From Inspired Startup
One of my hobbies is keeping tabs on the real estate industry. I’m not a big investor in real estate, but I definitely enjoy talking about the latest trends in real estate. I love ribbing my realtor friends that I think their jobs are becoming extinct and it’s time to rethink their value proposition soon or they may be going by the newspaper wayside. I’m a big fan of Redfin, estately, Zillow, and other real estate sites that are bringing more transparency to the real estate market. I’m tired of the industry driving profits through being opaque and keeping broken models in place in order to preserve their position. That being said, I’ve turned a bit more bullish on real estate as of late vs my very bearish position about 6-12 months ago. I’ve completed two transactions recently and thought I’d share about those transactions in more detail and my thought process.
One of my more popular blog posts was on my decision to walk away from Olive 8. I was ready to walk away, but did engage in a few interesting conversations with the folks there. Needless to say, we were able to come to an agreement to purchase property there. It’s far from clear that I bought at the bottom, nor was I trying to time the bottom. In fact, I’m probably early as only about 25% of the units are actually closed, there’s a lot of units still available. However, I approached the decision in a few different ways. First, the decision was a purchase decision first and an investment decision second. Like I mentioned in past blog posts, when you buy a car, it’s a purchase decision, rarely is it an investment decision where you are trying to calculate your return on investment and equity gains after acquiring the car. Because my wife and I really enjoyed the location of the property and the conveniences of the property – it fit us well for a purchase decision. But, how about as an investment decision?
Once we decided it was a purchase decision first, we did want to make sure that we were not overpaying – in the car example, even if you decided that you wanted that Toyota doesn’t mean you should pay sticker. In real estate, you can always buy below market, but you can rarely sell above market. So, the lesson is to make sure you get in at the right price. For us, that meant that we don’t purchase more property than we can afford. If there was a lesson learned from the recent real estate debacle, it’s that real estate does not always go up and becoming overleveraged leaves you exposed to potentially horrible options. In fact, our decision was to downsize to a place that we wanted, reduce our exposure to leverage and stay well within our budget. There’s always the temptation to buy up and lever up and bet on the real estate market with your personal property, I enjoy risk and often take risk, but for less liquid assets like real estate and levering just seems like a bad risk-reward proposition. Remember, I’m just arguing for your personal property. For an investment property or buying undervalued properties, it might be different. Why overspend on your personal property when you can evaluate much better opportunities with professional investors that could bring better returns? My thesis is to keep your personal property to something that you like and equity returns are like icing on the cake and keep your investing decisions with strict criteria to secure the best returns. There are a lot of great asset classes out there, find the ones that best suit you.
So, about the price and the purchase decision. It’s pretty easy these days to look up recent comps on all the other units that closed in the building. For me, it’s just getting comfortable with the other comps in the building and getting the best “below-market” deal that I could. It took several months, but we were able to get a deal that worked well for the seller and for us. I’d even argue that developers are more willing to meet buyers to make the deal work than property owners – as a property owner myself, I admit that I get attached a bit to property and sometimes unable to make the rational market decision. The developer was more than reasonable to make something work which is really a welcome breath of fresh air.
The whole annoying part of the process was my conversations with real estate agents, I’ve had conversations with them multiple times and have blogged about this in the past. Not the sellers agents for Olive 8, but buyers agents. I’m absolutely convinced that as a buyer, you’ve got to control the process with your agents. The agents are there to close a deal, not to make sure you get the best available deal. Had I listened to my agents, I would have closed a terrible deal and I would have closed it quickly because the “market” was on its way back and for sure I was going to make my money back in a few years. Do your own work, control the process, and the buyer’s agents will make it happen because they want you to close. I think more experienced agents might be able to expand the conversation more, but at the end of the day, you should not allow yourself to be badgered into making a deal because you feel indebted to them. If you’ve done your homework, consider using Redfin or negotiate with your agent - I’m not being compensated by Redfin at all for this, I just love innovators that are changing the model.
On a macroeconomic level, take this with a grain of salt as I’m not an economist, but I think it makes a lot of logical sense. With the extraordinary amount of debt the US is taking these days, our dollar has quickly come down in value and will continue to go down in value. That means hard assets – gold, oil, commodities, and even real estate will go up in value relative to the dollar. In addition with interest rates at these unsustainable levels, there is a bit of a hedge play against the US dollar by buying real estate. That being said, rent prices have been coming down, so the rent/mortgage ratio still seems lower than it should. Take it for what it’s worth, but I’m buying a little gold, a little oil, and a little real estate these days.
My second real estate transaction was an investment property at Seabrook, a town near Pacific Beach in Washington. It’s a relatively new development with a great developer and friend of mine, Casey Roloff. I’m in with a couple friends on this property, here’s how I thought about that investment.
I like to bet on people and Casey is a developer that is a visionary that makes things happen. I’ve been amazed what he’s been able to do, build a town literally out of nowhere and focus on building a bustling community with great thought on making it a walking town and family friendly. He’s a tremendous entrepreneur that has his sights set on building a large town where the community is first. I want to be a part of that.
It is a investment property that has cash flow with rental income. In fact, it’s a great washington coast beach town rental. The nice offset is that I will also be using the property as well so there is that individual usage value out of it. With the economy the way it is, vacationing has become more local and my bet is that more people will stay within 3 hours driving distance for vacations. It is situated between Seattle and Portland, two cities with great demographics for family vacations.
Similar to my argument above, I do believe this is also a hedge against the US dollar with solid individual usage returns and cash flow returns. Overall, I’m pretty bullish and excited with my bets. Even if they are wrong, I feel that worst case, I’ll drive them to the ground and enjoy the ride. What do you think? Do you think it’s time to start buying real estate or is it wiser to keep waiting?
About Nathan Kaiser
