The Long and Short of It

Is there a real estate bubble? Should I sell out of my properties? Isn’t the stock market in a bear market rally? Should I dump all of my positions? Thus the picking of brains began. For the next hour and a half (or four pints as measured by the Irish time keeping system) the two fellows voiced their concerns in hopes of finding solace in expert advice.

The land man graciously took the podium first. He explained to the writer that a real estate bubble should not destroy a wise investor’s portfolio. The land man informed the writer that the properties he held would most certainly escape the effects of a bubble. But why, asked the writer. How can my properties be immune to a possible crash in the market? The answer the land man gave was simple, and strangely familiar to the writer.

You see, said the land man, real estate values traditionally go up, and very rarely go down. Over the long haul, values of land increase at about 10% per year, give or take. Some years are great, like this one and some are poor, like those of the mid 1990’s.

Your properties will not be affected by a crash in the real estate market since you’re holding for the long term. Since renters are paying your mortgage, short term price fluctuations to the downside, however unlikely, will not affect your bottom line. Equity you have gained may temporarily stall, but will inevitably move higher once the storm has passed. The only time you lose money investing in real estate is when you sell it for less than what you paid for it.

When real estate goes cold, prices rarely drop. Instead, prices will sit at a flat level until buyers drive them up again. In real estate, there’s rarely enough selling pressure to drive prices down (barring environmental or natural disasters). When the market sees weakness it holds tight. Rarely is an owner willing to sell land for less than what he paid. So over a decade, your chances of doubling your equity are rather good. So even if a string of flat years are put together during the next ten years, you’ll likely add a very conservative 25% to the value of your property over this time. Since you’ve got renters paying for the property you have no reason worry.

But dear friend, the writer asked, who will be affected by a burst? I keep hearing that fortunes could be lost, dreams shattered and hopes crushed. Well, here’s the deal old pal, said the land man. Many people will be affected by a burst. The point of investment properties is to safely gain equity. If and when equity growth slows, investors (proper ones) still have income from rentals to cushion the effects (which are only on paper). Those without renters bear the brunt of full mortgage payments. “Investors” whose properties are rented out below the mortgage (and other associated costs) will not have the benefit of income. The key to investment property is cash flow. Which you have!

If the “work load” of carrying multiple mortgages without renters (or receiving less in rental receipts than the property costs’) overwhelms an investor and forces a sale in a flat market, things could get ugly.

Brokerage fees, title fees and taxes could actually end up costing the owner enough to put him in the negative on the property. Spending $1,000 per month on a mortgage that’s returning zero will cost the owner time as well. That $1,000 could have been in an interest bearing account. But there are situations that are even scarier.

An acquaintance of mine recently purchased a dozen pre-construction condo’s in Georgia. He has since sold nine for a nice profit, but the remaining three are still awaiting purchase. Unfortunately, the lower prices being asked by others in the development have already cut into the profit potential of the remaining three. It’s been weeks since a serious offer came in and now he’s considering unloading them at his cost. And this situation is happening now during a low interest rate, sellers market. He simply overbought in one area.

So I hope you understand that your property is in good position. You’re cash flow positive and able to absorb fluctuations. If you do buy more property, be sure to follow the model you’ve been following and look for cash flow. You can, and should, look to profit from quick flips, but by buying for the long term, you’ve secured tremendous potential.

As far as flipping property is concerned, you should do so when possible, in a prudent manner. However, your main focus as an investor should be to grow your portfolio with time proven investments. When your grocery bagger tells you how great real estate is, it may be time to get out. So in this market, you should keep flipping to a minimum to avoid risk, but if the situation is right, attack. You should only flip property if you hold enough cash flow properties to bear the brunt of possible problems… diversify!

The writer thanked the land man for his assessment and took control of the conch. So, the writer said, I guess you’d like to hear about the stock market now right? We’ll I’ve got a surprise for you. What you just told me about real estate holds true for stocks too.

It’s widely known that the buy and hold method to investing works. In the long run, as they say, you’ll inevitably win. And “they” are right. Historically, the stock market returns about 10% per year. There are down years, flat years, as we’re experiencing now, and there are up years, like the previous two. And like real estate, you only lose money when you sell for less than what you paid.

Is there a time to sit on the sidelines? asked the land man. Sure, replied the writer. But selling all of your holdings in this market is silly. When the market is flat, as it is now, you should hold onto your long term investments and only jump into new positions that could explode regardless of market conditions. I’ve seen your portfolio and you may want to consider investing in more dividend paying stocks. This allows you to keep your growth positions alive while gaining income. Dividend stocks are like renters, they pay the bills. You’ll also want to invest in small cap and micro cap stocks. When the broad market is trading flat, you’ve got your best chances of outperforming the “average 10% years” there.

Of course you should cut your losers and let your winners run if you plan on short term investing, but in the long run you should make considerable gains if you are playing the right stocks. This is not a buy anything market, nor is it a sell everything market. With the stock market trading as it is, picking and choosing quality is of utmost importance. And as your quality stocks gain momentum, you should be swinging for the fences with small caps… diversify!

As you know, there is no bubble in the stock market right now. And I don’t believe we’re in a bear market rally. Ups and downs are expected, but overall the market is healthy. You just have to be in the right stocks. You’ll never make a fortune on a blue chip stock now, but you can find income. You should be looking for gems in the small caps. Rest assured, you’re going to do fine.

So the two gentlemen finished their pints shook hands and parted ways. When it was all said and done, each man learned a little more about the other’s expertise and went home feeling secure. The land man paid the tab.

Luke Hodgens is the editor of
Powerhouse Profits a conservative investment newsletter. Click here to read more of his cogent analysis."