Among the many key factors in the ultimate success of any real estate investor’s retirement is the ability to remain objective while analyzing opportunities. I know yer wondering why I didn’t add a ‘duh’ at the end of that sentence. There are so many who don’t realize the impact of a biased analytical conclusion. Your Purposeful Plan becomes campfire kindling when relying on subjective analysis.
I’ve been in San Diego since ’67 and seen the phenomenal changes the area has gone through since. Seriously, compared to today, San Diego circa ’67 was Mayberry RFD. I remember how excited we all were, when as home agents someone listed a $35,000 home! We all wanted to see up close and personally what a house that expensive looked like. When, in ’71 Dad sold his home, and combined the net proceeds with proceeds from another small project to buy a home ‘up on the hill’ for $115,000! OMG! Lord knows what it’s worth today, 37 years and a three booms later, even with the market correction.
When I made the switch from homes to investment property in the summer of ’76 we’d just begun the huge run-up of real estate values. It went from about late ’75/early ’76 to the fall of ’79, when it hit an immovable object at 110 mph. It was ugly. Those up years though? Wow. We’d never before seen anything like it, not even close. In fact, the median price when I started in ’69 was in the high teens. By late ’75 we were still trudging along, hitting somewhere in the low-mid 20′s.
I’m gettin’ to the objective analysis part, so please be patient.
When this first price explosion hit, folks didn’t know how to act. When yer used to 3-6% yearly, and almost without visible transition go to 2% monthly, behaviors change. Duh. To put it into prospective, a $25,000 home on New Year’s day in ’76 was worth almost $70,000 on Thanksgiving of ’79. Everyone was Einstein. “I bought this duplex for $26,500 two years ago and just traded it for three duplexes.” That quote back then wasn’t even impressive. Two years. Geez.
Fast forward to 1984 when we’d pretty much emerged from the bloodshed of 20% inflation, 16.5% FHA interest rates, and a national economy that literally sucked the life from anything upright. Though there’d been cycles before of course, the extremes on both the up and the down of this one was breathtaking — and a brand new experience.
’84 was the year, as I look back with 20/20 hindsight, when I began to ‘come of age’ as a real estate investment analyst. The difference was how objective I became, and how uncaring I was of what the raw data showed. One of my mentors said — ‘The data is the data — manipulating it is what amateurs do in order to arrive at the conclusions they had before the analysis. That’s a sure recipe for nasty future surprises.’
The first lesson I learned was that the charts don’t ever go eternally up or down. Sounds like common sense,
right? You’d think so, but that’s not how folks behave. Time after time I’ve seen how an up market will never end, and a market correction will take us all to perdition. Neither are true, of course.
The second lesson was maybe the hardest and most painfully learned — an honest analysis and its conclusion are ignored at your peril. (See mentor’s advice above.) Write that one down, ‘cuz there are lots of RE investors paying the price for violating that one.
The third lesson relates to the garbage in/garbage out axiom. Relying on research not yer own is not allowed in our office. Yes, we use respected reporting sources for macro/regional info in the regions we research, but when it comes to local fundamentals, it has to pass our own in personal, boots on the ground smell test. Taking numbers/info from players with a dog in the fight is playing with fire. Even if there was no evil intent, the fact remains — the analysis is rendered not only meaningless but potentially injurious to those trusting its conclusions.
The fourth lesson is to pay attention to what the analysis is telling you. This is especially true when it seems to show a huge shift in market fundamentals and dynamics. Want an example? My research in early ’03 and beyond clearly showed changes were already installed in the San Diego investment market. Down payments, once predictably low, were becoming reminiscent of the Bay Area in character. Paying attention is what got me and our clients Outa Dodge back then — and in my opinion, we were still a year late in adjusting.
BawldGuy Axiom: A five year after tax cash flow analysis is only worth the integrity of the research and assumptions employed in said analysis.
There are almost endless lessons for the budding analyst, but these four will do until the next time the topic comes up. I still learn cool stuff all the time.
What I’d like the San Diego, and in reality, the California real estate investor to realize is the following.
Investing in San Diego (California) has been a bad strategy for several years now. Analysis clearly shows capital invested in Texas & KC, among many, grows much faster. The quality and size of your retirement income is at more risk in San Diego. Your subjectivity will not change what honest analysis shows to be your reality.
Just as fooling ourselves when trying to lose weight by violating the calories in vs calories out law, our subjectivity won’t change the results, no matter how much desire we bring to the table. A year later we’re still gonna be heifers instead of what we envisioned.
Likewise, ignoring the objective proof surrounding you in San Diego will not make the reality disappear. Getting our now is your best defense against a deteriorating retirement future. This is not a game, and our feelings of affection for our much loved San Diego have no value. Not behaving accordingly will find you between a rock and a hard place years down the road.
‘Nuff said.
Related posts:
- Purposeful Planning And Tax Shelter For Real Estate Investing
- Purposeful Planning For Lean — Real Estate Investing & Gettin’ Back In Shape
- Retirement Income –Real Estate Investment — 1031 Exchanges — Purposeful Planning
- Comparing Regions — The Tipping Point Isn’t Always Obvious — Purposeful Planning
- Purposeful Planning For Real Estate Investors Must Be Flexible ‘Cuz Life Happens
About BawldGuy
Amazingly insightful post Jeff. When I was still laboring in the dark halls of medicine, and beginning to sprout wings as a real estate investor, I stupidly began to explore markets from the primary perspective of where my wife and I would like to visit. Several paiful mistakes and thousands of learning and research hours later, and thanks to several bright mentors along the way, we began to learn to what data to track and what not to, and how to look at projects.
I became so enamored with the market analysis stuff I now do it full time – and you’re right, there’s new stuff to learn all the time, and there are huge shifts in market dynamcis and fundamentals around the country that will make this a very interesting business for a long time to come.
Where the heck did you learn to write so well?
I humbly suggest another half-a-law. “Governance matters.” Prop 13 has proven a godsend for long term investment stability wrt costs. That’s the good news. The bad news is everything else. Income taxes, rent control, and now the prospect of eliminating mortgage interest deductions from State income taxes has reappeared. An arbitrary state or municipality can derail the most purposeful plan.
Mark — Thanks so much for the kind words.
Write so well? I write better than I used to, that’s for sure.
If you wanna read some solid writing, go to BloodhoundBlog and go the Geno’s archives. He makes me look like ‘see spot run’. 
Your experience, and learning curve in analyzing various markets reminds me of so many clients’ stories. “Well, I always did love East Toilet Seat, Ohio, so what better place to invest, right?”
Also, look at Robert’s comment below, and my response. I can already see you nodding your head.
Robert — Half a law? How ’bout a law and a half?
On the A-List is — How do the local/state governments treat business in general, and real estate specifically? Are they pro business? Do they tolerate it? Or are they like the People’s Republic of Santa Monica?
Paradoxically, a real analysis isn’t even produced if we find out bad news about local/state gov’t attitudes about business.
Half a law my hinie.
“Half a law my hinie.”
I did say “humbly.”
Anyway, yes. I just rattled off a few examples of governance issues but it is great to hear that your zeroth law pertains to the local business environment. Funny story; when newly married I actually lived in Soviet Monica under rent control while owning income producing property in San Bernardino. My friends used to tease me about being simultaneously on both sides of Socialism.
My hat’s off to the ultimate gamer.