The Single-Family Investment

Orginally posted on September 13, 2011 by John Dessauer

As America continues to hope that the single-family market will turn around, it seems to be getting worse. I think that the reason that it continues to get worse is that we consider them as “investments”. I am here to tell you that single-family homes are not, nor have they ever been considered an investment as we know it today.

I’m not saying that no one has ever made money on single-family house investing as a strategy. I’m saying historically, that is not what the single-family house was created for. It was created for families to live in, not to invest in. But that mentality has changed recently.

Over the last 20 years, the single family home has become the most popular investment of choice. This applies to people living in the house, and people that may never live in the house and just use it for an investment vehicle. This caused an overabundance of demand for the product. Demand is one of two major ingredients for any boom market. The other major ingredient was supply.

You would see all kinds of construction from single-family homes to condominium projects during the boom. That continued to fester into condo conversion products to my own creation of a Divide and Conquer concept, where you take a commercial property and turn it into a residential product by re-surveying the property.

Whenever we experience a boom and then a bust in any market, it’s like a hangover the morning after a party. You end up saying, “Why did I do that”? It’s the same thing with the real estate bust. We had a great party, things got out of hand, and now we must heal our aching head and get back to some type of normalcy.

There are a lot of American’s that feel like they are still at the party. Not realizing that the party has come and gone. The clean-up time is here and nobody wants to clean up. American’s feel like we should bring more beer to the party or start up the music again.

The problem is, there is no more beer and no more music. Our inventory outpaces our demand. To straighten out the housing problem in America I think we need to do several things, including:

1)The government must let the process work its way through the system. The definition of capitalism in a free-market system is that which works without government intervention. The sooner this happens, the sooner the market heals itself.

2) American’s must realize that single-family houses are historically not good investments. Single-family houses up to a four-unit building are not geared as an investment; they are geared to live in. The comparative sales approach proves that these assets are based on current market sales, rather than financial performance of capitalizing the income stream, as in commercial assets.

3) Stop adding to the supply.  Buy existing inventory. You cannot build a house today for what you can buy an existing one for. In many markets, the cost to re-construct a house is more than what you can buy an existing home.

4) American’s must change the idea of their home being an ATM machine.

We have a chronic debt problem in this country. The problem encompasses the Federal Government, personal and consumer debt. We have to move away from this idea. To do this, I believe, we need a major culture change. This would include how we view things like instant gratification and what we consider valuable.

5) Individually, we must make things happen for ourselves. The excerpt    below is from an interview the Billionaire Sam Zell did with Forbes Magazine. I thought it was appropriate. (In Sam Zell’s words)

“I’ll tell you a story that I think is probably the most significant advice that I give young entrepreneurs. It’s the story about a Jewish man who lived in New York who started an appliance store in Brooklyn. [He was] very successful, very observant. He went to the synagogue every week, and life went on.

One day he went to the synagogue, and after he finished his regular praying, he reached out to God and said, ‘God, I’ve never asked you for anything, I’ve always been traditional, I’ve always been observant, but I’ve really got a problem. And the problem is that the neighborhood is changing, the business is tanking, and God, I need to win the lottery.’

The next morning he gets up, checks the newspaper and he didn’t win. So the following Saturday he gets up, goes to the synagogue again and now business is worse. He’s really getting worried again. He finishes regular prayers, reaches out to God again and says the whole bit: ‘Business is worse, the creditors are calling every hour instead of once a week … I need to win the lottery, please. I’ve never asked you for anything.’

The next morning he gets up, looks at the newspaper… he didn’t win. So now it’s the third Saturday and now as he finishes his regular prayers he’s on his knees and he’s crying and [his business is] entering Chapter 11 proceedings. And he says ‘God, I’ve got to win the lottery.’ And at that point, from up high, comes a voice — and it’s the voice of God — and He says ‘Moishe, you’ve got to buy a ticket!’

I literally had a young entrepreneur in here ten days ago and I told him this story. And I said: ‘You’ve got to find a direction, you’ve got to find where you can excel. […] What’s your skill set, how do you react to things, and how do you identify an opinion, a view?’

So I told him this story and he sent me a thank you note and stapled to that thank you note was a lottery ticket. We checked, but I didn’t win.” – Sam Zell

“Remember, wealth has nothing to do with money, success has everything to do with failure, and life is as simple as you want to make it!”

– John Dessauer

Leave a Reply

Your email address will not be published. Required fields are marked *