The Gospel of James

This blog’s about not being a greater fool. It’s also about fair comment.

This weekend I referenced remarks from a young Edmonton realtor whose advice to people vexed over an underwater condo was to buy more real estate. I disagreed. Still do. But I offered James Knull a chance to make his case for buying, even when so much economic evidence points to this being a greater fool moment.

Here is what he has to say. Uncut. — Garth

I must say that I am thoroughly unimpressed by the rudeness of Garth’s fan base. I’ve received several anonymous emails from fans with name calling and general belligerent rudeness. (Favorites seem to be “whore” and “fagot”) Furthermore, many of the posted responses to Garth’s initial blog entry contained much of the same. If you want me to take you seriously as a readership, you need to make serious arguments about Real Estate and the market, not take your anger at the world out at on me with a slanderous rant.

On to my article:

#92 Brian: “Fun question for James is should we buy or sell?”

There is one key argument I am going to make here: buy low, sell high. Simple.

As one respondent comments #144 junius: “A young realtor like Mr. Knull is too young to remember the crash of 1982 in Edmonton. He only knows the market over the past decade or so which means he has never seen a market crash.”

Another respondent comments #124 bullion.bunny: “Did everyone in Alberta forget 1995/1996 when house prices collapsed and people sold their home to “Dollar Dealers” for one single buck?

If one studies these eras, those who purchased real estate during that time of turmoil made an absolute killing as prices rebounded once the market rebounded. Don’t you wish you had bought a house for 1$? Those people who panicked during the downturns in 82 and 95/96, sold at a loss, and then waited until the market rebounded afterward and bought back into a heated market got absolutely killed. Which do you want to be in 30 years when we’re talking about the crash that’s happening right now?

Right now the market is at a low point which is providing an amazing window of opportunity. I’m pointing out that history should be teaching those wanting to make smart investment choices a lesson. Right now the market is low. BUY LOW. It won’t be too long until the market recovers, SELL HIGH.

Those of you who screaming mad that the market is going to spiral down forever, that this is it, and that get out now before the apocalypse happens are the SAME people who didn’t seize the opportunity to make money in 82 and in 95/96. The only real argument Garth makes that isn’t just him shamelessly poking fun at me is: “Well, the price of a SFH in Edmonton last month declined by $11,600, or 3%. Annualized, that’s a 36% correction. It means the engineers’ condo just lost more altitude. But what of the argument that only fools sell for a loss, and smart people who understand ontology actually keep buying real estate?”

By this logic then, would real estate drop by 360% over the next 10 years?

I don’t even need to rebut this point myself, #5 Dan in Victoria: “‚Ķsmart ones know there is a cycle it goes up and it goes down.”

A cyclical market recovers over time; it does not spiral up or down forever. Again I emphasize buy low sell high. Right now the market is low. In the future the market will be high. Another term for a depressed market is a “buyer’s market”. What should an intelligent investor do in a “buyer’s market?”

A sophisticated investor will buy a property if it provides cash flow. (To add, it should really have something positive going for it macro economically as well, like, for example, a new LRT station being built a couple blocks away). What is Cash flow? In simple terms, you collect more rent than you pay out in expenses. The sophisticated investor will take this a step further and analyze the macro economics of the particular property and only purchase if the long term prospects for collecting that cash flow are extremely good.

In very simple terms, if you buy one house to live in for your life, you will end your life with a paid off house worth in today’s terms about 300k. Why not do this with 10 houses? As long as you purchased with an eye on proven cashflow, your tenants will pay for your houses and you will retire wealthy. I am not JUST telling you to buy real estate. I’m telling you to buy CASHFLOWING real estate that has a positive macroeconomic profile and excellent long term prospects for rentability. To maximize this strategy, buy in a lower market, sell in a higher one!

Is this easy? No of course not! I fully expect to see a few posts from people saying “James is crazy, my brother’s friend’s cousin owned a house this one time and a tenant trashed it, oh that was horrible, don’t by real estate.” Being a good landlord requires knowledge and hard work. But the rewards are pretty clear. Owning 10 houses at 300k is a lot more net worth than owning 1.

So I put Brian’s question of should we be selling are buying back to you as the readership: Was the market a few years ago higher or lower than it is right now? Is the market high right now or low right now in relative terms? Where will the market likely go over the next 10 years? Don’t panic, stay calm, and take advantage of this opportunity. Be the person who gets to brag in 30 years about the deals you got right now. Don’t be the person who got scared and sold at a loss right now and then had to limp back in when the market rebounded.