Newcomers to real estate investing always have important questions, and rightly so.
"What's the 'lay of the land'? Who are the Role Models for Success? How is real estate different from other businesses? And, most important, where and how to get started? In this series we explore answers to these questions and more, and provide direction for those ready to get their program underway.
A Little Background
First of all, congratulations on your interest in real estate investing! Of all investment opportunities available today to the "average" investor, real estate remains the one field requiring the least amount of start-up capital and the greatest "scalability", or upward potential.
I have always thought of real estate investing as "grass-roots entrepreneurship" at its best. Where energy, intelligence and good judgement will be rewarded regardless of who you are or where you live.
My name’s Phil Elmes. I’ve been a real estate broker, developer and dealer for decades, primarily in the upper Midwest and in the Chicago area. I did my first rehab with very little money – actually, I was still in graduate school at that time. I took a turn at a part-time job in real estate, hoping to bring in additional income to help support my young family. And I have been 'doing real estate' ever since.
Since that time, I've bought, sold, syndicated, invested in and redeveloped millions of dollars of real estate. Much of this involved "adaptive reuse" and rehab. We will talk about just what this involves and how you can benefit as we go along.
More recently, since early 2000, I have been more and more purchasing, improving, and reselling single-family and smaller multifamily residential properties throughout the Chicago area, but primarily on Chicago’s south side.
In most cases, I deal in “distressed” property, property that needs improvement, needs change, with the idea of not so much creating value as restoring value. There is a difference. One is really truly, simpler than the other, and I’ll show you how that can be.
The Famous Real Estate Bubble
Beginning a decade ago (say, about 2005), we experienced a shift in the real estate market. The famous “bubble”, which hit our market as well as markets all over the country, was driving up home prices everywhere; even on the distressed properties we relied upon as our “stock-in-trade”. Perhaps we should not have been surprised.
The prices on distressed properties–in this case foreclosures–were bid up primarily by newcomers to the business who were watching too much cable television. They felt that they could dip into this market–aided and encouraged by their real estate brokers or perhaps their mortgage brokers–and become Instant Investors, playing the schemes that were popular at that time.
To a certain extent these so-called "investment strategies" persist today– no money down deals, highly leveraged refinances, “flipping” real estate for fun and profit. The result of this Feeding Frenzy back in 2005 and 2006 was that our rehab. business nearly ground to a halt. We found the properties bid up to levels where no reasonable, experienced investor or rehabber could the profit potential needed to stay in business. For all practical purposes we were sidelined by this “bubble” of quick-rising prices for over some eighteen months.
The Great Real Estate Housing Crisis
But then we started to get the first ripple, the first effect of what became known as the Housing Crisis, the foreclosure crisis. More and more “bank owned properties” (“REOs”) started to come on the market. These were properties the banks were taking back through foreclosure. As these properties came on the market in increasing numbers prices started to drop again. The media picked up on what was going on. Amateur investors one by one dropped away, in some cases already struggling with properties they had acquired just a few years earlier. Everybody started wondering where this was going.
Time has passed. We understand now that we went through an historic convergence of bad judgment and bad actors that has, in turn, brought extraordinary opportunity for profit and wealth building. That’s what this book is really all about. There is an opportunity here and it should be seized without question. But it’s also true that those who jump in unprepared will join the other losers in this mix
WHO SHOULD READ THIS SERIES
Let’s talk just a minute about who should read this series. For those curious not just about the foreclosure crisis but also intrigued by what this phenomenon could mean to them in terms of opportunity, these articles will make clear the scope of this opportunity and how it might apply for you. Exciting and achievable yes, but you will find it’s no Get Rich Quick scheme.
The second group of persons who should read this will be reasonably secure financially and serious about building (or restoring) Wealth. There are a lot of folks out there, perfectly responsible, thrifty, saving individuals, who have been building IRAs and other retirement accounts, only to see them decimated – if not decimated, sometimes reduced by thirty, forty, fifty percent.
Many of these unhappy folks are now clients and students in my real estate courses. If they were to continue their saving pattern (which is how these savers built their retirement plans in the first place) we all understand it will take years for their sadly reduced accounts to be restored. Folks have been hurt by this, folks who have been conscientious, who had resources and trusted in a system that went terribly awry.
But I’m not talking about stepping up one’s investments in pension funds and securities, though I trust there are opportunities out there (that’s way out of my field of expertise). I’m really speaking of investors who have just a bit of an entrepreneurial side to their nature.
Entrepreneurship in Real Estate Investing
What do I mean by entrepreneurship? Entrepreneurs are folks who take initiative, often separating themselves out from the pack. They tend to be individuals with foresight, commitment, and discipline. They understand risk, but they view risk in a slightly different way than most. Entrepreneurs are not speculators, nor are they investors, though what they are doing is inherently an investment strategy. They are risk-takers. But the difference is that they have a view of risk that is calculated, measured: they always have a plan and never commit all their resources to a single project.
Successful entrepreneurs themselves wholeheartedly, but they will always leave some reserves for an exit strategy. That sometimes flamboyant yet always calculating personal nature has always been at the core of entrepreneurship and is central to this country’s extraordinary growth over time.
Build A Sustainable Real Estate Business
Finally, the person I think should read this series is one who understands real estate as an opportunity to be pursued and run as a business. This is not about, “let’s dip in, jump in, flip this house.” I don’t believe that opportunity truly exists today as a viable, sustainable business model, if it ever did.
The Bubble was a phenomenon, like any speculative craze (think of tulips in 17th Century Holland, or real estate in Chicago, in the mid-1800s). The Bubble (the quick run-up in prices) was a situation where, in a rising market, you could make every mistake in the book and perhaps still come out. Until, of course, the frenzy–and the prices–collapse. That’s not what this book is all about.
Our focus here is about creating a business enterprise that grows and, more importantly, is sustainable. This is not for those seeking to get rich quickly or make a quick score. That’s what got us into this predicament in the first place. Equally important, this book is not about “gaming the system”. There are no techniques in here, or gimmicks, or Smoke and Mirrors that have been popularized on the seminar circuit and in books invariably titled “How I Made My First $million in 12 Months Playing Real Estate” and written by some 30-something at the wheel of an expensive sports car standing in front of a country club.
Using Foreclosures to improve neighborhoods
Finally, we will indeed talk about the foreclosure market. But not about exploiting the troubles of others, the widows and orphans of this world. Those folks may have been victimized by the System, but by now have mostly moved on. The best that we can do is focus on the sad result of that and try to fix it. Fix it for the communities that have been affected, by bringing the housing that is now vacant (in economic or real estate terms “distressed”) and turning such properties into affordable housing. That is the opportunity that this book is about.
Without doubt, it is true that those who jump in unprepared will join the other losers. We write here about how you can be a winner– for yourself, your family, and your community.
- Philip Elmes
Next time: "Who are the 'Players' in today's real estate market?" Where to fit in.