Lessons from Facebook’s face-plant …

No doubt you’ve heard Facebook’s stock face-planted recently. But just in case, here’s the whole gory story in just three headlines over five days …

Facebook stock hits record high ahead of earnings – MarketWatch 7/25/18

Investors … continue to shrug off … gaffes … with privacy and security … Chief Executive Mark Zuckerberg … said … the company has not seen an impact on the company’s top line.”

Facebook’s stock market decline is the largest one-day drop in US history

– The Verge 7/26/18

“Facebook’s market capitalization lost $120 billion in 24 hours.

Facebook’s stock set to enter bear-market territory after third straight decline – MarketWatch 7/30/18

“The stock has now fallen 22% from its record close … on July 25.”

Of course, if you’re a real estate investor this may seem like only a moderately interesting side story buried in all the news flying across your screen.

And maybe that’s all it is.

Then again, maybe there are some things to be gleaned from this epic implosion … even for real estate investors.

Lesson 1: Just because everyone else is … doesn’t mean YOU should

Your mom probably taught you that. But it’s good investing advice too. It’s never smart to be late to an equity party … or late leaving.

The so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) are the “must have” stocks for … just about EVERYONE.

The problem is popular assets often get bid up well past their fundamental value … as speculators jump in hoping to ride the upward trend for awhile …

… and hoping to be fast enough to get out before the trend turns.

Of course, hope isn’t a very good investing strategy.

Lesson 2: Don’t ignore problems just to keep hope alive

Notice the quote about investors continuing to shrug off bad news … ignoring the obviously developing problems at Facebook.

So when Zuckerberg comes out right before the bad news … even as Facebook’s stock was heading to a record HIGH … and says the problems aren’t affecting the top line …

… investors apparently chose to believe him, … and not heed the clues in the news that clearly showed Facebook was headed for stormy seas.

Now, investors are suing Facebook and Zuckerberg for misleading them.

But investors should also look at the big picture, and consider the motives of these who claim as is well.

Remember this classic assurance from the world’s foremost banker?

“Importantly, we see no serious broader spillover to banks or thrift institutions from the problems in the subprime market.”

– Federal Reserve Chairman Ben Bernanke on May 17, 2007

Just a year later the financial system all but imploded.  But the danger signs were there …

Peter Schiff and Robert Kiyosaki were warning people. Most didn’t listen.

We didn’t. But you can be SURE we listen today.

Lesson 3: Momentum is a condiment … not a meal

With real estate, sustainable profit is all about the income.

Sure, it’s great when things get hot and people want to pay MORE for the SAME income.  But at some point, the numbers don’t make sense.

You can bad fundamentals and invest primarily because “it’s going up.” But when momentum fades, prices snap back to fundamentals.

If you’re on the wrong end of it, it’s painful.

Of course, if you see it coming, you can cash out via refinance or sale, and store up some dry powder for the soon-to-be-coming sale.

Lesson 4: Trends and indexes are interesting, but the deal’s what’s real

We have a big, diverse audience … so we talk about big picture stuff. It’s important to see the big picture.

After all, every asset you own is floating in a big sloshing economic sea.

If you’re not aware of weather patterns and watching the horizon, you might not see storm clouds and rough waters forming.

But investors make money in EVERY kind of economic environment, so it’s not the conditions which dictate YOUR success or failure.

It’s your attention to being sure each individual deal YOU do makes sense.

That means the right market, product type, neighborhood, financing structure, and management team.

Keep the deal real … and have plans for what you’d do in a variety of economic situations …

… so when conditions change you’re not caught unaware and unprepared.

“The time to repair the roof is when the sun is shining.”

– John F. Kennedy

Lesson 5: Train wrecks in stocks can be tee-up for real estate

This is our favorite.

It’s not that we take joy when the stock market reveals its true character … but we know it’s a wake-up-and-smell-the-coffee moment for many Main Street investors.

As our friends Chris Martenson and Adam Taggart recently pointed out

… if you take the FAANG stocks out of the stock indexes, the highly-touted stock index returns would have been NEGATIVE.

It’s hard to diversify when you you’re exposed to the hot stocks everyone’s piled into … directly or indirectly.

