FCP 091: The Power of Contrarianism In Real Estate Investing

Jack: Hey there, and welcome to another episode of “The Forever Cash Real Estate Life Podcast.” Now, it’s called The Real Estate Life Podcast because real estate can offer you the kind of life that you always wanted to, that you always dreamed of. Now, in today’s episode, we’re going to talk about Contrarianism and how to be a contrarian. And how being contrary, in my opinion, is the best way to be in real estate.

Recorded Voice: Welcome to “The Forever Cash Life Real Estate Investing Podcast” With your host Jack and Michelle Bosch. Together, let’s uncover the secrets to building true wealth through real estate and living a purpose-driven life.

Jack: All right, so. And I have a special guest in my podcast today, which is our Daisy, our Yorkie. She is a party Yorkie, meaning that she has a recessive gene, she’s a fully bred Yorkie, but they come out with different colors. When two of these Yorkies breed with each other that have that recessive party gene, and as a result, they come out like this. Absolutely adorable, I think, right? Okay. She’s going to give us company today in the podcast. So, I’m going to talk about a contrarian, being a contrarian. Now, being a contrarian means that you go the other way. Contrarian has the word contra within it. And going in contra means going against the grain. So, being a contrarian is not always easy, but it’s an extremely profitable way of being if you can truly internalize the path of the contrarian. So let me give you some of the most famous contrarians that there are in the world.

The probably the number one, most successful, most famous contrarian is the third richest man in the world. Mr. Warren Buffet. Warren Buffet is the eternal contrarian. I read almost all the books out there about Warren Buffet. And one of the…And they all basically say that he started out early on looking at undervalued properties. He looked at properties that everyone was shying away from. And in some cases he found, not properties, it’s actually stocks, companies, right? And in some cases he found companies that, where everyone, all investors were shying away from, but the cash in the bank was worth more, and the real estate, in many cases, was worth more than what the stock was trading at. So, he knew that he was getting a bargain, right? So everyone else was shying away and he was going towards this. I know he bought a subscription, something like “The Yellow Pages” which, whoever bought “The Yellow Pages” is also contrarian.

“The Yellow Pages,” if you’re older than let’s say 30, you probably remember these big yellow books delivered in front of your door, which, pre-Internet kind of search engines in a sense, where you could find, like if you need a plumber, if you need something, you would just look there because you couldn’t Google it. Google wasn’t around, right? So, therefore, Internet wasn’t around with all these search engines. So, as a result, you would go and look in “The Yellow Pages”. Now, “The Yellow Pages” subscription model, “The Yellow Pages” still exists to this day. But the fun part is that people still pay several hundred dollars, companies, several hundred dollars, sometimes even thousands of dollars to be in “”he Yellow Pages.” So, “The Yellow Pages” is making this tremendous amount of revenue, but they have now barely any cost because they transitioned online too. They still probably ship out a few more catalogs, but they don’t advertise for “The Yellow Pages” anymore. So, even though it’s declining business, it cash-flows like crazy. So, typical contrarian move to go into something that other people just don’t look at.

So, now, let’s look at, at the same time, what is contrarian. So, in 2007, ’05, ’06, ’07 mainly, everyone ran after houses. But when everyone ran after houses, guess what we did? We ran after land, right? I ignored houses because it just didn’t make sense. It sounded to me like something that was not sustainable. When people bought, here in Phoenix, Arizona, where I live, bought houses for $350,000 that rented for $1,200 but the mortgage was $2,000, and they got these kind of reverse amortization loans where your payment is like $900 for the first two years, and then it’s higher. That was purely just a game to wait out a little bit. It was a game where you waited out the market for the market to continues to go up, and then once the market goes continuously up, you go flip the property to the next pool down the road, that then would do the exact same thing. Well, it sounded like a musical, a game of musical chairs, were when the music stops, somebody was left holding the bag. And that’s exactly, where somebody was left without the chair, and that’s exactly what happened.

