“Experience without theory is blind, but theory without experience is mere intellectual play.” – Immanuel Kant

The real estate market is hot. In a lot of the major markets – the Northeast, South Florida, and California, to name a few – it may be too hot. What to do?

If you live in one of the country’s overheated real estate markets, now is a good time to be selling.

Can’t your investment properties continue to go up? Sure. But sooner or later there will be a downturn, because experience teaches us that things always go back to the mean. With real estate pricing, think of the mean as what people can afford to pay in rent. When the cost of buying a property is 20 or 30 times what it costs to rent it per year, you have an out-of-whack situation. It’s a rubber band that is being stretched very far.

Because I have so many real estate investments, I talk about real estate almost every day. Most of the conversations go like this:

   Partner: “Hey. We got an offer on the 4th Street building. A father-daughter business that will tear down our offices and

    construct  townhouses. They offered us $3 million. We have $1 million into it. Want to take the profit?”

Me: “I don’t know. What do you want to do?”

Partner: “Well, it depends. This could be the highest price we’ll get for this property for a long time. But prices could continue to go up.”

Me: “Yeah. I just got back from four days in L.A. Spent some of that time looking at property for my son. The prices there are unbelievable – $500 to $1,000 a square foot for something that would sell for $250 to $300 in South Florida.”

Partner: “Gee, that would mean we could be making a $4 million profit. Maybe we should hold onto the property. Or maybe we should do the townhouses ourselves.”

Me: “Maybe. But then again, sooner or later this bubble is going to pop.”

Partner: “Or at least flatten out.”

Me: “Definitely. EP says the big banks are very worried now. There are too many soft loans out there. And too many investor-owned premises. They are starting to tighten up their lending.”

Partner: “If they do, that could pop the bubble.”

Me: “Or at least let the air out.”

Partner: “Maybe we should sell.”

Me: “Yeah. Take the money and run.”

The fact is, no one can say if the bubble will burst or gradually flatten. But I don’t mind saying that prices won’t continue to go up forever.

Even here in South Florida, where the real estate market is supported by wealthy people who are coming from the Northeast and Latin America, the prices don’t make sense. But just because I’m certain prices will eventually deflate doesn’t mean I’m confident they won’t continue to rise for a while.

So this is my current strategy.

I have divided all my real estate holdings into two categories: (1) those that could support themselves if the market suddenly dropped 30% and (2) those that would need some kind of cash help from me.

The second group, I’m selling. Not in a panic. Not at a discount. But I’m selling.

The first group, I am taking a passive position on. If my partner wants to sell, I’ll sell and take the profits. If he wants to hold on, I’ll do the same.

This strategy provides me with the following benefits:

1. It cashes me out, on a profitable basis, on the most risky portion of my real estate portfolio.

2. It allows me to keep a significant portion of my real estate investments in place so I can enjoy any further appreciation, whether that comes quickly (if the bubble keeps expanding) or over time (after a deflation).

This strategy also keeps me on good terms with my partners. Whatever happens, I am following their lead.

What You Should Be Doing Now

The best role to play in real estate right now is brokering, because brokers make money on the sale without taking any of the risks of buying. So that’s my first recommendation.

The New York Times did a little story on real estate brokers a few weeks ago. I quote:

“Until recently, the neighbors who drove the best cars, wore the best clothes, and gave the best dinner parties were doctors, lawyers, bankers, and stockbrokers. But now, with house prices skyrocketing and homes in the hottest markets selling in a matter of days, some real estate brokers are enjoying incomes and lifestyles that approach those of their wealthiest clients.”

The article, written by Motoko Rich, cited a few examples. One of them, Michael Neely in Bedford, New York, sold (or co-sold) 48 houses last year worth an aggregate of $56.7 million. In a two-week stretch alone, he cleared nearly $98,000 in commissions.

So if you have a broker’s license, get out there and enjoy the rest of the ride.

If you don’t have a license, you can still make plenty of money by finding good deals and flipping them to other investors.

 

  • Steve Cook has done over 300 deals like this in Baltimore over the past eight years. Steve, a member of the Main Street Millionaire Real Estate Coaching Team, will tell you about his experiences in upcoming issues of Early to Rise.
  • Dave Lindahl is another member of the MSM Team. He started out by flipping a single-family home. He now specializes in apartment buildings and currently has over 600 cash-producing units. Part of the transition for Dave was cashing out of his red-hot Massachusetts market and moving into other areas of the country that have far better rental yields and greater appreciation potential. You’ll be hearing from Dave, too – about how he continues to make money despite bubble markets in much of the country.
  • Justin Ford, editor of ETR’s Main Street Millionaire program, has made very good money in the South Florida real estate market (including one property on which he and I are partners). But he’s also expanding into other markets. Specifically, he’s targeting areas with strong employment and population growth that still have good rental yields. And he’s looking into areas where the price of the median home is only 2.5 to 3 times the median income (as opposed to nearly six times in California). Justin will be reporting to you on some of the most interesting opportunities he sees.

But if you’re in a bubble market and you don’t want to switch to a different area or broker deals (which allows you to profit without risk), you should consider doing some selling. If I were asked when and how to sell, I’d suggest following the policy I set for myself: Sell all properties that couldn’t sustain a market decline of 30% and hold onto most of the property that could sustain itself through that kind of downturn. That’s my second recommendation.

The third thing I’d recommend is something I’m still doing: Keep looking around for the below-market deals. There are so many people out there combing the markets, they’re not easy to find. But if you are persistent and you focus on a specific market – area and type of structure – you can do it. My friend PP has made a solid six-figure income for three years running since he got into the real estate business in 2002. And AK, my former assistant, is doing very well with a small renovation and resale business she started with me less than one year ago. (She has already sold her first unit for a $70,000 profit.)

Main Street Millionaire, by the way, is putting out a mini-program on this topic. It’s called “Buy Right/Build Wealth.” It outlines a 7-step plan for buying cash-flow properties below market value – even in a bubble market. We’ll send you more details on our new mini-program in the next few weeks.

That’s pretty much it.

One More Thing …

Except for one more thing. Now is an excellent time to improve your knowledge of real estate. With the market crowded and good deals so hard to come by, you can’t expect to be kept busy buying and selling properties. Devote some of your extra time to studying different aspects of the subject – the laws, regulations, marketing, etc.

Remember, it takes 1,000 hours to be good at any complex skill; 5,000 hours to master it. And you can do it 20% to 30% faster if you learn from an expert. Making money in the real estate market is no exception.

Learning from experience will always be the most profound way to gain knowledge – but it’s not always the most efficient or cost effective. You can get plenty of experience-based knowledge about real estate on your own. But if you devote some serious time to learning from people who have “been there, done that,” you’ll dramatically cut down the time it will take you to become a real estate master yourself.

In summary, this is NOT a time to be buying real estate at market value, since so many markets are in dangerously overvalued territory. You don’t want to be left hanging high and heavily loaded with debt if the market floor suddenly crashes. This is a time for brokering, judicious selling, and cherry-picking. And, most of all, for learning.

[Ed. Note.  Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]

Mark Morgan Ford

Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Wealth Builders Club. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.