Those Who Fail To Learn From History Are...

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...

The statement in the headline has been repeated in many different forms since 1905. My particular favorite time was when Winston Churchill used it in a speech during the run up to World War II.

I bring this up because I read yet another prognostication on the real estate market that completely ignored the recent past, and therefore predicted no end to the upswing in the real estate market.

The article began with a recap of what happened during the crash:

“When the housing market tanked in 2007, investors were quick on the scene with cash to buy distressed and foreclosed properties at deeply discounted prices. Hundreds of millions - probably billions - has been invested by small investment groups, some focused on single-family homes, others on multi-family housing.”

Pretty accurate, I’d say. I saw a lot of smart investors picking up crazy bargains when there was blood in the streets. I happened to pick up several myself.

The author went on to write:

“Going on ten years after the crash, the question now is: when will these investors cash in their real estate holdings and put that money to work in traditional vehicles such as stocks and bonds?”

jenga Great question, right? If the last crash taught us anything, it’s that the business cycle STILL exists. So the market goes up, and the market comes down. It’s been a pattern that has consistently repeated itself since the earth cooled.

But the author holds a different opinion. He stated:

“The answer just may be: not now, maybe not ever.”

Maybe not ever? Seriously? Since when does a smart investor doggedly stick with a failing strategy? Either this guy is only 12 years old and doesn’t remember the crash or he doesn’t know anything about real estate.

It turns out that no, he doesn’t know anything about real estate, and his entire position is based on what some “experts” are saying.

Shocking, I know.

I was even more surprised when I read deeper in the piece. Turns out his over-simplistic basis for his position rests on 2 things:

In much of the country, real estate continues to appreciate.
Rents continue to climb.

Yep, that’s it. That’s his entire basis for his belief that smart investors may never move away from real estate.

To try to hammer home his point, he spoke to one investor who stated:

"Investors who bought up foreclosures in the wake of the Great Recession have no incentive to sell yet, with the rental market performing so well. Until we start hearing talk of a bubble, I don't foresee investors unloading properties en masse."

And that:

"Stocks have been a volatile mess, while housing markets continue to appreciate and rents continue to rise."

Both are great points. But notice that the investor didn’t say he would stick with real estate forever.

The author continued by saying that even though rental property investing has its issues, such as a lack of liquidity, income property, in much of the country, continues to reward the patience of investor-owners.

Will it last?

This is the question that everyone with money in the market is asking…

So what does the author do? Instead of asking big investors what they think, he closes the article by asking real estate agents for their opinions.

Not surprising, they weren’t relevant or insightful. Their responses:

"Currently we see investors staying with rental properties for the foreseeable future, as there's still plenty of deals out there."
"Tax advantages are huge: being able to depreciate real estate is a huge tax advantage not available with stocks."
"You can finance rentals, which allows control over a much larger asset than your investment.”

So the guy who begins by stating that investors may never move out of real estate ends up painting a picture that says just the opposite. Then he throws in some meaningless agent quotes for good measure.

The fact is, market cycles are still with us and they always will be. And if recent history has taught us anything, it’s that the swings are getting bigger each time – bigger ups and bigger downs.

And that nothing either goes up or goes down, forever.

Be careful out there.