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Today’s Investment Strategy

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An Image of a Remodeled House for Gentrification

The Deal

I am often approached by investors who are looking for a “deal,” a property that sells for below market value, needs a good cleaning, paint, and carpet, and immediately turns a profit; a flip. Between 2010 through to the end of 2012, I found and closed a lot of these “deals” and made many investors great deals of profit. Today’s market is different.

The fourth quarter of 2011 was the bottom of the real estate market in Ventura County. The buying window was wide open, cash flows were great, properties that are worth $450,000-$500,000 today (just 20 months later) were selling for $280,000-320,000. Yet, in 2011, few seemed to recognize that we were at the bottom of the market.

The Problem

Many investors and buyers are discouraged. They see the bottom of prices as having been in the past and are fearful of the future. In addition to that, the 2-year chart on interest rates on Zillow’s mortgage calculator app makes someone feel like they are being ripped off by interest rates at 4.5%. Many mom-and-pop investors are leaving the market or are desperately trying to get creative to eek out a cash-on-cash return without considering appreciation.

The problem here is a lack of vision. The real estate cycle has risen and fallen dozens of times over the last 300 years and it will rise and fall again and again. No matter what legislation is passed to minimize the length and impact of these rises and falls, as long as there is capitalism, there will be a cycle.

The Strategy

Graphical Depiction of the Real Estate CycleDon’t wait to buy real estate; buy real estate and wait.

Wise investors today realize that they need to bet on the real estate cycle to make money. That is, they need to factor in expected appreciation into their buying decisions and realize that interest rates are still at historical lows. This is more difficult to do than the 2011 strategy, especially as it requires a keen understanding of the market and a watchful eye on market changes (this is where a great real estate agent comes in). In Ventura County, there do not appear to be any indications of falling property values. Everything is pointing towards continued growth. Perhaps not at the rate that we saw during the last 20 months, but certainly not falling prices. No one knows how long this will continue, but a wise investor will get on the ride sooner rather than later and then watch the market evolve while holding property as opposed to watching the market evolve without any acquisitions.

That seems to be the take away of an article in Wednesday’s Wall Street Journal: “.” Here are some takeaway quotes:

Calif.—On a recent weekday morning, a crew was busy sprucing up the exterior of Koonal Parmar’s one-story house in West Oakland. They trimmed trees, pressure-washed the wood siding and touched up his paint job. Mr. Parmar didn’t pay a dime for all this. The upgrades were compliments of REO Homes LLC, an investment firm that owns several houses on Mr. Parmar’s block. [. . .] The company’s motives aren’t altruistic. They are part of a broader strategy designed to upgrade the neighborhood to attract higher-income residents who, in turn, will help boost properties’ values.

In past housing recoveries, investors purchased foreclosed homes and often tried to flip them for a quick profit. But investors with a different approach have plunged into the housing market this time. They have assembled billions of dollars to acquire homes and upgrade them. Their aim is to gentrify communities and profit later when rents and property values rise.

“If your play is for long-term appreciation, versus just flipping the houses, wouldn’t you want to improve the properties and make the area more desirable?” Mr. McClelland asked. “It creates a look of curb appeal. It’s good for business.”


So then, what exactly is today’s recommended real-estate-investment strategy? Buy and hold. Get on the appreciation ride and watch the market. Plan to hold for the long term and only sell if you’re able to time selling prior to a fall in property values (again, a great real estate agent will alert you of changes in the market). Otherwise, as long as the property is affordable, hold it. Those who could afford properties that they bought in 2004 and 2005 and still own may have gone through a rough 7 years, but property values will, at some point in the future, surpass 2004/2005 values. It’s a cycle, yet every time it goes around, prices end up higher.