Newton’s Law Of Real Estate Investing — The Apple’s Still Falling….Down
Posted @ 10:06 pm - Filed under 1031 Exchanges, Real Estate Investing, Boise
As I was waiting to start one of the Boise seminars, our host, a mortgage broker, observed that every time he’d been involved with a 1031 (tax deferred) exchange, it had been a nightmare. I’ll confess that I haven’t been exempted from Murphy’s list. I’ve had some, shall we say, challenging moments over the years in some exchanges. But overall, they’re generally not more problematic than other transactions. So why has this lender’s experience with exchanges been so negative?
Ever seen a rocket built by a high school science class as a project? Did it remind you of NASA’s Apollo program?
There’s your answer.
Newton’s law of gravity applies to real estate, and with the same brutal consequences. It’s just that in real estate, appreciation sometimes acts as a sort of anti-gravity. This can give the first time investor great, but false confidence. It’s not that he really thinks he’s defied gravity, it’s that he has no clue either that he’s toppled from the roof, or that he fell up and not down.
Their ultimate enemy?
Investment rule of thumb: You don’t know what you don’t know. The four year old pretending to be Spiderman doesn’t know he can’t jump off Mommie’s dresser — but he’ll surely pay the consequences. The physics of the universe are relentlessly and mercilessly consistent.
When you’ve fallen off the roof, and are airborne, there are no do-overs.
There’s a physics to investing just like the physics we obey daily or pay the consequences. Jump off the roof of your garage a thousand times. How many times are you going to fall up? Violate the physics of real estate investing though, and you might luck out due to real estate’s version of anti-gravity — appreciation.
How many times have I heard the stories of glory which quickly morphed into Greek tragedies? Why? Because their mistakes were covered by the mother’s milk of beginning investors — appreciation. They jumped off the roof and fell up.
Then when the market returns to more or less normal, the physics of investing is back in play with a vengeance. Here are a couple very recent examples.
How ’bout the partners who made money on 10 straight pre-foreclosure deals only to realize their agent had made more on the deals than they had? They’ll laugh about that in a few years, but they’re not laughing now. Or the guy working his butt off, with total trust in his real estate advisor, buying cosmetic fixers at the rate of 5-8 a year, and netting a before tax profit of less than $60K. Here’s an honest guy working full time making a living buying and selling homes for around $6K profit per deal.
Stories like these two irritate me no end. Not because of what the investors did, but because they were following the lead of so called professional real estate investment advisors. The problem is, I’m convinced, at least for the most part, the agents honestly think they’re passing on real investment wisdom.
A rule of thumb: If your agent is making more money than you are, you’re working in the universe where the physics of real estate investment are not being obeyed.
Newton will not be mocked.
If you don’t know what the physics of the real estate investment universe are, don’t go out on your own. For the time being, the days of massive appreciation which has been allowing you to jump off roofs with impunity are gone. If you jump off that investment roof — you will definitely fall down. And remember the old joke — it’s not the fall that kills you, it’s that sudden stop. Not very funny, is it?
The apple that landed on Newton’s head fell down — not up. As he taught us, gravity can be your mortal enemy, or your best friend.
But defy it at your own risk.
This entry was posted on Tuesday, April 24th, 2007 at 10:06 pm and is filed under 1031 Exchanges, Real Estate Investing, Boise. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
