As America continues to hope that the single-family market will turn around, it seems to be getting worse. I think that the reason that it continues to get worse is that we consider them as “investments”. I am here to tell you that single-family homes are not, nor have they ever been considered an investment as we know it today.
I’m not saying that no one has ever made money on single-family house investing as a strategy. I’m saying historically, that is not what the single-family house was created for. It was created for families to live in, not to invest in. But that mentality has changed recently.
Over the last 20 years, the single family home has become the most popular investment of choice. This applies to people living in the house, and people that may never live in the house and just use it for an investment vehicle. This caused an overabundance of demand for the product. Demand is one of two major ingredients for any boom market. The other major ingredient was supply.
You would see all kinds of construction from single-family homes to condominium projects during the boom. That continued to fester into condo conversion products to my own creation of a Divide and Conquer concept, where you take a commercial property and turn it into a residential product by re-surveying the property.
Whenever we experience a boom and then a bust in any market, it’s like a hangover the morning after a party. You end up saying, “Why did I do that”? It’s the same thing with the real estate bust. We had a great party, things got out of hand, and now we must heal our aching head and get back to some type of normalcy.
There are a lot of American’s that feel like they are still at the party. Not realizing that the party has come and gone. The clean-up time is here and nobody wants to clean up. American’s feel like we should bring more beer to the party or start up the music again.
The problem is, there is no more beer and no more music. Our inventory outpaces our demand. To straighten out the housing problem in America I think we need to do several things, including:
1)The government must let the process work its way through the system. The definition of capitalism in a free-market system is that which works without government intervention. The sooner this happens, the sooner the market heals itself.
2) American’s must realize that single-family houses are historically not good investments. Single-family houses up to a four-unit building are not geared as an investment; they are geared to live in. The comparative sales approach proves that these assets are based on current market sales, rather than financial performance of capitalizing the income stream, as in commercial assets.
3) Stop adding to the supply. Buy existing inventory. You cannot build a house today for what you can buy an existing one for. In many markets, the cost to re-construct a house is more than what you can buy an existing home.
4) American’s must change the idea of their home being an ATM machine.
We have a chronic debt problem in this country. The problem encompasses the Federal Government, personal and consumer debt. We have to move away from this idea. To do this, I believe, we need a major culture change. This would include how we view things like instant gratification and what we consider valuable.
5) Individually, we must make things happen for ourselves. The excerpt below is from an interview the Billionaire Sam Zell did with Forbes Magazine. I thought it was appropriate. (In Sam Zell’s words)
“I’ll tell you a story that I think is probably the most significant advice that I give young entrepreneurs. It’s the story about a Jewish man who lived in New York who started an appliance store in Brooklyn. [He was] very successful, very observant. He went to the synagogue every week, and life went on.
One day he went to the synagogue, and after he finished his regular praying, he reached out to God and said, ‘God, I’ve never asked you for anything, I’ve always been traditional, I’ve always been observant, but I’ve really got a problem. And the problem is that the neighborhood is changing, the business is tanking, and God, I need to win the lottery.’
The next morning he gets up, checks the newspaper and he didn’t win. So the following Saturday he gets up, goes to the synagogue again and now business is worse. He’s really getting worried again. He finishes regular prayers, reaches out to God again and says the whole bit: ‘Business is worse, the creditors are calling every hour instead of once a week … I need to win the lottery, please. I’ve never asked you for anything.’
The next morning he gets up, looks at the newspaper… he didn’t win. So now it’s the third Saturday and now as he finishes his regular prayers he’s on his knees and he’s crying and [his business is] entering Chapter 11 proceedings. And he says ‘God, I’ve got to win the lottery.’ And at that point, from up high, comes a voice — and it’s the voice of God — and He says ‘Moishe, you’ve got to buy a ticket!’
I literally had a young entrepreneur in here ten days ago and I told him this story. And I said: ‘You’ve got to find a direction, you’ve got to find where you can excel. [...] What’s your skill set, how do you react to things, and how do you identify an opinion, a view?’
