Tuesday, December 25, 2007

Don't just hope there's a greater fool!

This NYTimes article chronicles some real estate pain:
But Mr. Jarrett hasn’t closed a deal in three months. He is on track to earn about $50,000 for the year, he said. Yet he needs $17,000 a month just to pay the mortgages, insurance, taxes and utility bills on his four properties — all worth less than half what he owes. Rental income brings in only about $3,500 a month.

When your strategy is just to assume that there will be someone who will pay more than you did, you don't have a good business plan. In so many places the real estate appreciation was far ahead of fundamentals (represented by rent and income). Now that prices aren't rising, there are a lot of people in a world of hurt.

Our case is different. We only buy places that can be rented out profitably. While this severely limits the pool we can choose from (we look every day and rarely does something even fit our preliminary criteria), it means we can do well even if the market tanks. Best case scenario- appreciation and an instant profit. Worst case scenario- take the rental income.

It is mildly annoying that when I tell someone I'm in real estate nowadays they assume things are going terribly. Actually no not at all, they are going well because we are so diligent and conservative.

Anyways I feel so sorry for the overly ambitious people that didn't take the necessary caution and now are facing foreclosure.

Happy holidays!


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