By Robert Ringer

(The content of this series of articles has been taken from my 1982 book “Civilization.” In the previous excerpt from that book, I examined an investment I referred to as a Capital Question Mark: real estate. Following is more of what I had to say at that time.)

Real Estate - Apartments
Apartments and low priced rental homes are much more risky. For nearly fifteen years it has been difficult, if not impossible, to buy good apartment buildings that throw off a positive cash flow, because rents have not kept pace with the increased costs of construction, real estate taxes, and maintenance, not to mention the cost of mortgage money. But now there is an even greater danger ─ rent control.

Because rent control is such an easy target for vote conscious politicians, you can count on it as a way of life for many years to come. Not just in the People’s Republic of Santa Monica (California) and major population centers, but in small towns all across the country. As word spreads that Brother Bill in Atlanta got the government to hold down his rent, Sister Millie in Wichita will want to be the beneficiary of the same type of thievery in payment for her vote, too.

It is precisely this kind of government meddling that makes real estate such a question mark. While I do believe that there may be routes through the real estate maze that can lead to the preservation of, and even an increase in, capital, these routes are fraught with financial land mines.

And, in my opinion, the route laden with the greatest number of explosives is the one marked “Apartment Buildings for Sale.” As the economy worsens, there will be some potential money makers available in real estate, but be very careful ─ especially with regard to rent control.

On the other hand, high priced homes bought for rental or speculative purposes are an interesting play, because they are unlikely to be subjected to rent control. Nobody cares about protecting “the rich.” In addition, remember that “the rich” tend to get richer during a hyperinflation, and it is for this reason that high priced homes retain much of their value, even while the general housing market is collapsing.

I have noted this phenomenon with great interest while watching the operations of a longtime friend, “Dr. Deal,” who builds million dollar and up homes in the Ft. Lauderdale Boca Raton area. While builders are going belly up in record numbers in southern Florida, Dr. Deal’s sales continue at a brisk pace. In view of the fact that there is no mortgage money around, it is more than mildly noteworthy that a majority of his buyers pay all cash.

Observing this situation firsthand has led me to believe that a good vehicle for converting depreciating paper currency into hard assets is, indeed, to be found in high priced homes in the right locations. Since wealthy people do not much care for discomfort, I would restrict such purchases to warm weather climates.

Obviously, the ideal is if someone is willing to take back a low rate, long term mortgage on a high priced home that is sound in all other respects, or, if you have the opportunity, to assume an existing low rate, long term mortgage.

Real Estate – Raw Land
I reject raw land on the grounds (no pun intended) that it is far too speculative during times of crisis. Undeveloped land carries with it an automatic negative cash flow, for one obvious reason: real estate taxes, with no offsetting income. If the land is financed (keeping in mind my previous caveats about institutional mortgages and creative financing), your out of pocket expenses are even greater.

In addition, the long-term on land can be very long, sometimes even decades. For the person who can afford to hold on indefinitely, while paying the taxes and assessments levied against his land by City Hall, I suppose raw land is a good way to preserve a large amount of wealth for his children. But there are not many people who can afford such a luxury.

One final, obvious, caveat about real estate: It is illiquid. Most people know this; it’s just that their actions indicate that they continually forget it. That is why if you plan to buy your own home, you should do so only if you intend to stay put for a while. If you’re buying your home for speculative purposes, you may just as well convert your depreciating paper into Capital Crapshoots.

In the latter case, you can at least cut your losses short and move on when you decide you’ve had enough. With a house, as millions of homeowners have discovered to their dismay, you may not be able to get out when you want to.
Coming up in Part VII: Capital Guarantees.

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Today’s Reflections:

Not a lot has been said by the new socialist government in Washington about implementing nationwide rent controls, but I’d be concerned about it if I were an apartment-complex investor. And until the real estate collapse reverses itself with the inevitable onset of hyperinflation, apartment complexes could be difficult to sell – especially at a profit.

As to raw land, other than its collapsing price, its inherent problems are always the same. Never, ever, buy raw land with the intention of “flipping” it for a quick profit. In Houston in the early eighties, flipping raw land became the city’s favorite sport. I heard a lot of stories about a lot of guys who were making millions playing this wealth-without-work game – but every player I knew about firsthand ended up broke-or, in a couple of cases, in jail. Beware!

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