See? On one hand you have the good news showing the Austin area roaring back from the market correction. On the other hand you have the consequences of that same good news. A double edged sword just waiting for the inexperienced investor. Higher prices driven by significantly increased demand, outpacing rents, (Increased rents will very soon follow, but not fast enough in Austin.) results in investors looking elsewhere. Why spend your hard earned capital in Austin for $X worth of property, when you can go to friendlier areas and acquire $2X worth of property? If capital growth is numero uno on your agenda, investing in half the property you could prudently afford makes zero sense.
Now let’s consider the project begging folks to buy their stuff at deep discounts. What does that tell ya? The market hasn’t been impressed with the product. Compare that to the region where the units are selling and renting off the street, and at prices builders aren’t feeling pressure to discount. And never forget a foundational truth: They’re discounting ‘cuz the folks who you want to sell to in a few years, don’t like them. Ignore that at your own peril.
Think long term — very long term.
The idea is to invest in areas in which demand will remain at the highest possible level. When it comes time to execute a tax deferred exchange, turbo charging your capital growth rate, you want your properties to be in high demand. Duh. Does it not make sense — what appeals to buyers and renters today, will also appeal to them five years from now? Good schools, proximity to diverse and plentiful employment, shopping, entertainment, and well, you get the picture.
The paradox here is that deep discounts though enticing, most often mean demand is waning. Not always mind you, but most of the time. There’s a big difference between getting a great deal on price, and getting a so-called deep discount on property which wouldn’t sell except for that discount. When investing in new properties in the current atmosphere, builders not able to sell properties without slashing their prices, aren’t doing you any favors.
They’re dumping their overpriced product on inexperienced investors who’re excited about paying what’s actually market value disguised as an incredible deal. Treating the acquisition of vehicles designed to take you to a magnificently abundant retirement as if it were a Blue Light Special is not recommended.
Brown and Brown passes on far more projects than we recommend. Lately it’s around 7:1 or so, maybe higher. So many of them are, uh, dogs. No thanks. Not only that, but the deep discounters almost always try to entice us by offering off the hook compensation. I mean humungous fees. Wanna know why we still refuse? (Beside the fact it’s just the right thing to do.) It’s because it’ll not just be your problem a few years from now. It’ll be ours too. We’re the ones who will have to figure out how to sell these white elephants, bought at such a ‘great price’. Since our entire philosophy is to stick with our clients from their first investments ’till we leave their retirement party, that wouldn’t be very wise on our part, now would it. (And by the way, you will invite us to your retirement party.)
It’s at that point you’ll be asking us what the heck we were thinking back in ’08.
What’s better you ask?
These days, buying well located, quality built properties for slightly under the street price is a pretty smart way to go. High quality tenants paying premium rents are what pays off in the long haul. Big demand today in the path of growth means bigger demand tomorrow in a matured yet still newish region. Ensure you’ve acquired units which are in demand at the more affordable price ranges and you’ve really done it right.
It’s the big picture view that wins out for the investor looking towards retirement.
Getting rich quick isn’t the way to go. You’ll take it when it comes your way, but it’s not part of any prudent Purposeful Plan. The Plan is based upon building wealth through the use of tried and true principles — what I’ve called Investment Physics.
In seminars I call it getting rich slowly and on Purpose. The smart money allows the market show them where to go.
An appreciation spike or two during your 10-30 year investment journey is of course welcome, but should never be anticipated. My experience shows these spikes occur at least once every decade, sometimes twice. This correction however, has led me to predict (believe) the next 10 years may not have any spikes. So when I lay out each client’s Plan, it’s never mentioned or accounted for in any way. Nobody ever gets upset when these spikes show up. If, on the other hand, I didn’t think the reasonably expected appreciation rate over the long term wouldn’t be at least 3-6%/yr., I wouldn’t be there in the first place.
Following a disciplined Plan over a long period of time will get you where you wanna be.
Going for the lowest price will often take you on trips to places you simply don’t wanna be.
BawldGuy Axiom: Investment Physics, when applied in a Purposefully Planned and well disciplined manner will always produce superior results over the long haul.
Defying gravity ain’t the approach you wanna take.
Step back and look at the big picture. Unintentionally discounting your retirement income by chasing price rather than adhering to Investment Physics is ironically too expensive at any price.
Contact me and together we’ll paint your own personal big picture. Think Big Picture = Big Retirement Income.