A Contrarian View
The Rational Investor
By ARationalInvestor on 01-18-2008
It may surprise you, then, that I think real estate is now becoming a very promising contrarian opportunity. But, as is the case with any investment, to succeed requires substantial research and attention to fundamentals. There are still a lot of mine fields out there, many geographies that have a ways to go before hitting bottom, and even when they recover will not offer good returns.
By way of example, consider the commercial real estate market in the San Francisco Bay Area following the dot-com crash of 2001. Vacancy rates hit 35% in many parts of the area, and prices of high quality commercial buildings fell well below replacement cost. Analytic contrarian investors who saw this as a buying opportunity have done very well as the tech sector rebounded. Vacancy rates are down to normal levels, rents have risen, and their investments have appreciated substancially.
Here are a few things to look for in considering this contrarian strategy. First, research any geographic area you might consider closely. Location, location, location. What is the industry base? Does it support well-paying jobs? Is the population in the area going to grow? Are there land-use constraints - either by geography or strict zoning (if both that's good). If your location is good, then what are the financial fundamentals? What are market-rate rents in the area? What is the vacancy rate? Once you are satisfied that you have found a location worthy of investment, become a hard-core "value" investor. Offer your price to the owners, not theirs. As an investor, you have no emotional attachment to a particular property, but the owners do. Be prepared to write many offers and receive many rejections. But, as this is a contrarian play, there aren't very many people chasing deals in real estate right now, so with tenacity you will find deals that make sense as investments.
Caveats: Your milage may vary. You should consider any real estate investment as a long term "hold". Never be in a rush.
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Posted by FreeBird on Jan 18, 2008
Its good to get your perspective in this area. To be honest, I've never really spent alot of time thinking about investing - but it sure has seemed that a lot of people were making a lot of money doing the house-flipping thing. You still can't go more than 3 or 4 channels it seems without running into some sort of "Flip this House" TV show. Reminds me of something my mom said once about men and beards (my dad grew a beard...) - "Once the engineers start growing beards, you know it's time to shave it off." |
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Posted by Pat on Jan 22, 2008
The Rational investor in an economic meltdown does well to buy and read books like "The bubble that broke the world" and/or get their financial advisors and their stockbrokers to think in longer terms than "clear back to 1990." I asked mine for a chart running clear back to 1900. I would also suggest two other books: Fischer's "The Great Wave" (we're at the tail end of an inflation wave that started around 1900) and Strauss & Howe's "Fourth Turning" for where we are in history's spiral. That said, the greatest problem for me is translating it into action. As Rational, I can see the forest just fine, but need an S type to tel me which trees to cut down! |
This makes a lot of sense to me. I was always leery of joining in the housing speculation, figuring it was a bubble that would pop without much warning. I'm very curious as to how much investment styles correspond to personality type - most rationals I know are by nature pretty skeptical and don't follow "the herd". Which types do?