The "New Fundamentals" of Real Estate

In the interest of full disclosure let it be known that we own real estate as an investment and a real estate brokerage ... and all the bias that comes with those.  

Good, with that said, let's continue.

We *think* there was once a day where the stock market was a place that actually helped both large and small businesses.

Wall Street facilitated the selling of stocks and bonds so that businesses could access capital to help them expand and grow.

Investors earned interest payments on their bonds or equity in their stocks.

Stock traders earned a commission.  Everyone was happy.

We're not sure when the stock market went off course but we do believe that that was the original intent of it.  A place where Wall Street helped Main Street.

Maybe it was just an "idea" and maybe it never actually worked as we've just described.

It certainly hasn't worked that way since we entered the game in the mid to late 1990's.  That was the era of "irrational exuberance" and the tech bubble took us on a ride that we'll never forget.

But even in the late 1990's it *seemed* that you could find businesses that met your criteria as good investments...

A business that seemed to have good, universally needed, products.

Products that were cheap to make, cheap to sell and had huge profit margins.

Products that made the world a better place to live and didn't ruin the environment.

Management that had the best interest of the owners in mind and was also honest.

Today the world has changed.

Today, with very few exceptions (like Apple) no matter what company you find to invest in, it's highly likely that their stock price is going to be affected by large global economic factors.

So no matter how well they do on an individual basis the larger winds of change will determine the direction of their stock price.

Things like "Sovereign Debt" (the debt owned by governments who sell bonds to raise cash) which were barely even mentioned 12 months ago are all over the news -daily.

The economy has officially moved from a banking debt crisis to a government debt crisis.

1,000 point drops in the Dow Jones Industrial Average and countries banning "naked short selling", as Germany did this week, is the new normal.

So even if you fully understand all the fundamentals of the stock you have purchased, much larger forces are now at work.  Huge macroeconomic events are sweeping their way around the markets that can alter a stock's value no matter how good its "fundamentals" are.

Fun, eh?

Mark Cuban has one of the better rants on this exact topic.

Now let's turn to real estate.

It's not perfect either.  These same large macroeconomic forces can have devasting effects on real estate as well.

Just look at the U.S.  

30% declines across the board.

Not fun.

But there's something real estate has that other investments don't.

Shelter is fundamentally a need.

If you own property in the right "category" you will always have demand for it.

Obviously, owning the right property in the right category is important.  Many will ignore this, they won't put in the work necessary to learn what the right properties are and those will be the same people who wave their arms in disgust when the winds of change come.

And when managed properly, good real estate produces something critical to your economic life, cash flow.

The value of the property may swing wildly but with tight management and smart control of your costs, like mortgage rates, you should be able to ride out even the most terrible of economic storms.

"Should" is the important idea here of course.

"Cash, cash flow and credit" are excellent daily mantras.

Most real estate investors are scared to buy properties because its value may fall.

That's inaccurate thinking in our books.

Your goal is to own real estate free and clear.

You should EXPECT changes in value and plan accordingly.  At some point in your ownership of it ... it WILL fall.

Your path to getting to the end goal of "free and clear ownership" may involve many different strategies and styles but at the end of the day, you're looking to flat out own your investments.

That's what gets you out of the rat race forever.

So wild swings in value are to be expected.

Accept that right now.

The question should be, how will you prepare for them?

When the downward pressure in Canada comes what will you do to protect your investments?

Will you sell? At a loss? Or will you have the proper reserve funds to carry you through a tough period?

Will you have polished up your marketing, negotiation and "action taking" skills to the point where you are ready to jump into action?

In the early 1990's our family went through an extremely difficult time and if it wasn't for some reserve funds we would have lost property to the bank.

The good news is, that although there were difficult days, we came out the other side.  We survived and it made us stronger.

Here are some of the things we personally enjoy with real estate investments:

1. We're the board of directors.  So we can take personal responsibility for results.

2. Our product always has a need (starter homes).

3. We can control where we own them (what community, with what fundamentals - population, employment, transportation, infrastructure).

4. We can closely watch the global economic landscape, increase our financial education, and have plans for multiple different economic changes that could come sweeping through.

Here's the interesting part.

For years, numbers 1 - 3 on this list were the most important factors when investing in real estate.

Knowing your "local" market was the key to success.

And it's still important.

But in today's world, number 4 has become critical.  Essential even.

If you're only watching the "local" fundamentals you are not watching enough.  You are not preparing enough.

The days of just knowing the population trends, employment sources and transportation routes are over.

Huge macroeconomic trends are here.

It's a new world.

Get ready for it or get out of the way.

Until next time ... Your Life!  Your Terms!

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