Chuck Ponzi April 25th, 2007

Those who follow local novice real estate investors over at the SDCIA (San Diego Creative Investors Association, aka SD Real Estate Investors), know of a frequent poster named Jeff who is a self-proclaimed real estate investor from San Diego. Jeff’s a good guy, if not a bit confrontational, and has become a real estate “investor” only within recent history (bubble time)

In a recent post, he has lamented how some of his investments are not doing well, so let’s revisit some of his investing wisdom:
This entry comes from August 13th last year… only about 8 months ago.

You probably won’t be surprised to know that I invest for appreciation. Many (most?) would say that what I do isn’t even investing…it is gambling. I am used to that–I disagree with it–but I am used to it. If that is your view, then my answer to your question doesn’t matter…any aspect of my investment strategy will not satisfy you…

Now, if I have misunderstood your question, and you are asking instead whether or not I include tax benefits in my monthly calculation of cashflow…I would answer that of course I include them. Tax benefits are real money, money that I see each month in my paycheck. I don’t have to wait for a refinance, or wait for a sale–that money comes every month no matter what.

The government pays me to invest in RE. Isn’t America great!

Ah, yes, America is great.  Land of opportunity. And tax breaks.  Can’t forget the tax breaks.

His compadre Ronald Starr came to his rescue at one point on Aug 11, 2006 with the following gems of wisdom:

 You also have to understand that the value of houses is not based on the amount for what  they will rent.  That might be true of income properties.  But single family houses are not income properties.  Their prices or values are determined simply by the supply and demand of the buyers, mostly owner-occupant type people.

And, the higher the value of the SFH properties, the lower is the ratio of the rent to value of the properties.   So, one house that I own in OK is probably worth about $35K and I get $475/month rent.  A house in CA that I own is probably worth about $325-350K and the market rental value is perhaps $1400.  Worth ten times as much, rent of less than three times as much.  That is the way things work.  That is why people who want positive cash flow need to be thinking of buying lower-cost properties, probably under $150K.  My recommendation is look for those under $75K.

Don’t feel too badly if you really don’t understand things yet at only 18 years of investing.  It took me about 23 or 24 years to understand.  And then I had to spend over a year communicating on internet boards such as this one so I could learn from other people.  That and trying to answer the questions asked, which forced me to think really hard.

Ah, yes, the old supply and demand argument.  Rents don’t matter, only supply and demand.  Rents have nothing to do with demand… we should remember that.  Mental note to self… there is no such thing as fundamental value, only demand value.  Gets difficult to hold for long when your properties are hungry.  When asked how he is feeding his alligator by Gekko, he responded:

This is all covered, in detail, earlier in the thread…

The short answer is I “feed it” the same way I purchased it–with 100% borrowed funds.

Truly gems of wisdom.   A comparison to another investing genius would serve us well, back from Jeff on February 27, 2007

I am also astonished whenever someone mentions Buffet as the end all God of investing–and offer this “rule” as if it were a law.  The problem with this “law” is that Mr. Buffet has lost money MANY times and is in fact having a terrible year–the fund he is currently managing has recently “lost” against its benchmark for several months to a year.  Right now Mr. Buffet is losing money.

The truth that all investors know is that there is risk to any investment, and that the highest risks are associated with the highest gains.  Even Mr. Buffet knows this…

Ah, yes, that little bugger risk, huh?  The one we said wasn’t priced into the market?

This one’s from January  8, 2007:

Debt juggling is just fine, I have had to hit my “back up” cash reserves twice lately to cover vacancies–each time for 5k.  Ouch.  Without those darn vacancies I would be about break even…

Change in perspective or approach?  I can say that I adamantly wish I hadn’t bought any houses in Cape Coral!  If only I would of known that they were going to be the worst performing.  Except for them, I would say that I am batting a thousand.  All my other houses have gone up remarkably and cost me very little each month.

Then the slide begins: (February 15, 2007)

Anyway, I don’t have any updates yet with real numbers, but I can tell you what I have been telling my friends lately.  I am not batting 1000.  I didn’t really expect to, but admitting it anyway was hard.  My three houses in Cape Coral are going to end up being HUGE mistakes…they have lost thousands of dollars in equity and are losing $1000 a month while I rent them.  While all mistakes are mine, in my defense I was clearly the victim of some pretty unscrupulous “businessmen.”  The builder took over two years to build my house (ONE isn’t even done YET!).  Now normally that wouldn’t be a problem on pre-construction, but according to the contract I signed as an absolute beginner I have to pay the construction interest while they sit on their butts.  Dang.  Also, these houses actually went UP 50k each in the first few months I owned them (if I coulda sold), but over the last year have lost greater than 50k.  If the builder would of built on time, I could of made 100k or more.  Also, the lender said I wouldn’t have to re-qualify my construction to perm loan, but since the builder went over the 12 month period, I DID have to re-qualify and couldn’t…so that cost me ANOTHER 10k (times 3).  And so on…basically I am going to lose a LOT of money these negative cashflow houses…

And I would of bailed on these houses–took my loses–if I hadn’t been given assurances by several professionals that I could get Go-zone depreciation bonuses on these houses.  Turns out that is unlikely (not absolutely sure STILL), so sticking with them was an even bigger mistake.

On the flip side, every other purchase I made that year was a good one.  So not counting the Cape Coral homes I am WAY ahead.  My two SLC houses probably have increased 120k all by themselves.  Still, those CC houses really burn my hide…

Anyway, am I happy I did it?  You bet.  I’ll be even happier in 20 years when I retire with 8 million in equity (assuming 6% appreciation).

Ah yes, beautiful compounding of real estate gains… to the moon!

Unfortunately, his alligators are proving to be hungrier than thought and are in the process of eating him alive:

Well…as many of you know I own three terrible houses in Cape Coral Florida.  Through a series of misjudgments and being taken advantage of (and lied to), I am losing ~$1000 on month on each of these houses when they are rented.  I am just sick about them and often cannot sleep–like now.

Anyway, what should I do?

I have been hitting my personal residence HELOC for the negatives, but can only take that so far.  I would just like to “walk away” from these homes but of course I am too embarrassed to do that (so far) and I suspect it is not an option anyway…

I go round and round with what to do on these properties…at first I say hold until the market returns and keep borrowing on my HELOC, then I say no way that is too expensive, sell.  But when I think about selling I think about the ~45k loss for each house!  I will have to make payments on that ~135k loss for 30 years!  So I think about “walking away,” but then I think about the credit score hit I will take and how many years that will follow me–so I go back to the hold until the market turns solution.  Around and around…I am dizzy thinking of it.

If nothing more than a textbook description, this is what goes on in the mind of investors who cannot separate emotion from investment judgements.  It’s that escalating commitment problem where they assume that the sunk costs are still being felt.  Sunk costs are sunk costs.  They are gone.  They will never return.

Anyone have any advice right now other than to just go short-sale and dump the alligators and sell all his properties?  Or, is this just another Casey Serin, but older with more responsibilities?

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