Now, I didn’t even think about it at that point, but it just, I looked at it, and contrarians are often number investors. So they look at the numbers, and if the numbers make sense, they invest. It doesn’t matter what the market says, it doesn’t matter what the people around you say, doesn’t matter what the masses do. So, contrarians are, by definition, highly independent individuals, or companies, or so, but usually individuals, that are independent, they’re able to make independent decision from peer pressure. And in essence, kind of that’s my story and that’s definitely also Michelle’s story. Yes, I joined a couple of groups and stuff like that, but I never really felt at home in those groups. If I felt like going home, I went home. And if I felt like not joining a group, I didn’t join a group. And if I felt like going a different way, I went to a different way. And yes, there was this kind of need to be part of a group, but I always struggled with that. But, definitely, in the investment decisions, if the numbers don’t make sense, just because everyone else runs that way doesn’t mean you should be running that way. You should be running the way that the numbers make sense.

So, in 2005, ’06, ’07, when everyone was going after houses, we didn’t go after houses, we actually went after land, right? We went after land, and we couldn’t, we flipped land because when you buy something at 5 or 25 cents on the dollar, 5 to 25 cents on the dollar, you can make money, on an up market, you make huge amounts of money, and in a down market, you still make money, all right? You still make money. So, then happened, 2008 happened and 2009 happened. And I went to the local Real Estate Investor Association and I saw that everyone, I mean, the newspaper was full of blood stories of people losing it all, and that real estate was the worst investment in the world, and that you need to stay away from real estate, and from houses, and that people were losing their houses.

So I went to the Phoenix, Arizona, to the Arizona Real Estate Investors Association meeting. And in that meeting, they were telling me that, now, because prices had gone down so much, you could buy properties at $25 to $60 a square foot. I mean, I kid you not. So, I ended up buying a property, we ended up buying a lot of houses in a moment, we jumped in, bottom line. Because everyone was screaming, “Stay away from land and some houses, stay away from houses, stay away from houses.” So, what did we do? We looked at houses. That’s the contrarian way, right?

The contrarian way is that when everyone’s screams run, you go look exactly at what they’re running from, because it always, the rule of thumb is that the level always overcorrects, right? If there’s a frenzy, it overcorrects towards too much like greed and trying to make deals work that don’t really work. And on the contrary, once the bubble bursts, it overcorrects into the other side. So now we ran into the…So we looked at that everyone running away from houses, the masses are not buying houses. Well, great, that means houses must be on sale.

So we looked at that and we bought houses, 1500-square-foot houses that were renting at $800 to $900, we bought them for $26,000. In the market where two years prior they were selling for $200,000. Now, it’s only a matter of time until these properties come back to those prices. And guess what? It took less than 10 years and the properties, actually probably more like seven years, and these properties are back to the $150,000 to $200,000 prices. And guess what? We still own them, we still own them. So, again, the contrarianism worked, right? When everyone is running to houses, we were in land, and we continued being in land because land works in all the markets. So it’s probably one of the only asset classes that you could flip, that could flip in any market condition because when land sells, when you buy land for $5 to $25 cents on the dollar, you could always sell them with a profit. So then, at the same time, because people abandoned houses in masses, that’s the time to get in. So now we’re looking at multifamily, and in multifamily, we see a lot of the pieces of the frenzy.

Now, by the way, we stopped buying houses in about 2013 in Phoenix, and about last year, yeah, about last year in another market that we were buying houses, because prices have accelerated again, and have gone up so high in some markets that it, again, doesn’t make sense to invest in those markets anymore. So we’re out of the Phoenix. We’re not investing in houses in Phoenix right now because it doesn’t make sense to buy a house for $250,000 and only rents for $1,000. Yes, the mortgage are low, but once I take into consideration property taxes, once I take into consideration the cost of the property management, some repairs, and some vacancy, we’re not making money on these deals. They’re not cash flowing anymore.

Buying rental properties in this kind of markets right now just doesn’t make sense, unless you find a market where you can get something for 200,000, that rents from 1,500, then you can make it happen. Or if you get something for $400,000 that rents for 3,000. Then you can make the numbers happen. But, other than that, the numbers just don’t work, right? And somebody is really sleepy here. So, just doesn’t work. And if you listen to this in the audio podcast, by the way, I am holding my little Yorkie in my arms and she’s really snuggled up to my chest right now. If you’re watching this on YouTube, you can obviously see her. So, oh, and now she got the attention, something seems to be happening. Anyway.

