Tuesday, August 19, 2008

A True Story That Raised My Real Estate Investing IQ

Back in the late 80's, I had my own business in the fitness industry before attending college. The income I was bringing in was not where I wanted it to be. I knew the Physical Therapy degree I would receive after college would allow me to expand my business and afford me the opportunity to live in a nicer home and community. While attending college, I was renting a 1,000 Sq. Ft. duplex in a lower middle class neighborhood in Los Angeles, CA. I couldn't wait to graduate from college, because I knew it would be my ticket out of the "hood".

Fresh out of college, I was looking to celebrate in a big way. I wanted a much larger home and wanted to live in a nicer neighborhood. To make that happen, I grabbed a newspaper, looked in the Real Estate Rental section and called several listings in the Hollywood Hills section. Having a celebrity clientèle, I thought I should live in the neighborhood I serviced. I found a home that appeared to fit what I was looking for and so I set up an appointment with Gordon, the owner.

When I met Gordon at the home, I was surprised at what I saw. The home was simply stunning. The home was a 4 story designer home built into the side of a mountain with a list of prior celebrity residents. I thought to myself, "how in the world did this young dude acquire this property...I need to pick his brain". I moved into the home with my girlfriend at the time and signed a lease with option to buy contract. I befriended Gordon knowing he could teach me more about investing than I already knew.

The Lease Option price for the home was $450,000. Gordon, appearing a bit embarrassed, admitted he had been offered over $800,000 for the home just 4 years earlier and didn't sell it thinking it would fetch a million dollars. Thinking it may have been a ploy to justify the $450k sale price, I investigated his story and found that indeed the home values in the area 4 years earlier were in his stated price range. When I asked him why he didn't sell the property when it fell below the 800k he had once been offered, he said, "I thought the fall in price was just temporary and that it would go back up...but it didn't...it's just continued to drop and drop". After a year of renting, I decided not to exercise my option to buy the home...a BIG mistake as you will see.

My talks with Gordon marked the beginning of my research into real estate cycles. In the process of researching cycles, my investing IQ increased exponentially. I eventually began investing using this research and profited handsomely as a result. My only regret was that I didn't exercise my option to buy Gordon's home. I kept an eye on the value of his home over the years and in 2005, the home sold for a whopping 2 million dollars.

Real estate prices go up and down in the short term, but the long term trend is always to the up side. It really pays to buy and hold real estate.