So I told him this story and he sent me a thank you note and stapled to that thank you note was a lottery ticket. We checked, but I didn’t win.” – Sam Zell
“Remember, wealth has nothing to do with money, success has everything to do with failure, and life is as simple as you want to make it!” – John Dessauer
Thanks John for your thoughts
however please don’t forget all the top trainers teaching to use the house like a ATM with lines of credit to invest in SFR and their programs teaching finacial independance. when all the seminars were traveling through are neighborhoods and many did buy both SFR and commercial and many got crushed on the advise of these professional trainers and investors.
It seems there were many contributing factors, and you can not blame the little man who has worked for a company for years trying to capture some finacial freedom and independance to escape the corporate trap as well.
It appears there is only a few who can really teach and show someone how to aquire
property, wealth financial freedom for the average american wanting some finacial peace of mind, while others take advantage of there desire providing little help, care and guidance and a true mentorship to success. We all have are responsibility part to play.
Many of these trainers new this fall would come, and still preached you can do this, knowing the fall was not far away and many would suffered from there advise, so who you listen to and trust does matter most, lets hope most are honest and truly earn their keep for what they charge and collect form there target audience.
So as one of my best teachers and mentor who truly had my best interest as a student says it all comes down to the markets with much of these two emotions, understand this and this will raise the clouds to see more clearly, “Fear and Greed”
So the truth there is much fault to go around, and the consumer was mostly misguided and taken advantage of for if not for much of the hype and easy money as well as the banks pushing for theses financial instuments to be offered and sold, alot of this could have been avoided. And the small 1-5 SFR investor may have had a retirement enough for them to retire on happily that met there financial goals, really cash flow is cash flow and all investments have some downside, right?
Tracy Micheal
Tracy,
Yes, that was all the rage. Unfortunately, it is something that we are plagued with via our culture. Borrow to buy, instead of save to buy. It is all well and good on the upside of a bubble, but the downside, which always comes, is what kills that strategy. We all can live and learn from the mistakes of a single-family house “investment” nation.
Johnny D.
Hi John.
What are the major culture changes you are thinking about ?
Ben,
We need to change our culture from a nation of consumers to a nation of producers. A lot of our issue comes from the idea that we produce nothing. We consume everything. We want the bigger house, the better car, etc… We need to change that. As far as our National Debt, I think it is crazy for us to borrow money from the Chinese only to give it back to them with the Chinese products that we buy. Meanwhile, we are stuck with the debt.
Johnny D.
Unfortunately, I am a perfect example of this. My wife and I bought our first home in 1984. We never thought of it as an investment. About 10 years later, we were making more money and wanted a bigger home. We sold our first home for a little profit and bought our new home. This was in southern CA and as you probably know, the market had crashed in the early ’90′s and we got a new home for about half of what the builder originally tried to sell it for 2 years earlier. Still just a place to live. Another 9 years pass and we decide to move up again. We buy a home we really can’t afford but with the advent on no doc loans, we get the laon anyway. About that same time I get hooked on RE as a great investment. I buy two condos as rentals. Today they are worth about 60% of what I paid for them and the rent doesn’t cover the costs. But the story gets worse. We sell the home we bought in 2003 in 2005 for 500K more than we paid for it. We’re ecstatic! Move out of the LA area to the Palm Springs area. Buy another home to live in at the top of the market and another “investment” SFR to rehab and flip. Well, we rehabbed and hit the market as it was tanking and lost over 100K. The home we bought as out residence is down about 40% from what we paid for it.
So yep, I’m a great example of trying to make a big buck on SFRs as investments. Buy the SFR to live in. Maybe it goes up in value but maybe not. The era of the home as ATM is over!
Tom,
We all did that. I guess that is what “The American Dream” was. Well for most it has become somewhat of a nightmare. The best thing to do is “wake up” from our sleep and learn from the events and take action. We will all be o.k. of we can use the mistakes of the past and change our mindset and our actions. Good luck my friend!
Johnny D.