So now, let’s look at multifamily. We see the exact same thing happening right now in the multifamily space. There is a lot of money out on the street. People realized that in houses, other than flipping them, and fix-and-flip, that still works. But just buying and renting for cash flow, houses are really not that good anymore in most of the major markets. So, people are moving on to the next thing which is multifamily investing. And, three years ago, we were able to buy multifamily units at seven, eight caps, basically returns that when price on the purchase price it would return 7% or 8%. And that’s, remember, you’re paying only 20% down and get an 80% loan, so your actual return on investment is much higher with the upside value that you could go up there. And now, it seems like everyone and their brother is teaching multifamily investing. Everyone and their brother is sending hordes of people out there, institutional investors coming out there. And the prices that people are paying is absolutely absurd.

These prices just don’t make any sense anymore. So we’re still buying, but we’re having to look at like 400-year deals in order to find one that actually qualifies for us that we can get. So, we are in the process of hiring right now an analyst. So if you’re interested in working with us and you’re an analyst, let me know. We’re also in the process of hiring basically a second, in a sense, assistant, kind of like, that is like a transaction coordinator, and personal assistant, and different kind of things for us. So, make sure, if you’re interested in that, let us know. But the point is, we are very, very carefully buying, but most importantly, what we’re doing is, we’re positioning ourselves right now for a correction. And when the correction happens, here is the same thing, contrarian, right? We are the eternal contrarians. So we’re seeing that there is an exuberance going on in the multifamily space, right? Rents cannot keep going up by 3%, 4% per year. So, at some point of time, these people that are buying these properties right now or have for the last two years at outrageous expectations, they’re going to soon lose some money on these properties.

So, when they start losing money, or when they start, when the market corrects and people are starting to realize that you can’t underwrite them like that, that’s when there’s going to be opportunities to buy. The masses will flee from multifamily again, the masses will go away, and that means that, finally, properties will be available again through the banks, through foreclosures, or the open market at numbers that completely make sense. Now, we still do find some of them, occasionally. So, when we find deals, we literally underwrite them with zero rent growth or perhaps 1% rent growth, but not more than that, right? So we, versus other people, many people underwrite them at 3%. We have had five years of 3% rent growth. It’s unsustainable to expect it to continue to be like that. So those who underwrite them, they might have a problem down the road. Well, guess what? We want to be there for that. We want to be ready for that. Houses, I don’t expect them to crash or do anything dramatic, so we’re not in houses. Land, we continue to be in land.

Or another opportunity that we’re looking at right now is actually retail space. You know what? Everyone is afraid of Amazon. Everyone is running away from Amazon. That means that retail space, currently, nobody’s looking at retail space. So if nobody’s looking at retail space, what is the first thing I do? Look at retail space, right? So we’re getting ready, after the summer break right now, to look at the retail space of some opportunities there. Because if they’re in the right location, with the right demographics around there, and the right kind of tenants, they can be beautifully cash flowing. Because, the thing is, just because Amazon is taking everyone’s lunch doesn’t mean that retail doesn’t work. Retail just might have to include some hospitality, right? Some restaurants. Retail might have to include some dollar stores, which are always going to be in fashion, particularly in a certain demographic, population group, right? Retail might need to include like several smaller stores instead of a big anchor store, right? So, when you look, and most importantly, retail needs to be positioned in a way that people find it and it’s easy for them to park and easy for them to get to.

So, if you have these things, then retail can actually be very attractive. But if you don’t have those things, and you’re buying in the wrong area, then Amazon is eating your lunch. So you gotta be, again, careful. But there is an opportunity right now because everyone is looking the other way. Everyone is looking into multifamily, nobody’s looking into retail and those kinds of spaces, right? Or office space. Office space is also, I mean, there’s a transition of small businesses going towards these Regus shared office space places, but at the same time, office space in the right location, you could actually rent it to one of these multi-user companies like Regus. And actually our own office is at the Regus, right? We’ve gotten rid of our big office space and we are Regus, and everyone on our team works from home. So, there is space for these kinds of opportunities, but you gotta think about them the contrarian way.

