Why I Downsized in My 30’s

Winter is coming. Don’t be afraid of the market, just be prepared. Sitting on the sidelines is worse than being in the game; but be smart and buy the right asset. I am moving my business and networth in to commercial multifamily.

In February of 2014 we sold our primary residence for $285,000.

Four years earlier we had purchased that same home for $202,000…nice return right? After the sale of this home we purchased another home about 15 minutes away for $330,000 and 2 years later, in 2016, we sold this home for $455,000…all cash. That was about a 100% cash on cash return. We then purchased a third home for $487,500 and recently sold it $585,000.

Now I don’t know about you, but I am not sure of another asset class where you can leverage other people’s money and make returns like I just shared. It would seem like its a good idea to keep playing this game: buy a house, sell it 2 years later and then buy a bigger house-but this time we did something different. This time we downsized! We bought a smaller house with a lower monthly mortgage, with lower monthly expenses, and reduced our overhead. In fact we bought a townhouse and no longer have yard maintenance, grass to water, and we have a smaller footprint. Additionally we freed up all the lazy equity that we had built up over the last 6 years. But why?

In the wise words of Warren Buffet,

“Be fearful when others are greedy and greedy when others are fearful.”

Everyone is a Genius in a Bull Market.

As an executive leader at my marketing and technology company. I have some first hand experience with a number of young professionals who are making a lot of money …I mean a lot!

But what are they doing with their money you ask?

They are buying bigger houses, nicer cars, going on more extravagant vacations and not a single one of them owns real estate outside of their primary residence. They’ll throw stupid money at bitcoin, make a ton of money, and lose it all because they have no exit plan. It’s brazen, hubris and cavalier how people are throwing money around. Not to mention Entrepreneur is the new buzz word. People are starting businesses at an absurd rate and banks are giving them money …Gotta Love Capitalism 🙂 But when money is this cheap, the banks are left to play the volume game-but I digress-that’s another story for another article.

Leverage is a great thing, until it is not

We are in the largest expansion since World War II. Unemployment is at an all time low and we now have more jobs available than there are people to fill those jobs. Consumer debt is higher than ever, and the dollar is weaker than ever……ah Inflation is a hell of a drug. It has been nearly 10 years since we have seen a correction in the market and people have lost touch with HISTORY. What goes up, must come down.

I hear people getting flustered about paying 5% interest rates or refinancing their homes to do really dumb stuff like buy more stuff. Have they forgot about the 90s and early 2000s- when 9% was the deal of the century? Although home lending is much stricter than it was in years past, there is a correction in our future. When? Why? How? I do not know. But I am certain that I will be prepared and I am doing everything in my power to insulate myself and our investors from risk. There will always be risk involved in any investment. But I can prepare for winter by choosing a strong market, choosing a strong asset and buying it at the right scale.

Winter is coming…

There are 3 things that concern me in our current economy:

  • Corporate Junk Bonds
  • Student Debt
  • Subprime Car loans

*More to come on these in future posts.

But I remember what it was like in 2008…

On September 29, 2008 The Dow Jones fell 777 points in a single day; this moment in time change my career as an investor for the better. I was in the thick of it as a future broker; and I watched people get their heads handed to them on a platter. Leverage is great, but only if you know what you are doing with it. In a bull market people get soft with their underwriting, their exit plans, and their projected growth-they forget that winter always comes.

But even during the subprime crisis of 2008, the default rate on commercial multifamily loans was 0.04% (less than 1%). The subprime debacle was not caused by professional investors it was caused by average joes, getting cavalier with their lending and their investing practice. It was caused by over leveraging. That being said since 2000, real estate has still outperformed the stock market by 2x. NCREIF Property Index (NPI Index) has shown a 10.7% annual return compared to 6.14% annual return from the S&P 500. This is why I am downsizing and selling off my single family real estate. I am positioning more money to buy large commercial multifamily assets in Texas & North Carolina. Not only are Texas & North Carolina some of the fastest growing states, they are extremely job diverse, employer friendly and landlord friendly; with a large inventory supply of Large 100+ unit, B Class, Multifamily. I cannot predict the next correction and I am definitely not going to be sitting on the side lines, but we will be ready and prepared for the most bitter winter yet.

Stay ready,

Samson Jagoras