A Sharp Pencil in 2011
December 1, 2010
Paul has a sharp pencil. If a property doesn’t pencil out, no way he is going to buy it. One of our long-time subscribers, he told me that he has saved thousands of dollars—in properties he didn’t buy. He saved the money because the properties he passed on were bad investments. Paul has a degree in finance, so that helps. He also works on the philosophy that every property has to pencil out, or he’s not interested.
Would that all real estate investors had Paul’s attitude. The real estate market is littered with broke real estate investors. Those were the investors who were agog over increasing real estate prices, mirror-fogging loan requirements, and the panic over maybe “missing out” on the real estate boom. They missed out, all right. They missed out on smart investments.
Smart investments are those that actually make an investor money; they pencil out. Completely left out of the category of “smart investments” are those that depend on the stars lining up in perfect accord, the moon becoming full three times in a month, and all the traffic lights turning and staying green from here to the next state. Smart investors factor in all the what-ifs they can think of and learn about. If the what-ifs look more ominous than the yes-it-probably-wills, smart investors move on to the next property—and don’t look back. Do they ever miss out on a good investment? Sure. Are they ever happy they passed on investing in something? Like Paul, often.
No economic situation is forever; the stars don’t all line up, the moon never is full three times in a month, and the traffic lights are sure to change. Nonetheless, these broke real estate investors seemed to believe the very same real estate market that crashed and burned four years ago was the exception. Their one and only criterion for success seemed to be how many properties they owned or controlled; and they bragged about their “success.” What they rarely bragged about was how much money they were making.
When I began investing in real estate in the early 1980s, property was cheap and easy to come by; no-money-down deals were one a block. But rents were too low to cover the mortgage payments on those properties. But since we had some nifty depreciation options, such as 15-year, double-declining that would just about ensure that investors at least broke even at tax time, investors bought properties anyway. They apparently counted on making up their losses with volume.
As with the real estate market of the late ‘90s and early 2000s, nothing is forever. The good times of the ‘80s changed, albeit not with the myriad disasters that befell investors beginning in 2006.
Here’s the important point about investing in real estate. It’s not how many properties you own; it’s how much money you make.
Back when I started investing in real estate, I met all kinds of people who bought properties, fed them every month, and counted on making up the difference with their tax return. I am a conservative investor. I believe, as Paul does, that my investments have to actually make money. No way would I acquire property that didn’t at least break even every month from day one. Starting out underwater made no sense to me. Other investors made fun of me with statements such as “Oh, you’re one of them!” Yep. And it has paid off. Every property I have invested in has turned a profit.
My investment plan was and is to buy properties where I show a profit from day one and that sit in a neighborhood I would live in. Those are my hard and fast rules. In planning for next year, smart investors are joining Paul and creating hard and fast rules under which they will buy a property. Every property has to pencil out. The investors who are broke are flat out of the business of investing in real estate. Their pencils are broken. Unlike Paul and me, they are still littering the real estate market.