Buy The Cream, Not The Crap
Last weekend I delivered my first, last and only 1-day Perth seminar to a packed room of savvy property investors.
During the morning session, I provided a comprehensive snapshot of the WA property market using six ‘market snapshot optics’ so as to conclude whether current economic conditions were favourable (i.e. a tailwind), unfavourable (i.e. a headwind), or neutral, to rises in property prices.
The conclusion: While there were green shoot signs of a recovery underway, until jobs and migration improved, headwind conditions were likely to cause property prices to stagnate in WA.
(Although my remaining seminars in Brisbane, Sydney and Melbourne are all now sold out, for a limited time you can purchase the full audio of the Melbourne event, and the market update sessions from Sydney, Brisbane and Perth here).
The morning session concluded with my brand new ‘Six Rules For Investing In Headwind Conditions’, and in this article, I’d like to flesh out Rule #3 – Buy the cream, not the crap.
Fort Myers – 2009
The genesis of this rule stems from my experience buying cheap ‘crappy’ properties (see below) in Fort Myers, Florida in 2009, in a region called Pine Manor (which the locals nicknamed ‘Crime Manor’). Prices were low (duplexes that were once $150,000 were now selling for $15,000+), and yields were as high as 20% or more.
While I had to pay cash because I couldn’t borrow in the US, I bought as many of these properties as I could afford, and I ended up with about 60 plexes that were forecast to deliver a huge annual net income on paper. Life was good… until you factored in the extra aggravation of dealing with properties with deferred maintenance, and tenants and management that were all in the category of ‘extra grace required.’
Six or so years later, those properties had increased in value three or four fold, which sounds impressive, but when you factor in the initial repairs, the turn costs every time a tenant moved out, and the aggravation, it wasn’t quite as glorious as it seems.
Good Advice From Uncle Zally
Reflecting upon this with my real estate mentor – Stu ‘Uncle Zally’ Silver, he observed, “You know 9-Cup (that’s what he calls me, after the nine cups of tea he claims I extract from each tea bag), you’d have been better off buying fewer better quality properties in better quality areas.”
“How so, Uncle?” I replied.
“Well, those better properties have now appreciated more in value, and you wouldn’t have needed to carry a gun to collect the rent.”
Once again, Uncle Zally was right. While those ‘cream properties’ (in Cape Coral) were dearer than the crappy cheaper ones in Crime Manor, the yield I’d have sacrificed to buy middle class houses, in middle class Cape Coral would have been more than offset by the additional capital appreciation earned over the time I owned the property, plus the tenants would have been much less aggravating.
When the property market is experiencing headwind conditions, real estate prices are soft and it’s easier to negotiate substantial discounts. In such times, I urge you to learn from my mistake, and seek to buy cheaper ‘cream properties’ that will be periodically on sale than the ‘crappy cheapies’ which may look enticing on paper, but will come with additional aggravation.
No, I’m not talking about multi-million dollar mansions, just nice houses, in nice suburbs, where nice people like to live.
You’ll find that, as the market recovers, those with good jobs will be able to borrow more money, which will facilitate well-located and quality properties to appreciate quickly, whereas cheaper areas will remain the domain of investors and affordable house buyers – both of whom are always hunting for a bargain.
Do you have a question, a thought or a tip of your own to share? Join the discussion here by leaving a comment now.
Until next time, remember that success comes from doing things differently.
Want the rest of Steve’s rules for investing in a headwind, along with his rules for investing in a tailwind, and also the full recording of his Melbourne 1-day event AND the market update portions of his Sydney, Brisbane and Perth events? These are on sale now here for a limited time