So as Main Street investors come to suspect the disproportionate influence just a few arguably overbought stocks have on their TOTAL net worth and retirement dreams …

… history says people’s hearts turn home to an investment type they instinctively understand and trust. Real estate.

So for those raising money from private investors to go do more and bigger real estate deals, a stock market scare can make it easier for your prospects to appreciate what you’re offering them.

Lesson 6: Do the math and the math will tell you what to do

Very few paper asset investors we’ve ever met actually do the math.

They either buy index funds based on trends and history, and don’t realize most are exposed to the same small group of hot stock everyone owns …

… or they buy stocks based on a hot tip, a gut feeling, or a recommendation from someone they think is smarter than they are.

But real estate math is SO simple to understand and explain.

And when you can quickly show a Main Street paper investor how a 15-20% annualized long-term return on investment real estate is quite realistic … with very moderate risk …

… real estate is the CLEAR winner.

Even a modest 3% per year price appreciation on 20% down payment (5:1 leverage) is 15% average annual growth rate.

Add to that another 2% or so a year in amortization … paying down the loan using the rental income … you’re up to about 17% annualized equity growth.

Toss in another modest 3-5% cash-on-cash and some tax benefits and you’re pushing 20% annualized total return pretty fast.

And that’s just bread-and-butter buy-and-hold rental property.

There are all kinds of specialty niches and value-add plays which allow active investors to goose returns …

… or for a syndicator to put a lot of meat on the bone for their passive investors … and still take a piece for doing the work.

Lesson 7: Monitor your portfolio for weak links and over-exposure

Lots of paper investors who didn’t even know they were exposed to Facebook are finding out the hard way …

… just like when we didn’t realize our whole investing and business model depended on healthy credit markets.

So be aware …

When you’re overly exposed to a critical factor like interest rates, credit markets, a tax law, a specific industry or employer, or even a currency or financial system

… you run the risk that a single unexpected event can take a BIG bite out of your assets.

And while you might not be able to fix everything right away, the sooner you’re aware of the risks, the sooner you can start preparing to mitigate them.

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.

Halloween Horror Stories 2017

Halloween may be yesterday’s news, but we’ve collected a killer bunch of horror stories that will give you a good spook … no matter what time of year it is.

In this annual segment, we’ll share seven tales of real estate investing gone horribly wrong … and the lessons investors took away from their nightmarish experiences.

This blog post features four of the stories … to hear the full collection, including stories about downed trailer parks, burning buildings, and more, listen to our podcast episode!

In our 2017 edition of Halloween Horror Stories you’ll hear from:

  • Your far-from-frightening host, Robert Helms
  • His co-host, an all-around scary guy, Russell Gray
  • Formidable five-decade investor, Bob Helms
  • Our formerly frightened guests

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Drugs, guns, and squatters

Peter and Monique bought a property … only to find out it was quite a nightmare. The pair bought a C-class apartment building about a year ago.

“The issue was not the fire, or the landscaper that was shot, or the gun that was pulled on the on-site manager, or the homeless people who set up in one of the empty apartments for Valentine’s Day,” says Peter. “No, the problem was even worse than that … it was the property management company.”

Peter and Monique thought they did their due diligence.

Their property management company, which the last property owner had also used, was the biggest and best in the state.

But the numbers started telling a different story.

Still, when Peter and Monique spoke to the people at the property management company, they were pleasant and reassuring.

The numbers kept sliding … for eight months, until the couple finally decided to hire a new property management company.

The pair discovered after the fact that the former management company had been negligent on all fronts. Although the company had a set of policies and standards that looked great on paper, they hadn’t been following them.

The property managers were not screening tenants, paying important bills, or handling maintenance issues. Some leaks hadn’t been fixed for MONTHS.

One of the most difficult parts of the situation was saying goodbye to the former company, who Monique and Peter had been friendly with and liked personally.

But today, Monique and Peter have contracted with a smaller boutique property management company that an investor acquaintance recommended to them.

They have weekly check-ins with the property management company, which has been staying on top of issues, so far.

Lesson: Don’t trust a property management company just because someone else trusts them. Do your due diligence … and then let the numbers inform your decisions. And always keep tabs on your property manager with regular check-ins and in-person visits.

The money pit

Felicia is a doctor and frequent traveler. She’s also a real estate investor.

