The crazy part of this was that not only were those returns unbelievable, they were not supported, even by the monthly statements sent to his investors, per various newspaper, magazine and internet articles. Anyone given the returns and the information given to support those returns would see that they were impossible to have occured.  But no one questioned him and it was he and his sons who finally confessed his wrong doings, not some disgruntled investor.

Whether it’s pure greed or our human need to believe in other fellow human beings, I don’t know.  After all who would be low enough to steal and ultimately bankrupt charities, friends and even relatives.  Sure, we have all seen and heard of people stealing some toys from children or the collection plate at church but those perpetrators are hardend criminals, probably on drugs and likely very poor. Not some centimillionaire or billionaire that couldn’t possibly need to steal.

The adage that if it is too good to be true it probably isn’t, kicks in here.  Yet we all want to believe that we can trust the wealthy investment advisor or the public corporation.  Unfortuanately that trust is often misguided.

I have seen people, time after time, pushing to buy a commercial property based upon projections that not only show wild increases in income but spectacular inceases in value.  Try as you might to bring a modicum of reality into their calculations they just don’t want to hear it.  In fact if you are a Commercial Real Estate Broker, they will forget about you and find someone who sees numbers through the same rose colored glasses if you don’t agree with craziness.

Although I do not deal in apartment properties with less than 5 units, I have been approached numerous times by so called investors who wanted me to find them a triplex or 4 plex that they could buy with 10% down (which they could until about a year ago) that would be a good investment.  Well the fact of the matter is that in the last 6 years buying a property in that way would invariably end in a substantial negative cash flow.  Interestingly enough for about 3 years people could buy that way and sell the property at a profit albeit less than they thought when one counts the money needed to feed the property during the holding period.

There are many California investors who levereged into Florida properties that became virtually worthless in 2007.  Not only were they left putting substantial cash into the property every month but they had no one to buy the property from them at any price.  Foreclosure was the only avenue open to them.  I am not saying these were crooked deals but they were often over sold by zeolous sales people who knew better or in many cases were so ignorant they didn’t know better.

Because the theory of leverage investing in real estate is so attractive, people often forget that the same basic principals pertaining to buying a business or investing into a company still apply.  If the property doesn’t pencil when you buy it then you better have a good business plan to rationalize what is gong to change to make it pencil in the near future.  That rationalization needs to be clear and based upon current data not pie in the sky projections of the market always going up wildly.

As of December 2008, I am just starting to see some decent real estate investments come up.  Prices are starting to be based upon today’s numbers not what may happen in 2 or 3 years time.  Financing is tougher to get but we are still getting commercial real estate financed if the borrower is qualified and the property has real numbers attached to it.

Is it wise to start getting back into the investment real esate market? Yes, because buying when property values and interest rates are low makes solid sense.

Will investment real estate prices fall some more in 2009?  Probably, but one can get a deal at any time in the market if solid investment parameters are followed.

Will investment real estate prices start to rise again?  Yes but may not until 2010.  However, if a property was bought right and a holding period of 3 to 5 years is part of the plan then the investment will probably be a winner.

Should we never trust anyone again?  That would really be a terrible way to live. It’s nice to trust people but it is also nice to do your due diligence when dealing with someone responsible for your money. Americans are very trusting people which makes this a great country in which to live but it also allows for the scoundrels among us to flourish. 

Lets just agree to trust in a prudent way.

This was a great plan and could pay off tremendous dividends. Leverage allowed percentage returns into the 3 digit number ranges. Life was good.

Unfortunately things tend to change. Somewhere in the early 2000s prices started to escalate so much that our perfect investor with the perfect plan had trouble finding a property to buy that was priced in a distressed range whether it was distressed or not. So the investor started moving farther and farther from home base.

Suddenly Orange County investors started to find themselves in the middle of San Bernardino. Maybe even the High Desert or worse. Not only that but soon even these returns were in full retreat. Pretty soon the investment with all of it’s risks started paying off like a certificate of deposit. In other words, lousy.

Now the business plan needed to change. Now the cowboy investor had to start figuring that he would need to live with this investment for awhile. Maybe even 5 years. If that was the case, property management became more and more important. Operations were where the money was going to be made.

Admittedly this was pretty tame stuff. Returns could be better than certificate of deposits but they were not going to be like hitting the slot machine bonanaza either.

Today the investor may need to plan on a 6 or 7 year hold and he probably needs to pay attention to tenant retention and deferred maintenance. He needs to become a property manager or hire a good one to keep the cash flow coming and eventually to make that big pop on sale that came so frequently in the good old days. 

In today’s world blind luck has been replaced, once again with good management.  True, blind luck is much more fun to talk about at cocktail parties, but usually management triumphs.  This marketplace has driven us back to the mundane.

The same reasoning can be applied to buying a property using what is known as negative leverage. That is, buying a property at a 5 cap rate and financing it at 7% interest. It’s going to be real tough to make a return on investment until the net operating income grows substantially.

Buyers are suddenly reacquainting themselves with the concept of cash flow. It’s been a few years since that has dawned on them. Frankly, I’m not sure why that concept seemed to vaporize around 2002 or 2003 but it did.

I know, I know property values shot up faster than a rocket and one only had to buy and sell a property in the space of a few months to realize their gain. But still, why did we collectively lose our basic principles when dealing with hard assets such as real estate.

Why did losing money become fashionable? Why did it take the tanking of the entire mortgage market and eventually the credit market to wake us up?

Won’t it be nice when Sellers all wake up too?