Thinking About Real Estate

  • The chatter about real estate deals has started again
  • My estate agent friends are slow to reply when I send them deal outlines
  • Mortgage rates remain at historically low levels
  • Inventories are down

…so you might be thinking about buying real estate.

It is worth thinking about “why”.

Beware if you are motivated by a fear of missing out. That’s a boom mentality and we’re all susceptible to herd thinking.

Beware if your local market has swung so that the cost of ownership is more than the cost to rent. You are likely being tempted to speculate, rather than invest.

When I’m ruled by my head, rather than my heart, I am able to remember what follows. I’m writing them out to remind myself to be smart!

Other People’s Money – when interest rates were under 4%, it was a “no brainer” to borrow 30-years fixed to buy a house in a great school district that was less than my cost to rent.

What swung the deal for me was access to the mortgage, which made the long-term cost to own significantly less than the cost to rent. My cost to own is 75% of my cost to rent locally. My cost to own is 30% of my cost to rent in the San Francisco Bay Area (an alternative location I consider frequently).

While interest rates have risen, they remain low by historical standards. I’m in the process of borrowing some more money to take advantage of the inflation insurance offered by long-term, fixed rate lending.

While private equity firms, hedge funds and investment bankers get to use other people’s money, we don’t.

If you are using your own money it pays to remember the next two tips.

Real Economic Growth drives wealth creation and liquidity drives pricing.

Put simply, if you are thinking about buying real estate then what’s likely to happen to the local economy over the next 25 years.

Can’t hold for 25 years? Don’t buy.

Why? Because you lose the option to move quickly and easily. Your mobility is a highly valuable asset. Don’t give it up easily.

As you age, and if you choose to have kids, the value of your “move option” will decrease. At 45, with three kids and a low cost base, it would be expensive for me to move.

That’s OK – my cost of living is so low compared to my Tech/Finance peers (HK, London, SF Bay Area, New York) that I suspect many of them will move to me instead (and support our local property market).


Understanding Crowd Psychology

While I’m sure YOUR memory is excellent. How long is the memory of our fellow citizens?

Institutional memory is about three years long – the clean out of 2008-2010 is fading from our collective consciousness. How bad was it? It was awful but we’re unable to remember. I spent this weekend reviewing papers from 2006-2008 and was amazed at what I’d forgotten.

Always remember that our mood is skewed by the recent past. 2013 was a very positive year compared to the five years that preceded it.

Let’s recap… if you…

  • can hold long term
  • have the funds available to buy
  • like the long-term growth prospects of your location

…then my advice is to sit and wait for a crisis.

How often do we get a solid crisis opportunity? It’s more often than you think. Key ones that I’ve lived through…

  • Stock Market Crash of 1987
  • High UK interest rates, and tanking property values, 1990/1991
  • Mid-90s Asian Crisis
  • Tech Bust of 2000/2001
  • Great Recession of 2008/2009

Five great buying opportunities and that only includes one’s that I lived through.

Because it takes three years to forget the boom that preceded the bust… you need to allow 2-3 years to move into your position. You’ll see this pattern repeated over-and-over in real estate.

Be patient, balance your holdings and wait for the next crisis.