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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
We had this old saying back in my investment banking days:
“Don’t fight the tape.”
It was a phrase that we used in finance that basically cautioned you not to bet or trade against the trend in the markets.
It was a REALLY old saying because the term "tape" referred to the ticker tape machine that the old timers used to have on their desks to get stock prices delivered to them before AOL, E-Trade, and iPhones.
The crazy thing was, we rolled our eyes and used the term a ton back then because there always seemed to be some bonehead clown who swore that he had developed a “system" or “strategy" that would beat the market.
The streets were littered with the carcasses of these guys, because the market chewed them up and spit them out without skipping a beat or even noticing them.
What’s Old Should not be New Again
I guess I shouldn’t be surprised that I continue to see the same kind of “bet against the trend” behavior in real estate investing.
I saw it in 2006 when the market was crashing and a bunch of guys I knew got obliterated because they kept buying houses to rehab.
And I see almost the same thing happening today.
I thought about this when I saw an article on CNBC.com recently that was titled "Homeownership falls to 19-year low: Here's why.”
Did you read it? If you didn’t and you’re doing flips, then why the heck didn’t you?
The Only Thing Constant in Real Estate These Days is Change
Case in point: I bought a rental house in my target neighborhood a little while ago for $37.5K. A short 14 months later the house across the street, exactly like the one I bought in terms of size and condition, sold for $65k.
The market is changing constantly.
As investors, we need to keep up on the changes if we’re going to survive in this business.
And the CNBC article is an important indicator of change that’s not just coming, but that’s here and happening NOW. Here's a portion:
"The homeownership society is clearly over. Even as home prices soar and value returns to real estate, the one number that just keeps falling is the nation's homeownership rate.”
The article went on to say that:
"Home sales were higher in 2013, but that was largely due to huge demand from individual and institutional investors on the low end of the market. Using all cash, they bought up swaths of single-family homes in the most distressed markets, pushing prices higher by double digits."
The article did have some good news - but it might not be what you want to hear if you do flips.
It said:
"On the plus side, the trend will favor investors in rental housing…
The increase in the share of households renting to a 19-year high in Q1, and the low supply of homes entering the rental market, look like boons for both rental value growth and multi-family homebuilding…
Home prices are beginning to moderate, as a result of slightly more inventory coming to the market and lackluster sales, but price growth is still well above income growth, never mind rising mortgage rates."
What we Should Take away from This?
As far as I’m concerned, it means that we need to keep an even sharper eye on prices and be ready to adjust our investing strategy if we see the demand for full rehabs leveling off.
And it also tells me personally that it’s time to accumulate more rental properties, both houses and apartment buildings. Because if the home-ownership society is truly over, then the big money is going to be in cash flow property for the foreseeable future.
Is that a trend that you want to be on the wrong side of? I don’t think so.
What do you Think?
I’m curious to hear your take. Let me know by commenting below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.