Dangerous Real Estate Example

[wabmester]

I was dumbfounded when I read this article on CNN/Money today: Tycoon in the Making

This "brilliant" couple has taken on $2M in debt, has negative cash flow, bought at the top of the market, has taken extremely risky loans (variable rates, balloon payments), and they're being heralded as model investors.

All I can say is watch out below!

 

[unclemick]

The irritating thing is that these 'brilliant' investors show up every generation (60's,70's,80's,90's,etc) get profiled, written up or whose yet write their own books/seminar's/TV infomercials. High risk is only mentioned in passing with no quantification of odds. I know a few who took risks and won, and many who took risks and lost - these people are relatively silent.

 

[Cut-Throat]

Every time I come across an infomercial or ad for making gazillions on real estate (Carlton Sheets etc.) I almost gag.

The real money is in the seminars ! - otherwise THEY would be out making money with real estate!

 

[Michael]

They own real estate valued at 3.4 million, and owe 2 million.  They could sell today and retire.  If they wait, it may go up more, or it could crash.  I tend to think that it will probably go up for a while yet, unless they chose their location poorly.  I think this because I have tremendous confidence in the greed of politicians.  They will continue to restrict the building of new homes near the coast so that property values will continue to be bid up, as this will increase the property taxes that they collect.  The couple could still lose if they get too leveraged with their loans.

Personally, I would just cash out now and go fishing.  They really have no real reason to take any more risks.  It will probably go up for a while, but it also may all come crashing down on them.

 

[Whakamole]

Sounds like all the "tycoons" who were buying internet stocks on margin a few years ago.

This will be entertaining to watch.

 

[Jarhead*]

Unclemick:

Exactily.
Remember Howard Ruff?
This guy had no financial background, but had a very believable presentation, wrote 3 books (all ghost written). Even had a TV program called Ruff Notes.
All based on hard money theory.
Basic advice was sell all real estate that was close to the coming maurading hoards, (ie. anything close to a metro area). Buy all the gold and siliver you could and buy a property in the boondocks.
Hard to believe now, but this guy had a huge following, and probably responsible for more loss of net worth than anybody that I can think of.
Howard Ruff was a poster child for emotional investing.
A pretty good argument to not reading or listening to "listen to me, and I will make you whole", types that come out of the woodwork at the peak of the latest craze.
While i am far from being a sophisticated investor, I believe I share a trait that most of the posters on this board appear to have. "Don''t invest on fear or greed".
Get yourself a track to run on, and don't waste your time and your nerves on the latest "can't miss" idea.
Have read a lot of your posts, and find myself agreeing with most of your ideas. One thing that I enjoy about this board is that it reinforces most of my own ideas about what is important, and what is noise.
Wonder what Howard Ruff is doing now?
My guess is that he sold all his gold and silver, and bought a high rise in Manhatten

 

[unclemick]

Ah Yes Howard Ruff

Never subscribed to the Ruff Times, BUT do still have a couple gold coins and a 10% Joint Venture agreement(non working CO gold mine) from the 70's gathering dust in the safety deposit box. I'm one of the silent non winners in that area.

 

[cute fuzzy bunny]

I'm suspicious of some of the data. Specifically that they bought a couple of SD homes a year or so ago and they've already increased 50-100%? Perhaps, but I highly doubt it.

Sounds like the guy that bought my old mcmansion. Bought it at a ridiculously overinflated value - almost twice the depreciated construction cost plus the cost of a similar size piece of land in the area. Not to mention the place was ripe for a lot of work - I'm figuring 50-100k in needed repairs over the next 3 years. They also were discussing at least 100k in upgrades. They did 100% financing split between two banks.

I hope their loans arent variable, and if they are, I hope they have ready access to good prescription meds in a couple of years.

This couple in the article has a rude awakening coming...when these inflated real estate values pop, their interest rates increase 50-75%, and the banks call the loans. It'll be "a good time to buy" alright...for people who end up scavenging their property in bank sales.

But hey, good luck to them. Maybe rates will stay at 1%, the real estate bubble with continue to double every year for them, and there'll be no end in sight.

 

[db]

I think this because I have tremendous confidence in the greed of politicians.  They will continue to restrict the building of new homes near the coast so that property values will continue to be bid up, as this will increase the property taxes that they collect.

I think your view is a little narrow. Some of us want to see development near the coast restricted so there still is a coast to enjoy. Try finding the ocean in much of the LA & OC counties. We don't want that in Santa Barbara County.

db

 

[Michael]

Some of us want to see development near the coast restricted so there still is a coast to enjoy.

You are right. Different people have different motivations for their actions. I did not mean to imply that all politicians thought this way, just that it is one of the several motivations of the majority (not all) of local politicians.

Howard Ruff

I think he is still publishing a newsletter. I remember reading that Mark Hulbert rated Ruff's rate of return for the last couple of decades. If memory serves, and it is not always right, his return was in the 5 to 6% annual range over that time period. This was a while ago, so I don't know what it is now.