May is Always Special, But This May Marks the Anniversary of Several Milestones.
Posted on May 1, 2007
Filed Under Real Estate Investing |
Spring is one of my favorite times of year and since May is usually when the spring storms begin to calm down and the temperatures become more consistent I guess that contributes to my fondness for the month.
May also seems to be a milestone month for me. I seem to have more transitions in my life and career during May than any other month of the year.
In 1984, May was the month I went on my first plant trips and accepted my first engineering job to start after my graduation the following June.
In 1982, May is when I formed my first business partnership.
In 1983, May is when we dissolved that partnership and prepared to form a corporation.
In May of 1992, my wife and I were married. All in all, that day is the happiest of my life with the birth of our son a close second.
But, May of 1987 is a very special milestone relating to my investing. That month is when I started back into real estate investing.
The Tax Reform Act of 1986 was hard on investors. Prior to the passage of that law, the “best” way to buy investment real estate was far different than it is today. It was possible to completely shelter any amount of income with passive losses from real estate. So, almost everyone was bought properties that had a substantial paper loss while still giving at least a small positive cash flow. Once the law was changed, it all changed.
I saw the writing on the wall and once it became clear to me that the worst parts of the legislation were going to pass, I started selling my investment properties I had been acquiring since 1984. By, worst, I mean the parts most unfavorable to way I bought and held my properties. By the fall of 1986, I had sold all of my investment properties, except one, and purchased a home at a great price near my work to wait out the coming storm. I was convinced the world of real estate investing was coming to an end. Hey, I was still a kid in my twenties, I didn’t know about the cyclical nature of equity markets and I wasn’t yet jaded when it came to politicians and their claims of wanting to help.
The law was passed by Congress in late September 1986 and signed by President Reagan shortly thereafter.
By December, I was glad I had only one investment property.
Then an interesting thing happened. Investors started to almost panic in early 1987. They had properties that were going to continue to produce paper losses in excess of what they could use to offset other income. The interest deductions were changing too so many who had financed purchases or repairs with credit cards were faced with a loss of the deductibility of that interest unless they had very good records. Few if any did. No one called it a bubble bursting but they did talk about the real estate market crashing.
The more I read, the happier I was to have moved when I did. While property prices didn’t exactly drop significantly in my area they did go flat and rents started to fall. Incentives for renters became the norm in my area. It was a really bad time to be a landlord if you had properties purchased before the “reform”.
Then, as 1987 progressed and I learned more about the new laws it became clear to me how money would be made going forward. But, I wanted more confirmation. By late April, the prices were getting close to right and the motivation of the sellers was good and there were still lots of non-qualifying, non-escalating loans to be had. In May of 1987 I started buying again.
Since that time I have worked my plan, bought judiciously, repaired and rehabbed smart, rented to great tenants, sold when appropriate and steadily moved forward one step at a time.
Sure, others have made piles of money faster than I have, but most of them lost that much or more just as fast. Some are even in jail because of tax evasion.
Slow, steady, buy based on the numbers, never assume the tax benefits are constant, never keep an under performing asset. Either turn it into a great performing one, or get rid of it.
Oh, the one property I kept? It was the very first investment property I bought in August 1984. I still have it today. It has been an outstanding investment!
Looking back, there were others in my portfolio that I could have kept in 1986 and with some minor adjustments they too could have become outstanding performers. But, I bolted before the pack and at the time was glad I did.
This time I have not deviated from my long term plan. My buy/hold/sell criteria is still exactly what it was before the correction, bubble burst, whatever you want to call it.
When you understand the fundamentals and let them drive your criteria you make money no matter how the market changes because the fundamentals expose the leading indicators, unlike unsold inventory, days on market, average sales price, etc. Those are all lagging indicators.
In 1986, I was weak in my comprehension of the fundamentals, I was very young, it won’t happen again.
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Tim, I have some properties in an LLC ans I might have to walk away from them if I can’t sell them. I don’t want to so this but if I have to what’s the correct course of action to prevent getting hammered?