What IS Old School Anyway?

Posted @ 3:46 pm - Filed under Capital Growth, Cash Flow, Economy, Investment Lessons, Real Estate Markets, Retirement, San Diego Property Owners, Sominex Account, Texas

If what we’ve been through as a nation economically has a bright side, it just may be the new and improved eyes now available to investors of all stripes. Real estate investors for sure have, or should have, added much wisdom the last few years. Many have become enthusiastic students of Old School teaching. In markets like San Diego where real estate appreciation is considered both a redundant phrase and a birthright, this has been a most trying time. Since I blew the ink dry on my first license back in October of 1969, making money buying local property has never been fodder for serious debate — ’till now.

A reader, one of my favorites, and a wise, experienced investor, sent me a link showing Phoenix residential rents have been taking a hit, and may continue their downward slide — various reasons were given. On the other hand, the prices have been lower than they have since the boom. Buyers have been paying cash for homes, resulting in lower rents due to the lack of loan payments. They’re buying, for the most part, for capital growth. Cash flow is fine, but not their primary aim.

Their thinking is long term. Buying for cash, they don’t really care much, relatively speaking, about how much rent they get, as long as they can keep tenant quality in their comfort zone. This bodes well, NOT, for those facing a mortgage payment the first of every month. They care very greatly how much rent the market will bear.

Now, the lesson I learned when this first happened to me back in the day, wasn’t what many have concluded these days. Oh, at first it was, but then one of my mentors made a brutally honest observation.

He said, “A larger down payment, or even the decision to pass on a few investments wouldn’t have changed much. Those in a much stronger financial position than you aren’t hurting as you are. Why? They did two things you didn’t before starting.

1) They correctly surmised their relative financial strength. And 2) They ensured they were backed up for the Black Swan type event not even a crystal ball could foretell. They had major cash reserves from Day 1. You? All you had was faith in the status quo never changing.”

Folks tend to wanna make this stuff as scientifically reliable as possible. Me too. Numbers provide this confidence factor for sure — but it’s so often a false confidence. Know that famous bumper sticker? S*** Happens? We all instinctively understand the sentiment, don’t we? We’ve all been there in many parts of our lives — it’s part of living for Heaven’s sake. Things don’t go as planned, which means your Plan better allow for that fact of life.

Will rents continue to fall in Phoenix? Probably, but they surely won’t be the Lone Ranger rowin’ that boat. (Come on, who mixes metaphors better?) Many regions, including San Diego are seeing rents slide. Why do ya think I’m so strong on Texas income property? They’re holding their own most places, and edging upward in others. But back to the point here.

Old School thinking is what took me to Texas.

Your Purposeful Plan must, by definition be long term in nature. It must correctly assess your financial strength. When things change, and this is maybe the most critical lesson I’ve ever learned — you must adjust. When your professional tells you to do something not found in the original Plan — do it. He’s adjusting to reality.

Flexibility is crucially important to anyone’s retirement plan. Without it, opportunities are lost, and avoidable trauma isn’t, well, avoided. Sometimes it makes sense to sacrifice one part of your Plan to better navigate rough seas.

Old School thinking. Amputate an arm to save a life.

Choosing into what markets to invest your capital is one thing. But plunging in without much more than faith in your due diligence and a good down payment just doesn’t cut it. The good old days are just that — old — and gone. Adjusting to the new reality is not an option, it’s a must. This is why I’ve been a disciple of Old School principles from the beginning.

One of those principles says investing without a Purposeful Plan is the fastest route to chaos. The Old School teaches boots on the ground research. Abundant cash reserves. It holds superior knowledge as golden. It believes reality is not perception — it just is. Perceive it differently at your own risk. Besides, how reliable can your perception be, when you don’t even know some of the questions to ask, much less the answers? Oh, that struck a nerve did it?

Old School isn’t all knowing or magical. It’s not perfect, as it’s certainly not omniscient. But I’ll take it over every other approach, hands down.

Let’s talk how Old School can be applied to your Purposeful Plan. I’m at 619 889-7100 — BawldOperator on duty. Have a good one.

This entry was posted on Wednesday, September 9th, 2009 at 3:46 pm and is filed under Capital Growth, Cash Flow, Economy, Investment Lessons, Real Estate Markets, Retirement, San Diego Property Owners, Sominex Account, Texas. 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.

8 comments to “What IS Old School Anyway?”

RANDY MICHAEL on September 10th, 2009 at 6:35 am said:

Nicely said. For more than 20 years as an investor I’ve been fighting the conventional wisdom that the value of a single family home is dictated by “comps” and by bank appraisals which use a sales approach to value. For 20 years I’ve said there are two problems with the conventional wisdom: 1) you may not sell the house anyways 2) history (appreciating values) may not repeat itself.

Unfortunately for the other 99% of people, the last few years proved I was right. Me, I’ve only invested in cash-flowing properties, period. Income approach to value. Equity and appreciation are icing on the cake, but the property must be self-funding.

I guess it feels good, almost vindicating, to be proved right after all those years of talking to a deaf audience. Like 9-11, it seems to always take a catastrophe to get people to open their minds and stop mindlessly following conventional wisdom as if they were sheep. The buy low-sell high idea sold a lot of books and seminars and CDs, just not a lot of real estate.

BawldGuy on September 10th, 2009 at 9:27 am said:

Randy — So happy to hear from a member of the Old School Choir.

Self-funding is a must, with exceptions as rare as hens’ teeth.

Unfortunately those books, CD’s, and seminars did sell a lot of real estate. We’re seeing them in the headlines almost daily.

Buying low and selling high is fine as long as the property paid for itself along the way. Welcome Randy, and don’t be a stranger, OK?

Dennis Fassett on September 10th, 2009 at 10:05 am said:

It’s shocking how far away from “old school” we have strayed.

As fundamental as it seems, I can count on a couple of fingers the number of real estate investors that have any sort of cash reserve set aside.

Great post as always Jeff.

BawldGuy on September 10th, 2009 at 10:27 am said:

Hey Dennis — Not having a cash reserve is akin to skydiving without a backup chute. I just don’t get it. Our company policy is to insist on abundant cash reserves, or wait ’till that’s in place.

Dennis Fassett on September 10th, 2009 at 10:31 am said: