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Greed Can Cost You Your Shirt!
The proper action when things are going well is to pay off debt and consolidate your position. Then you will be financially strong and can go for further expansion without fear of loosing what gains you already have. When you are not deep in debt you do not have to worry about your creditors getting paid. Since the usual history of a business is cyclic (boom and then every 7 years (plus or minus) bust) you can predict when it is time to consolidate. When the prices are "too good to be true, they are." In the two years just before the top of the market is reached, prices are going up at very incredible rate. I have seen real estate go up 25%, per year, right at the top. This is incredible and I guarantee you it cannot sustain itself, at that rate. As hard as it is to give up a profit, it is harder still to sell an investment when it is going straight up. But, understand this is when you need to sell. If that is not what you want to do then you need to go to plan B: pay off your debt and get ready for the market drop. If you are debt free you can survive the drop and then be solvent and financially secure when the recovery comes. I would like to tell you a story of the largest apartment owner in Hollywood. It was 1980 when I met Nick. He owned 11 buildings at that time. He bought the worse buildings in town. These had the best cash flow. He owned mostly brick buildings. This was because they cost less money than stucco and wood buildings. This lower price allowed Nick to generate higher profits. Nick would buy a building. He then did a market study, and figured out what size apartments and what numbers of bedrooms were generating the highest rent, per square foot. Then he remodeled his building to get the highest price per square foot he could. He spent over $100,000 per building to do this. He also had to earthquake proof all of his buildings. One of the reasons that brick buildings sold so cheaply was that they needed to be earthquake reinforced. When Nick finished remodeling a building, it was producing a very nice cash flow. Nick would use that cash flow to buy and remodel the next building. This was very smart thinking. Where did Nick fall off the rails? First he would find a great deal, while he was still in the middle of a remodeling job. He just couldn't pass it by. He borrowed on one of his finished buildings to get the down payment to buy the building. Then he would borrow on a second building to get the money to remodel the new building. Now he was remodeling two buildings at the same time. By borrowing on two of his successful buildings, he now had to pay the loan payments on the two new loans. The rents from the older buildings now went to the lenders instead of to Nick's remodeling project. The new building, just bought, didn't produce enough income to cover the new loan on it because half the building was empty due to the remodeling. Nick now needed to keep borrowing money to fix the buildings and pay the loan payments on the buildings that didn't generate enough income. When a building was completed it then supported itself very nicely. Was Nick happy with that? No, he wanted more and more buildings. If at any time Nick had stopped borrowing to buy new buildings, and just finished all his buildings in remodeling, he would have been able to catch up with himself and started expansion from a new level of security. That was, using the buildings profits after paying all of his loan payments to buy and remodel more buildings. Nick just couldn't wait and consolidate his position. He had every building he owned loaned up to the maximum value that he was able to. The rents were more than enough to cover the payments on each individual building. So what happened? Two things. The first was his greed. We entered the 1991 recession, and the price of buildings went down. The banks were starting to foreclose on buildings and put them back on the market for very cheap prices. Nick just couldn't let a deal pass him by. He bought 3 of them. He borrowed the last dime he could squeeze out of every building he owned to buy these buildings, thinking that he could do no wrong. One bank made him the deal of a century. They wanted a lot of money down but the price "was just too good to be true." Nick was so much in a hurry to get his hands on this great deal he didn't bother to do his normal structural inspections and research. After all, Nick owned 17 buildings in Hollywood by now and knew the market better than anyone else, he thought. He looked at the building and saw it was only 20 years old. The building was empty, which meant it brought in no income. That didn't bother Nick, he would just get it rented quickly and the building would support itself. What Nick hadn't noticed was that the foundation was damaged and a $100,000 repair was needed. This was a repair that Nick couldn't afford. I begged Nick to walk away from this building and let the bank have it back. He refused and squeezed more money out of his collection of buildings. As you can imagine, Nick was loaned to the hilt and had no money set-aside for an emergency. At his peak he owned 17 buildings worth $45,000,000 with him estimating his net worth at $7,500,000. He was definitely worth a lot of money. That was for sure. Before we get jealous of him, lets look at these numbers a different way. If Nick was worth $7,500,000 then his real estate loans had to be the difference. That is $37,500,000. These were sure big numbers. Let's look at these numbers in terms of their percentages. This $37,500,000 was 83.3% of $45,000,000. $45,000,000 had to be the retail value of all these buildings. Nick would not think in terms of selling them. He never sold a building. He only bought, and bought, and bought. What Nick saw was the potential. If property values went up only 10%, Nick's net worth would go up $4.5 M. Property values had gone up over 20% in the 1980's but the recession that had started was of no concern to him. It is clear that he had stretched himself to the limit. The last building the bank sold him put him in trouble. He might have even survived it if he sold one, two or maybe three buildings. No, Nick wouldn't do that. One year later the recession was not over. Unemployment in California went up and up. Businesses were closing, President Reagan was closing down Aerospace, and workman compensation insurance was so high no one could stay in business. Vacancies in apartments were going from 1% to 5% to 10%. Then it happened, we had the LA riots. Hollywood became a ghost town and then it happened again, the earthquake of 1994. Brick buildings fell down on Hollywood Blvd, none of Nick's buildings. People moved away and vacancies rose in Hollywood too as much as 17%. Do I need to tell you what happened to Nick? He lost everything when vacancies went to 5%. He had no reserves or cushion for a margin of error. For 18 years Nick lived like a pauper, in one of his small apartments. He did his own property management for all of his buildings. He drove an old car, worked seven days a week, took no vacations, always had to worry about paying his next loan payment and where to borrow his next dime. His plan was to make $10 Million Dollars and sell everything. What he got was nothing for 18 years of his life. I have no idea where Nick is now. He disappeared off the face of the earth. So, "A BIRD IN THE HAND IS WORTH, A MILLION THAT ARE PROBABLY NOT IN THE BUSH! About The Author Willard Michlin is an Investor, Business Broker, California Real Estate Broker, Accountant, Financial Distress Consultant, Well known Public speaker and Administrative/Business Consultant. He can be contacted at his Ventura, California office by calling 805-529-9854 or by e-mail at kismetrei@earthlink.net. See other article by Willard at http://www.kismetgroup.com
MORE RESOURCES: How Jordon Hudson, 24, amassed $8 million real estate portfolio within months of meeting Bill Belichick New York Post Scenic Hwy. 1 property was home to beloved restaurant, garden. Now it’s for sale San Luis Obispo Tribune Real estate transfers in Adams County from April 21-25, 2025 Muddy River News Real estate report: Three key factors are behind Louisiana’s surge in investment Baton Rouge Business Report Hyderabad blues: Real estate sales in city see biggest drop The Financial Express Exclusive: Trump's first real estate project in Qatar to be announced by Qatari Diar, Dar Global Reuters ArchCrest opens new real estate division Northern Nevada Business Weekly Two key real estate bills take aim at industry regulations Real Estate News by RealEstateNews.com Advocacy Scoop: New NAR Poll Unveiled—Tax Reform, Real Estate Policy and Voter Opinion National Association of REALTORS® Cattaraugus County: Ellicottville home, Machias property lead March real estate sales Olean Times Herald Licking County real estate transfers for April 14-18 reach $1.4 million in Newark The Newark Advocate Richland County property transfers recorded April 21-25 Mansfield News Journal Fond du Lac County property sold for $530K in latest real estate transfers for April 21-25 fdlreporter.com Ranking Arizona: Top real estate law firms for 2025 AZ Big Media The Pipeline: Commercial real estate roundup for 5.2.25 Richmond BizSense People on the Move: New execs at HomeServices, RE/MAX Real Estate News by RealEstateNews.com Mid-America Real Estate closes sale of 34,431-square-foot shopping center in Midtown Detroit REJournals Property transfers: Nursing facility, rental complex sell for more than $1 million Canton Repository Alexandria Real Estate Equities Looks Juicy But Uncertainty Keeps Me Sidelined (NYSE:ARE) Seeking Alpha Real estate veteran named president of regional Berkshire Hathaway HomeServices Hartford Business Journal Startup radar: Seattle-area tech companies build software for robotics, real estate, and more GeekWire Raith seeks to raise $700m for non-core US real estate fund IPE Real Assets Blackstream opens luxury office near Lake Keowee GSA Business Report Household Struggles Weigh On Real Estate And Spending Seeking Alpha April real estate transactions CraigDailyPress.com Franklin Real Estate Development finds inspiration in Greenville’s history upstate business journal 'Slow and steady': How a couple retired early by buying one rental property a year with 5% down payments Business Insider Solano Real Estate Scene: Slow down, buy a house Daily Republic Secluded estate near Ann Arbor is Washtenaw County's most expensive home. Price: $8.99M Detroit Free Press Job Market Defies Tariff Fears to Remain Strong in April, Offering Jolt of Confidence to Homebuyers Realtor.com Solano Real Estate Transactions: May 2, 2025 Daily Republic Berkshire region real estate sales – May 2, 2025 The Berkshire Edge How the Dallas Commercial Real Estate Industry Could Fare in the New Tariff Environment - D Magazine Here's what local experts say the Baton Rouge real estate market will look like in 2025 The Advocate Real estate performance in Quarter 1, and some perspective Garden City News CENTURY 21 Real Estate and Institute for Luxury Home Marketing Launch Collaboration With New Q1 2025 Luxury Market Report Franchising.com Abundant listings and stable prices not enough to drive April sales in the Fraser Valley GlobeNewswire SDSU: SDSU Imperial Valley alumnus finds new meaning in real estate career Imperial Valley Press Online What's the most expensive property sold in Rhode Island? May 2 real estate transactions The Providence Journal What properties sold in Bryan, Chatham and Effingham counties this week? Search the list here Savannah Morning News Tarek El Moussa Calls for 'Real Reform' in Real Estate Industry: 'I Saw Families Lose Everything' House Beautiful Report: Health care real estate gains greater favor in Twin Cities Finance & Commerce US Commercial Real Estate Leader Peachtree Group Launches 114-Room Residence Inn in Ocean Township, Tapping into Jersey Shore’s Expanding Hospitality Market Travel And Tour World Real Estate Magnolia Reporter Costar Group (CSGP): “Bloomberg Of Commercial Real Estate” Insider Monkey Graham Norton’s Manhattan Carriage House Is Listed for $5.595 Million The New York Times Real estate transactions: Week of May 2, 2025 Inside Tucson Business Real Estate: Market Pulse (April 2025) Seyfarth Shaw LLP Status update: 7 Upstate commercial real estate projects upstate business journal When Donald Trump mocked a real estate icon for having a 'Trophy Wife' The Economic Times How to Choose the Right Real Estate Broker Investopedia Compass goes retro with launch of ‘Private Exclusives Book’ - Real Estate News by RealEstateNews.com Compass goes retro with launch of ‘Private Exclusives Book’ Real Estate News by RealEstateNews.com Commercial real estate listings: Wingstop leases space on Three Chopt Road - Richmond Times-Dispatch Commercial real estate listings: Wingstop leases space on Three Chopt Road Richmond Times-Dispatch Real estate report: Industrial market remains ‘chronically underbuilt’ - Baton Rouge Business Report Real estate report: Industrial market remains ‘chronically underbuilt’ Baton Rouge Business Report Windermere ‘confused’ about Compass’ claims of collusion Real Estate News by RealEstateNews.com Allied Properties Real Estate Investment Trust (APYRF) Q1 2025 Earnings Call Highlights: ... - Yahoo NexPoint Real Estate Finance, Inc. 2025 Q1 - Results - Earnings Call Presentation (NYSE:NREF) Seeking Alpha Inside the Family Office Advantage in Private Real Estate WealthManagement.com Woman Arrested Again on Real Estate Forgery Charges Rural Radio Network |
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