A few days ago while sitting in my plane I was reading the USA Today and the Wall Street Journal because my pilots picked them up from the F.B.O.
The USA Today had an article that said housing prices would continue to increase this year for a 6.8% gain over last.
The WSJ said house prices would decline this year between 3-8% over last and made a mention of…
The Bubble
A lot of people ask me when I think the bubble will burst. It’s a common topic of discussion at seminars. Before I can render my most highly sought after (yet extremely worthless) opinion on that subject there’s a few questions that need answered for the sake of clarity.
Here they are:
- What the heck is a bubble?
- What does it mean “to burst”?
- How do we know there is such a thing?
- Who knows when it happens?
- If and when it does happen how does that effect us, assuming we can figure out what it is? Do people die or get sick or lose loved ones or what?
- Who declares the bursting bubble officially over?
- Is there some kind of pill I can take so I don’t catch the “bursting bubble” disease?
- Where do I go online to get all these answers?
- How do I know whoever gives me the answers is telling the truth?
Ok, I’m being cute. It’s my vain attempt at being humorous. I’m sure its not working if you’re one of those thinker brains that worry about things like bursting bubbles.
The truth is, there are no answers to these questions, only opinions and I guess mine is as valuable as anyone else’s. Certainly worth what it cost, Nothing! That’s also the true value of all the others you’ll read and hear from columnists and talking heads on TV.
I guess when people refer to a real estate bubble bursting, they mean real estate values will stop rising so fast and some will even decline. If that’s the definition, my answer is…
Duhhhhh!
Is it some kind of shock to anyone that values won’t keep doubling every year in some areas or at least continue climbing at 25-50% per year? When values climb that fast certainly some will correct and decline a little for awhile. So What?
When I started in 1982, the prime rate was 18%. You couldn’t give away real estate, but somehow I bought and sold 23 houses in my first six months and I was clueless how to do this business.
Then the rates started coming down about the time the 1986 tax law changed taking away most depreciation losses for investors. Chaos ensued and properties were flooding the market place. Banks were being taken over by the RTC as their foreclosures got out of hand and Uncle Sam stepped in to protect depositors. You could go to auctions held in hotels and bid on 50 houses in one night.
I Had A Blast
I was buying 5 or 6 properties at every auction with a value range of $60,000-$85,000 for prices ranging from $5,000 to $25,000. It was like shooting fish in a barrel with a bazooka.
A few years later the RTC bonanza played out and the market corrected itself just in time for the depression of the early 90’s when Donald Trump got his degree from the school of hard knocks.
Real estate was a nasty word. Very few people would consider it as a bonified investment if they listened to the columnists and talking heads who had all the answers…for FREE.
Then came the turn of the century and the Y2K scare where the world’s computers were to crash and wreak havoc on our financial systems, the market would crash and pandemonium would consume the earth. People would get wiped out and commit suicide in large numbers. Millions of dollars were made selling prevention products and services to protect yourself from the impending Y2K doom. The talking heads had enough news fodder to last the whole year of 1999. Everyone was afraid to buy anything… well, almost everyone.
I Bought 122 Houses That Year and sold them all for a nice profit.
Maybe I should have been more financially prudent and followed the herd who took advice from people who write articles.
Here we are a few years later in a vibrant economy with real estate price increases beyond that of the 70’s and we’re faced with another disaster…
The Bursting Bubble
Personally, I can’t wait. I’m anxious to see what this bubble is, if it exists and exactly how one burst. This much I know for sure. If there is a bubble and it does burst…
I’m Gonna Make A Lot
Of Money From It…
And So Should You!
Here’s an absolute truth you can take to the bank…People Will Always Need A Place To Live. Whether its good times, bad times, interest rates up or down, prices going up or down, stocks hot or cold, bubble or no bubble…
There Will Always Be A Need For A Requirement of Life Called Shelter. In the early 80’s you couldn’t give away a real estate license. There was a mass exodus of real estate agents, yet people still found a way to buy houses…the American Dream.
Did business slow down?
Yes! But not mine!
I just adapted to the times and got really good at buying and selling with owner financing. It was a blast knowing…
My Wealth Came From Chaos
Show me a self made billionaire and I’ll show you someone who was buying when everyone else was selling and loves chaos. I know a guy who bought 5,000 houses in Houston during the oil crisis when he could get a 3/2 brick house for $5,000-$10,000. I wonder what he’s worth today. Those same houses are worth over $100,000 each. God love chaos.
