This is a guest article by Dr. Dean Burke, author of The Millionaire Nurse Blog. Many years ago, someone I knew was fascinated with the real estate market in Florida, and he set up an investment company to allow others to invest through him. He promised his investors 20% returns. Needless to say, I didn’t participate and I thought he was a little nuts, but this is what the market was like during the bubble. Thanks to Dr. Dean Burke for sharing his experiences and lessons learned.
Unless you were there, it is impossible to visualize the Gulf Coast of Florida’s beach property boom just a few short years ago.
The Redneck Riviera was making a lot of people rich beyond their imagination. This area known for Spring Breaking bikini babes and beer-buzzed bozos was hotter than a teen at his first wet t-shirt contest.
Realtors were flipping or subdividing tracts of sand and scrubby shrubs and making hundreds of thousands in profit. To hell with 6% commission!
Everyone I knew was playing the game. The talk from the beauty shop to the coffee shop was not about Millionaire Housewives, high school football, or American Idol, but about 1031 property exchanges, setback zones, and building codes…
You might be saying, “Where were the grown-ups?”
Well the bankers were lending money to anyone with a pulse and a signature. In this case, “no doc” didn’t mean being without a physician, it meant no paperwork or proof of income required to qualify for a mortgage. “Step right up!” the carnival barker yelled!
I had been visiting the Gulf Coast since I was a kid. My family rented a small concrete block home for a week every summer. My brothers and I had great fun digging fox-holes, waiting 30 minutes after eating to swim so we wouldn’t die of cramps, and building bonfires at night. When I was teen I kissed my first girl and had my first sip of Boone’s Farm while strolling these same beaches.
When I was able 15 years ago, I bought a vacation home in the same area, and I traded up three times since then.
The property boom hit in the early to mid 2000s. Prices began rising overnight. All my friends were making spectacular money! After watching their success, I wanted a piece of the action. The lot across the street from my beach place went up for sale and I jumped on it. No money down, interest-only, baby! Just a couple of months later with prices rising daily, I put that lot up for sale.
Later that same day, while I was nursing a cold one on the beach, a real estate agent trudged across the sand with a contract in his hand. With only the sweat equity involved in digging two holes to place the for sale sign and a signature, I had a pile of money! As I wanted a place on the bay so I could dock a sailboat, I tripled my money by selling my beach front home. (Sorry kids!)
Six months later I had three other properties, nearly worth a million bucks in all. One of these was my dream lot, a bay-front, with deep water dock — a perfect sailboat parking place!
Flexo suggested I include the details of my thought processes, whether there were any financial calculations that went into my purchases and how the decisions were made to sell. I laughed when I read that. The only calculations were greed on my part, making money. The idea that the lots might go down in value never even entered my mind.
Most of you are probably thinking, “I know how this ends: The Lehman Brothers bankruptcy and a spectacular crash.” You’d be wrong.
The needle that pricked this bubble was born in a little low-pressure weather area off the western coast of Africa. Once the levees broke from the Category 5 power of monster Hurricane Katrina, the nation’s spotlight was on how fragile the man-made dwellings on the Gulf coast were. We were 300 miles from the storm, but it might as well have been in our back yard.
Property values plummeted and the lives of everyone connected to that area of the country were changed forever. Businesses closed. Bankruptcies, foreclosures, and shattered dreams were common stories, all a couple of years before Lehman Brothers fell. The subsequent second-round real estate body blow was like pouring alcohol on an open sore.
I was only a bit player in this theater of the absurd and the sand. I had not mortgaged my future on my real estate venture. I learned many valuable lessons from those heady times. I’m reminded of it every month when I make my payments on land that is worth 30 cents on the dollar now.
I’m not looking for sympathy. I’m a big boy. The more cynical among you will think, “He got what he deserved!” I’m glad to say I have survived those days, and I am a much smarter investor today because of it.
Now I ask myself these questions before any major investments, particularly in real estate. They’ll help you too if you will let my pain be your gain.
- How does this investment relate to my overall goals? If buying a home in two years is your top goal, investing in gold futures may not be the safest place for that money. Make sure you weigh your time horizon and risk tolerance when you are saving for a large investment.
- Is this investment low-risk or speculative? If speculative, make sure it is only a very small portion of your net worth. In my case even with a 60% loss on the value of land I was and am able to make my nut as they say. Make sure your speculative investments won’t take you down with them if you suffer a total loss.
- Who will I sell to? When everyone seems to be making the same investments around you, stop and think who the next buyer will be. If you encounter people making the same investment or gamble as you are, that normally aren’t a part of that world, your alarm bells should ring. You owe it to yourself and your family to consider potential negative outcomes. Can you say, “Bubble?”
- What are the steps and potential outcomes during each step of the project/investment? If large investments makes you nervous, when you consider the investment, create a mind-map on a whiteboard outlining your potential good and bad outcomes. Do this for each step of the project. Get expert help. You can’t predict hurricanes or tsunamis, but when you live on or near a coast, they need to be considered. When you purchase a rental, consider the possibility of a fire or going months without a lessor. When you are investing in an oil company, what happens if oil prices drop or rise by 50%, or in the worst case, there is an oil spill? Think of as many outcomes as you can and weigh them appropriately.
- What is the reward potential? Make sure you understand the possible gains and compare them to possible losses. Is that risk worth taking?
- When will I divest myself of this investment? Know when to cash in your gains or minimize your losses. You know the old saying: Bulls make money, bears make money, but pigs get slaughtered. Don’t be a pig. (Oink oink!)
You will never bat one thousand when it comes to being successful with your money. Losses will happen. The secret is minimizing your catastrophic losses that take you down or take decades to overcome.
I have been an active investor through two investment bubbles. The dot-com bubble of the late 1990’s and the real estate bubble.
Investment bubbles are like being a married guy at a party without the wife, and having J Lo and Katie Holmes all over you. Resisting temptation can be almost impossible, but not giving in is what makes a successful marriage. Resisting the siren call during the peak of a bubble will make you a more successful investor, but it’s damn hard!
With luck maybe I’ll have those lots paid off by the time my future grandkids are grown. They will enjoy their beach property. When I get sand between my toes hopefully I’ll be able to remember the good times I had as a kid and not let my adult stupidity get in the way of those great memories!
Published or updated April 21, 2011.