A couple posts back an anonymous poster sought to establish my bull pedigree by throwing out the old canard about a rising market translating into more business for me:
“Hmm… a bull in disguise? Well, that’s understandable. For sure in a declining market, Rob isn’t going to starve. But given a choice, a rising market sure brings more business to Rob so why not?”
Its no secret that I’m bullish on real estate long term, especially when acquired in a disciplined manner. Who in their right mind isn’t (regardless of what investment choices they eventually make)?
The poster’s comment is emblematic of one of the challenges that comes with that blessing we call the internet: once something is said it acquires a veneer of truth, regardless of its real value.
In this case the poster has no insight into how my business works. He (or she) doesn’t know what increases my volumes, or my margin, or how either effects my bottom line. He certainly does not understand how my personal business fits into my larger corporate activities.
Yet he seems quite confident in tagging me as a closet bull based on my statement that, “…real estate, long term, tends to increase in value. It has been proven, time and again, that it is worthwhile to get in more often than it is worthwhile to get out” and the unqualified assumption that the current market translates into more money for me.
I find it interesting that this kind of inaccurate speculation is so common. If anyone actually buys into that kind of thinking it is, as Keen writes in his editorial, a case of the blind leading the blind.
I’ll pull back the curtain a little. I make money from a variety of sources. Some comes from brokering real estate transactions. That’s where I charge other Realtors a portion of their income in return for letting them use my corporation and licence to do their business. I also earn money from representing buyers or sellers in transactions. Nowadays I tend to find myself selling clients’ properties, but not in high volumes (I don;t like to see my clients get rid of good property). In different markets I buy investment properties for clients, but that’s currently hard to do (a search of the old blog will show that even last year there were some great opportunities; take a look at those old posts and compare the number of possible buys that I pointed out then to what I point out now). I also manage rental property. The more properties I manage, the more income I earn, and the income is steady. And, of course, I invest in, among other things, income producing properties.
This brief description is not intended to impress anyone with my abilities, or to justify my income by pointing out how hard the work is, or how competitive the business is. I work hard, but I’m very fortunate. I’ve got my health, a great wife, a great family, I live where and how I want, and I’ve got a few bucks. It could be a hell of a lot worse, and I’m the first to recognize that.
It is intended to show that a market like ours doesn’t simply translate into more profit for me. Not too many years ago I had a peculiar challenge: I couldn’t find properties for clients that would lose money. They had high tax bills, and wanted two things: stable investments and tax write offs. Most lenders required 25% down on investment properties. In Maple Ridge it was common to find properties that were cash flow positive at 25% down. They were very stable investments, but they had no tax write offs.
Today I’m in worse shape. The tax write off is there in spades, but the other numbers don’t make sense. Does anyone think that portion of my business is up?
Of course, those investment properties roll right into my management company. If I’m helping a client liquidate their holdings I’m also reducing the size of my management portfolio. And, if I’m not buying properties for my clients, I’m not adding to my portfolio. Some might speculate that a slower annual rate of appreciation would contribute to a healthier bottom line for someone like me, and they’d be right.
Oh yes, my foreclosure business is way down over the past three years. It could increase 100% and still be negligible.
On the investment side, I bought my first investment property for $65,000. It was cash flow positive with 25% down. Before long I bought another for $75,000. But the third cost me $150,000. Today its hard to find anything comparable. Of course, those properties have performed extremely well, and I’m grateful. I’ve always wanted to fly, so maybe I’ll sell one of them and by a plane. But I can’t help but think: If we were in a 5% appreciation per year world, wouldn’t I have more tenants buying me more property sooner? The answer, of course, is yes. Open up Excel and do a few spreadsheets. Start in 2003. Buy three properties that cash flow at 25% down for for $65,000 each. Apply the historical returns we’ve had to date, and then pencil in 5% per year (i.e, no correction, period). Then compare that to buying the same three properties but only getting 5% per year over the past 4 years. Add a property each year, again, based on cash flowing at 25% down. Its clear which gives a better retirement. Yes, adding properties requires the downpayment, but that’s the rub: double digit increases mean you can’t buy a condo that cash flows for $20,000. 5% per year increases means that you can. And in my scenario you wouldn’t have needed $20,000 for a downpayment until this year, at which time you’d have 7 tenants.
What’s the point? I’ve presented both anecdotal and factual evidence that this market is nowhere near as lucrative for Realtors (and for me in particular) as some assume. Yet the assumption persists. Its really not a supportable assumption (I know because, like most people, I’m on intimate terms with my income). How many other unsupportable assumptions do we run across on the ‘net, and how many do we accept as fact?