If you’re concerned about a real estate bubble, the best thing you can do for yourself is put yourself in a position where you can’t lose. Come to think of it, that’s not bad advice even if there isn’t a bubble.
How do you do that?
It’s simple!
- Don’t bury your cash in real estate.
- Don’t guarantee debt.
- Get as liquid as you can.
If you leave cash in real estate and values do decrease, your cash will be the first to go because it’s invested in the top end of the value, (i.e.) down payments.
Don’t write a check and you can’t lose the check. It ain’t rocket science. Learn to buy real estate without your cash and the most you can lose is a little…
Free Equity
If you personally guarantee debt to buy houses, you’re at the mercy of the lender and like a puppet on a string. When they pull the strings, you dance. If you insist on getting new financing to buy houses and guaranteeing debt, you’d better learn to dance.
If you haven’t learned yet to buy houses without writing checks or guaranteeing debt, it’s a simple matter of getting the proper training. Any training that encourages either is the wrong training.
Spend a little money and time learning how to do it right and save yourself years of cleaning up the mess that may occur if there really is a bubble and it does burst, whatever that means.
The more liquidity you create, the less you care about a bubble or interest rates or who’s president and the more prepared you are to take advantages of chaos and think like a billionaire.
So how do you create liquidity?
Here’s the simple steps.
- Buy real estate without money or credit and turn it into cash.
- Invest that cash in assets that produce more cash. (Not buried in real estate).
Cash ? Assets ? Cash ? Assets ? Cash
For clarity, I did not say you couldn’t use cash to buy real estate. In fact, it’s a good use of cash and it’s ok to write the checks as long as you get two things in return…
- If you write a check it should return a much larger check…Quickly.
- You must get a lot of free equity in exchange for your check, several times the amount of the check.
Anytime you can use cash to buy an asset that produces more cash, it’s a good use of cash as long as it’s not buried in that asset long term.
Here’s an ugly example of why.
Let’s assume you put up a $100,000 down payment to buy a million dollar property(s) and finance the balance by getting a new loan, taking a loan subject to or seller financing. Your intent is to hold the property for long term growth and it looks like it will appreciate at 10%.
Now let’s assume you could take that same $100,000 and invest it in something other than this property and get an average 20% return over a ten year period, which you can in a coma. That means in ten years your $100,000 has turned into $725,000.
Let’s also assume you could buy a million dollars worth of real estate without using the 100K, and of course you can. If all my assumptions are true, and they are, here are the ugly facts:
- The real estate will appreciate the 10% with or without your $100,000 cash buried in it for ten years.
- If you leave the 100K in the real estate, it can’t work for you passively in other investments to earn the 20% return.
Therefore:
You Just Lost $725,000 You’ll
Never Get Because Your
$100K Was Buried In Real Estate.
You can grow actively by learning to buy real estate without your money and passively by investing the cash it produces in more liquid, high growth assets. That way you grow ten times faster and when you don’t want to be active anymore you can retire…
Filthy, Stinking Rich
And bursting bubbles will no longer be a concern.
How do you get a 20% return?
Here’s a few ways.
- Make private loans- I loan at 65% LTV, 15% interest, 5 points, and 3 months interest prepayment penalty. That’s a minimum 23 ¾% return on cash if it’s out a whole year and it almost never is. Average return is 35%.
- Buy Defaulted Mortgages- Learn to do this and your returns can easily top 100% annually and usually do. Get to our Paper Power boot camp.
- Buy Tax Liens- For returns in the teens or much higher.
- Buy and Sell Houses For Cash- I heard this works.
- Mutual Funds and Stocks- With a little training and the right sources, a 20% return is not difficult to achieve.
I also have a private placement fund that should get you more than 20% passively if you can invest $100,000 or more. We’ll send a perspective upon request. Fax to
904-421-0181.
Well, there you have it, my opinion on the real estate bubble. If you prepare yourself correctly and one does occur, it will just be another passing news story in the never ending barrage of hype and worthless information forced upon us by the media in an effort to acquire market share.
Hey, here’s a tip. Turn off the news and get TIVO. That way you can watch the good shows like Boston Legal and the bubble may come and go before you ever know it was here. Just a thought.
Ron
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