How to Invest in a Boom Market

For the past year, as real estate has continued to boom, I have been warning of the danger of what I define as "pure speculation" in this volatile market, citing specifically condos in downtown San Diego and new construction in the La Quinta area of the Coachella Valley. Investing in real estate is something you do based on a logical and economically sound basis. You locate property in a “tenant demand” area, purchase it with a reasonable down payment of perhaps 20 - 30%, and anticipate a five year plus holding period. You also have sufficient current income and/or reserves to cover normal vacancies and maintenance needs during your holding period. Speculating is when you take out a home equity loan, sell off your 401K, and put your last dollar down on a couple of houses in the second phase of that development being built in MakeAbunch, Nevada because your next door neighbor or your barber made a killing on the first phase. Or perhaps you commit yourself to a “no down” deal on a condo conversion without researching the relative costs of ownership vs. the fair market rental value. Bear in mind that, for the past several years almost any real estate you bought almost anywhere you bought it turned a sizable appreciation profit. Now, I don’t think the boom is going bust as some pundits are saying, but I do believe that things are calming down a bit and continued reckless speculation is just that --- reckless. Today, and for the foreseeable future, an individual really has to work hard to lose money in southern California real estate. But here are some simple rules for doing just that: 1. “Going in” on the advice of your next door neighbor, your hairdresser or other unqualified advice givers, 2. Purchasing property with nothing down and insufficient reserves to give you staying power in case of a downturn, extended vacancy, etc., 3. Making your buying decision because if “feels right”. Feeling right is OK for buying that sofa or painting. Buying real estate should be a logical decision based on the numbers. 4. Going it alone, without benefit of a qualified real estate broker/investment advisor, because you’ve already made lots of money in real estate and now you know how it is done. Maybe; but do you have the research expertise and resources to keep track of the market on a day to day basis, and the experience to truly make use of those resources? Real estate is and will continue to be an excellent investment, especially in southern California. The key is to select quality properties in great, stable areas that you will be proud to own, and that will attract quality tenants. And, at least for the near future, be happy with your 3 - 5% annual appreciation, knowing that, traditionally, southern California property has doubled in value about every ten years. Greed and short term thinking are killers. Here is an actual example of a duplex’s history:

$147,000:	Purchase price in March, 1991
$100,000:	Market value in March, 1994
$400,000:	Market value in March, 2005

The speculator with no staying power might have been forced to sell at the low end of the market, whereas the investor with adequate reserves to handle the downturn ultimately wound up with a huge profit. The moral to this story: *invest with your head, not your heart*.