She’s a busy lady. So, when her real estate agent found a great deal on a portfolio of eight homes while Felicia was out of town, Felicia didn’t hesitate to say yes.

Four properties were in good condition and already had tenants, while the other four were fixer-uppers. Not a problem … Felicia figured she could use the profits from the first four homes to fix up the second set of four.

The fixer-uppers were in C- and D-class neighborhoods, and Felicia discovered that her attempts at repairs were constantly thwarted … because every time her contractors left equipment and materials outside, they were stolen.

She was sinking money into the properties at a horrifying rate. Finally, Felicia asked how much it would cost to do all the repairs.

She got a $50,000 loan from her bank and used it to complete the repairs … only to discover that her 50k was gone and the buildings still weren’t ready for tenants.

At that point, she had to decide whether to keep digging herself into an even deeper hole. She decided to sell.

Felicia says if she could have done it differently, she would have made sure her investing partner was on board before proceeding with the deal. She found out after the fact that her partner hadn’t even made on-site visits while she was out of town.

She also would have had a general contractor or inspector go through the fixer-uppers and give her a quote and a time frame for repairs.

And finally, she would’ve made sure she was well capitalized so she could finance the repairs.

Lessons: Do your due diligence before purchasing a property. Understand your partner and make sure they’re all in. And if you do get into a bad situation, make sure you have the awareness to know when to stop.

The chilling chop saw massacre

Michael M. was driving by his property one day when he saw something truly horrifying … his tenant had fired up a chop saw and cut a ragged hole into the brick wall of his building.

An apartment on top and mini-market on the bottom, the property didn’t have any big problems … until one hot day when the mini-market tenant to put in an air-conditioning unit themselves.

Michael said he did a few things when he found out.

He was tempted to be offended that his tenant had permanently altered the building … so his first order of business was to get over his initial shock and anger.

Next, he talked to the tenant. He collected the tenant’s hefty security deposit and made it very clear that any unapproved alterations would be cause for removal.

Then, he hired some professionals to fix up the hack job done by his tenant. The tenant paid the bill.

Lesson: Make sure tenants are aware of the provisions of their lease and the consequences for violating those provisions. And make sure you’re covered by collecting security deposits from tenants.

A killer of a deal

BJ and Pauline’s problem started with their quest for a 1031 tax-deferred exchange.

The couple wanted to use the equity in their four-plex to buy a larger multi-unit apartment building.

They found the perfect property … or so they thought. It was a 12-unit building that fit all their criteria.

While doing their due diligence, however, the couple hired an inspector and began to realize the building would take a lot of work to get up to par.

All right, they thought … we can handle that.

Then BJ decided to do a few walkthroughs himself, without the real estate agent. On one visit, he ran into the maintenance man and got the real story about the building.

Apparently, the current property manager had recently been murdered in one of the building’s units. No one had disclosed that detail to the duo!

That manager had been involved in some “extracurricular activities,” says BJ, and most of the current tenants were there because they’d been connected to the manager’s illegal side job.

Despite their chilling discovery, BJ and Pauline didn’t throw in the towel. Instead, they used the building’s problems to their advantage.

They started by negotiating a rock-bottom price with the owner based on the information they’d discovered.

After purchasing the property, they got started on renovations and hired a new property manager. Their new manager had all the current tenants complete an application and sign a lease … so most of the former tenants moved out.

Although cash flow wasn’t great for a few months, the pair now have 7 out of their 12 apartments filled with vetted tenants. They’re hopeful for the future.

Lessons: Always visit and inspect properties yourself before purchasing. Get someone on the inside to give you the real scoop about the property and area. And at every point in the process, make sure you have a good team in place, including a quality lawyer and a diligent property manager.

Don’t get scared off …

We hope you’re not too scared. The goal of these stories is to encourage, not discourage.

Hopefully this year’s horror stories illustrate that real estate has ups and downs … and that nothing is wrong with you if something goes wrong with a deal.

We also hope you learn vicariously from these lessons and develop strategies for mitigating risk in your own investments.

End up with a horror story of your own? Like our guests, we want you to be able to shift from thinking “Oh no!” to asking, “What can I learn from this?”

Push yourself to fail faster, get better, and always keep learning.


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.