By Mike Heayn
THE MEDIA LOVES TO PERPETUATE BAD news. The bottom line is that bad news sells better than good news. Last week I read an article that said we were in a recession. Albeit bad news, it is news to listen to and understand. However, with the right knowledge, right real estate deal and right real estate experience, real estate can still be a good investment.
They say one of the best and safest investments to make during a recession are the stocks of companies that sell “need to have” items such as soap, toothpaste and shampoo because no matter what transpires in the economy, people will buy those items. Sure, people may buy less of the “need to have” items, but they are still going to buy them. On the other hand, many economists say one of the worst investments to make during a recession is real estate because it is illiquid, which means it is difficult to turn into cash. I am no economist, but I do not buy into real estate being one of the worst investments to make during a down market. I think a good real estate transaction with the right parameters has potential regardless of the market place, but I also think it is important to keep a long-term investment strategy, since no one knows when a market will turn.
First, I am not suggesting an inexperienced real estate investor enter the real estate market during a downturn, because lack of experience and one bad deal can bankrupt you quickly. However, if you have experience and see an opportunity, buying real estate may become one of the best investments you will ever make. If we examine the facts, you will see that the wealthiest families in the United States keep their wealth in real estate. Besides providing a great tax shelter, real estate is a tangible asset that, aside from a major catastrophe such as a fire, earthquake, tornado or other disaster will be there regardless of value. If a property’s value drops by 20 percent, it is still physically there and if it is still bringing in cash and you do not need to exit the asset, there is no real harm done, aside from your ego.
With that said, going into the real estate market because you think you can beat it is foolhardy at best. Last week I mentioned that deals exist in today’s market and that is true, but thinking you can buy a property and quickly increase its value to a point where you can sell it at a premium is not a prudent investment decision. Gone are the days of easy financing and quick flips. At the right price and with a long enough investment horizon, real estate can give an excellent return. As mentioned earlier, a bad deal can bankrupt you quickly through leverage.
The double-edged sword of real estate is leverage. Allowing you to buy more than you can afford through borrowing is what leverage is all about. Leverage is what helps people attain the American dream of home-ownership. If you put a little money down in the form of a down payment and the real estate asset appreciates or goes up in value then you have made a return on your money. But what goes up must come down and that is what so many Americans are experiencing now with a reduction of their home values. With hundreds of thousands of dollars tied up in a home, what sounds like a nominal reduction in value — such as five percent — is significant. A reduction in value is only really important when you go to sell the asset or when the payment goes up and the bank cannot refinance the property for the money borrowed. Any real estate investor will tell you the risk associated with real estate investing, using leverage, and how it can wipe you out financially.
Speculators and novice real estate investors alike should not “test the waters” during recessionary times and a down real estate market. Even with the proper knowledge, any real estate investor will tell you it takes strong internal fortitude to invest when everyone else is running for the exit. But that same investor will tell you that with every down market comes an up market, and those who are prepared and have invested wisely will find themselves in a strong position able to create great wealth and join the rest of the wealthy families in the United States.
MIKE HEAYN is a Washington Mutual multi-family loan consultant. He (310) 428-1342, or e-mailed at
Originally published in the Santa Monica Daily Press print edition on March 19, 2008. Read the original PDF.