One of my longtime passions and investment strategies has been residential real estate. Many of the blogs and books that I follow talk about real estate, and I will definitely get into more detail regarding real estate in future blog posts. However, for now I think it is important to talk about liquidity (the ability to convert an asset into cash) of your personal residential real estate. Let me tell you about our latest adventure.
We just completed 251 days of attempting to sell our personal residence in Arizona!
We had our home on the market for over eight months! We priced it based on the realtor’s suggestion and ended up lowering the sale price three times. We showed it to over 80 prospective buyers with much positive feedback over that period of time – a couple people close to making offers – and we had an actual offer that fell through due to a change of heart by the buyer.
It bugs me when I read blog posts and books that promote myths/urban legends: “Real estate will always go up, therefore it’s a good investment,” or, “If you’re renting you’re simply throwing your rent money out the window/down the drain.”
Is real estate always a great investment
Real estate can be great and an awesome investment – I read a lot about people that are making a killing in real estate by flipping – but things can suddenly change!
There are many factors to consider, but you certainly have heard people say this before: location, location, location. There are several personal finance blogs I’m following where folks based in the San Francisco Bay area are currently experiencing a white-hot real estate market that is resulting in bidding wars. We, too, used to live in the San Francisco Bay area, and have our own example to share:
We bought a town home nine years ago on an island located within the San Francisco Bay area. The island is the City of Alameda, which is nestled next to Oakland and close to the Bay Bridge. We lived in this home until we moved to Arizona three and a half years ago. When we moved, we rented our California home out to a nice couple that ultimately bought the place from us. For the entire nine years that we owned the home we had a significant amount of money wrapped up in the down payment, mortgage payments, property taxes, insurance, HOA fees, and finally the largest mortgage balance we ever contracted. We were upside down on cash flow the whole time it was rented.
You read about how crazy things are going into this SF area with the real estate and job markets taking off. The East Bay and several similar areas are improving as well. However, in our case, we sold the home for only about $10,000 more then what we paid for it nine years earlier. Granted, we could have held on for another few years and maybe we would have sold for more money. We bought near the high of the market before the great recession.
But who really knows how you will come out on real estate until you are looking at it in hindsight? We were more interested in the debt and negative cash flow aspect of our life, improving our cash flow, knocking out the last of our personal debt, and helping our super great tenants buy their first home.
Progressing in my career, I was moved quite often, enabling me to climb the proverbial corporate ladder. This involved moving every couple years – much like I am guessing it would be with the military. About two years into each relocation, my employer would usually ask me to move to yet another place, to take on a new position. Working hard and smart at each new location and assignment would bring about another promotion. As a result of these relocations, we lived in Colorado, Oklahoma, New Mexico, California, and Florida. In most of these places we sold our homes after living there only a few years and came out fine financially, mainly because of the corporate moving relocation package.
For one of our relocations from California to Florida, I did not receive a corporate moving package. This was in 1992, and coincided with California being hit by a real estate downturn. Later, when we moved away from Florida, we had to rent our home out for three years (1994-1997) while waiting for the Florida market to recover. Our California home did finally sell for only $15,000 more than what we had paid for it 5 years before.
We have been impacted directly by many of the factors that affect real estate over the years. These include the state, the city, the neighborhood, the national economy, the local job market, interest rates, the ability for people to qualify for mortgages, and the property itself.
Timing is Everything
I started at a young age buying real estate. I purchased my first property in 1977. The economy in 1977, as many of you may remember, was hit with the gas shortages; interest rates went through the roof on mortgages (13% -18% range), and the economy tanked. At that time, the construction company I worked for in the summer had nearly 100 spec homes on the market in a couple different cities along the Colorado front-range. They could not give away those homes. I bought one of these homes at cost and took on my first mortgage with a 13% interest rate!
I was also affected by the California Bankruptcy in 1992, the down turn in Miami in 1995-1996, purchasing again in California at near the top in the Bay Area in 2006, and finally trying to sell this year (2014-2015) in Arizona.
Your real estate is not liquid!
In the case of the construction company, they had a lot of money tied up in materials and labor to build those houses – but they were finally able to sell them in the end and recoup some of their costs. They desperately needed cash and had all the reserves dwindled by construction loan interest.
After years of buying and owning residential real estate as an investment, I’m close to having the last property paid off. During that time I have had a lot of money tied up in equity with most of my cash flow going towards my debt snowball. Early on I was in a precarious and highly leveraged financial position with equity, coupled with the inability to easily sell any of those properties.
What if I needed cash right away – what would I do? Get a HELOC, credit line, or refinance to a new mortgage? Those would all take time and are not guaranteed.
From my personal experience, I have learned to take the long view of real estate. What is important is that you can weather the storm of the ups and downs of the real estate market. I think in my life I’ve seen four major market crashes and their corrections. When I am researching to buy a property I make sure that we are in a financial position where we can own for years, regardless of what the market is doing.
I do not view purchasing a property or investment from a perspective of selling in two to three years. The longer the time frame you plan on holding on, the better the odds are that you will go through one of these cycles and recover ok. If you don’t have the long view or a corporate relocation package to back you up, I would rent.
Where do we stand now?
I started this post by saying we spent 251 days trying to sell our home in Arizona. This was a disappointment to us because we were planning on using that money to downsize to a smaller place and to kill the last of our investment debt.
It goes to show that when you have a paid-for home, even though that improves your net worth, you don’t necessarily have liquidity. You could own a 1 million dollar home free and clear but not be able to afford the property taxes and remaining expenses. Technically you would be a millionaire, but own a non-income producing asset (all your eggs in one basket).
I’ve mentioned in another blog post that this has been my “get rich slowly path.” Leveraging residential real estate as an investment, I spent 30 plus years focused in this area while working full time in my career. Needless to say, this has taken a lot of patience and perseverance. So this recent obstacle comes with owning our home.
We will ride our “just one more year” timeline until we are financially independent, living off our passive income, and moving on to enjoying the next chapter of our lives.
Have you had a similar experience with attempting to sell a home? Do you feel the same issues with liquidity of real estate?