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By PETER
ROSENTHAL, President
V.I.P. Trust Deed Company |
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THE GREATER FOOL THEORY
As most of my readers know,
real estate runs in cycles. This is the third time (in
California) that I have, personally, experienced
sustained real estate appreciation over a multi-year
period. You may disagree with exact dates but the run
ups that I am referring to are the late 70’s, the late
80’s, and the mid to late 90’s. Obviously, the recent
run up has continued through today. The real estate
appreciation in the 70’s was crippled in the early 80’s
due to very high interest rates. The appreciation in the
late 80’s was followed by a SUBSTANTIAL correction in
the early 90’s, for a variety of reasons that are not
relevant to this column. You may assume that I am
predicting a major real estate correction – I am not. I
am not an economist and, frankly, if I were, I probably
wouldn’t know what I was talking about anyway.
The trick to real estate investing is just that –
invest. Do not buy real estate just because your
neighbor or mailperson made a “killing” on a duplex.
Just like the stock market, plan long term.
If you are buying income, commercial, or industrial
property, make sure that the property “pencils out.” If
you are planning to hold the property long term, make
certain that you get a fixed rate loan. This is an
investment not a rush to slaughter. This brings me back
to the “Greater Fool Theory” which is something like the
stock market theory of the bulls, the bears, and the
PIGS: the pigs get slaughtered.
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If you haven’t heard the “Greater Fool Theory” it’s
simple. In times of sustained, double-digit real
estate appreciation it’s tempting to buy “anything.”
Theoretically you can buy a $500,000 investment
property and sell it in a year or two for $600,000.
After all you could have purchased the same property
two years ago for $400,000. Does this income
property pencil out? If it doesn’t pencil out you
must have a good reason to purchase it, OTHER THAN
the possibility of selling it at a higher price two
years from now: It STILL won’t pencil out. By now,
you must get my drift: do not buy a property that
doesn’t make sense (FOOL) in the hopes of selling it
to a greater fool two years from now.
This column was specifically aimed at real estate
purchases involving investment property and not a
personal residence. If you want to buy a personal
real estate, mortgage rates are abnormally low at
this point and a long term, fixed rate loan will
stay with you even if there is a downturn in the
real estate market. On the other hand, if you went
to a palm reader who convinced you that the real
estate market is going to crash next month, then
wait. Come to think of it, if a palm reader did
convince you, I may write another column about an
even GREATER fool. Believe it or not, I keep a real
crystal ball behind my desk for questions like: Will
these high prices continue, or what do you think
interest rates will do next year?
I still love the old line from Hillstreet Blues,
“Let’s be careful out there!”
Peter Rosenthal
VIP Trust Deed Company |
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