The contrarian way is like, there’s this guy called Kirk Kerkorian, he’s a Vegas investor. When Vegas went readily through the…When Vegas was in the biggest like slump ever, he went buying up half of Vegas, right? And now Vegas is booming again, and guess who is worth a few billion dollars more? Kirk Kerkorian, right? That’s the true path to success is you can ride success two ways. You can ride a wave, but you gotta get off the wave fast enough before the wave runs out. Or you can go and see where has the wave run out, where are people going away from, from real estate, or from certain businesses, and then go in there and buy them for pennies on the dollar. Like Warren Buffett says, “Be greedy when others are fearful, and be fearful when others are greedy.” Right?

So, when the market is in an all-time high, it’s not the time to get into the stock market. The time to get into the stock market is after the crash, right? When the stock market lost 50% then put all your money, or not all your money, but put a chunk of your money into the stock market then, because then it’s going to probably roar back within a matter of a couple of years and you make 50%, 70%, 80% on your money in a matter of two, three years, right? But when the market is an all time and everyone tells you how excited they are about the returns they’re making in the stock market, then it’s too late. You’re not then going to invest and are going to make a ton of money in the stock market.

So, again, contrarian is a way of life. It’s a way of thinking. I even use it in our vacation trips. When I see, like, we went to Egypt, the United States had a travel advisory against traveling to Egypt. Well, perfect. That’s when I want to go, because, you know what? The hotels are dirt cheap. A friend of ours went also, they stayed at the Ritz Carlton, or the Four Seasons, one of the two, in the presidential suite for I think under $200 a night, because everyone stayed out of Egypt. Now, what does…you can think about that differently. You can think I’m crazy about that. But typically, what that means is that there is a slight chance that somebody does something bad somewhere. But they’re going to go and do that to the Marriott Hotel somewhere, or they’re going to do that to the Embassy. They’re going to do that to the embassy, are they going to make that when nobody’s around or when the streets are full? No, they’re going to wait, right? It is statistically shown that after one kind of explosion or something happens, it’s extremely unlikely that the same explosion happens in the same location again, these terrorists even move around. So, statistically proven, it’s actually safe to go in these places, and we found it to be fascinating, and the people were so nice, and so appreciative, and so wonderful, and so on.

So, if we see there’s a bird flu going around, well, great, let’s go there because the bird flu is usually, those flus and stuff, they’re usually in the poorer areas of town, and when you go to the four, five star hotels, they’re not there. When there’s a currency crisis in Argentina, great time to go into Argentina and buy some real estate, or go on a vacation over there, because the currency is so cheap that you can get to Argentina for half the price, etc, etc, etc, etc right? That’s basically what we are talking about here. Don’t let the fear of those people around you guide you. Look at it from a analytical point of view of what makes sense.

Now, if you don’t feel comfortable going to Egypt with a travel advisory, then ignore that. But if you see that real estate prices are dropping somewhere, if you see that the country has a currency crisis and you want to go, wanted to go through the country all your life, then that is the time to actually go, because that is the time when it’s cheap. And that is, when the market is crashed, it’s not the time to stay off the market. It’s the time to get in the market, in the stock market, in the real estate market, in the multifamily market, in the housing market, in the land market, whatever it is. That’s the time when you get it. Now, the beautiful thing about land flipping is that it works in all the markets. All right?

So, with that, I want to say, be a contrarian. Go out there, become a contrarian, think like a contrarian, and you will find yourself overwhelmed with opportunities to make a fortune in the process. And with that, my dog, Daisy, and I say goodbye. Bye-Bye. See you in the next episode, and make sure you give us a five-star review and a thumbs up on YouTube, and a five-star reviews on iTunes, and see you in the next episode. Thanks. Bye-Bye.

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