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Greed Is Not Good In Recessions

April 24, 2009 – 3:34 pm

One of the more famous lines from movies that will stay with all of us is when Michael Douglas says in the movie “Wall Street” , “Greed is Good”.  In that movie and in that time frame maybe greed was good, at least for Douglas’ character.  He certainly seemed to live the good life.

However, for most of us ordinary investors, greed is not so good, especially in recessionary times.  I am specifically speaking about real estate investing although I believe that my thoughts may also be applied to the stock market.

Greed tends to make us think that we ought to be jumping into the fray and picking up investment property on the cheap.  That is not a bad idea but the implementation of it can have drastic results if not thought out very well.  Most smaller investors are not that tuned in to the real estate market, just as they are not tuned into the stock market.

This issue came to light when I read a promotion for people to take equity out of their homes in California by refinancing, and buying small properties such as 2 to 4 units apartments in other states.  This concept is not new and can be very dangerous to the average investor.  Of course this all presupposes that someone in California still has equity in their home.

The core problem is that the average small investor typically relates the market in most other states to that of Orange County.  We happen to live in one of the wealthiest counties with one of the best economies in the United States. At least it’s that way in normal time.  We tend to go into recessions last and come out first because we are such a desirable place to live and invest.

Most other states do not have the diverse population  or economy that we have and do not have the population density we have.  They often rely on one or 2 major industries and if those industries have problems everyone in the area suffers.  Just look at Detroit.  In fact many of these states do not rebound for years after a recession has ended.  The population density can easily shift and apartments may have vacancies for years.

Moreover, the investor becomes dependent upon a local broker who is very motivated to make a sale.  They may be sincere but they cannot relate to an Orange County economy or weather and what they consider normal may be far from we out here call normal.  In fact properties need to be built to withstand very severe weather conditions, something we know nothing about in Orange County. They also must be maintained constantly to withstand the various weather conditions.

When problems occur with a property out of state the investor will suddenly find out that the property manager for a small building can only be of limited help without lots more money to be sent to them. If the investor owned a property locally they would drive over to it and see what the problem is, make an informed decision and tell the manager how they would like the problem handled. When they need to catch an airplane and kill at lease one day going back and forth, they have a problem. An owner’s decison may not be the same as the property manger’s  but when you are a long distance away one has no way of knowing. The investor may have no idea if the property is being properly managed at all.

One also realizes the problems with out of state investing when vacancies arise.  The local property manger or broker will typically put out a sign and hope for the best. In Orange County that may be all that is needed. But in another state with a poor economy one may need to do a whole host of marketing techniques in order to get a property rented.  The out of area owner can only sit and mange their anxiety while the world seems to spin out of control and their cash flow dwindles to nothing.

I won’t even mention the problems with selling a property for an out of state owner.  That is for another session.  Suffice it to say that one must harness their desires to be the next great bottom fisher that we will all read about in future sucesss magazines.  So keep that greed in check and always always keep the basic investment criteria in mind.  Not the least of which is that in real estate, you need to be relatively close to your property unless you are doing very large deals or are a pro.

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