Principles That Saved Me From The Financial Crisis

Home prices were blazing higher by the month and real estate was the hot topic. There was FOMO (fear of missing out) in the air. Many people believed prices had only one direction, up. I’m not going to lie, I wanted in. In fact, I was in search of a home around 2 to 3 years prior to the housing crisis.

What stopped me from buying prior to the crisis?

My desire to own a home began when I witnessed a friend purchasing her first home. It was a townhouse with a tiny back yard. We discussed how fast the value of the home was climbing as we had BBQ’s in that small back yard. Back then, that small back yard was luxury compared to where I was living.

So, what stopped me from participating in contributing to the housing bubble? Research. My search for homes did not start until I had done my research into as much successful real estate investors as I could. I studied their story about why they failed. What their life lessons were. Lessons on how to be an investor who wins one way or the other.

My obsession to mimic the successes of others had me studying hundreds of stories about them. You come to realize there is a pattern that looks similar among the successful.

What did I learn? It was fundamentally simple. Use leverage appropriately. The best deals are ones you make a profit on the front end. Location is a major factor in real estate investing. If you invest in real estate correctly, a financial crisis like the one in ’08 will not affect you.

The simple principles

So, I began to form my own set of principles that was aligned with my longer term goals. Here are 6 principles I decided to uphold against my first primary home purchase.

Down payment should be enough to return near 8% ROI if property were to be rented out.
Location must be viable for healthy rental conversion.
Location must have healthy rental market.
Location must have good growth prospects.
Buy undervalued properties that need work.
Maximum commute time 1 Hour.

It was that simple. These principles fortunately prevented me from buying properties before the housing crisis. With massively inflated prices, I simply couldn’t find a property that met most of these criteria. Lenders were willing to lend but I refused to make the mistakes of others, so I rejected countless realtors trying to push a sale.

At times, this led me to search for homes 1 to 2 hours away from my place of business. Luckily, I was grounded by my principles which prevented me from making such purchase.

My search continued for about 2 to 3 years for the right home. During this period, I had learned a lot. Then, it happened. The housing bubble began to burst.

Opportunity of a lifetime

Prices began to plummet. Supply of homes on the market began to skyrocket all over the country with homes foreclosing everywhere. Then the numbers slowly began to make sense.

A home that sold for $580,000 in 2006 and hit a peak market value of $700,000 had dropped down to $420,000 by October of 2008. The numbers began to fall in place and met my requirements. I had no idea how worse the crisis would get, but I pulled the trigger.

After the initial purchase of my first home, the value of the home further declined until 2011. The home dropped down in value to around $350,000 before prices quickly turned around and began its climb higher. It was brutal, but I couldn’t care less. I had options and I was in it for the long term. By 2013, the property had recovered to the original purchase price and ended the year higher.

The Lessons

The timing of my first home was horrible but because of my principles, it prevented me from making worse financial decisions. After my initial purchase, people continued to foreclose on their homes by the thousands. Pickets with signs showing foreclosures were everywhere as lawns went from green to yellow. It was a unique experience, one of magnitude rarely seen in US history.

The most difficult part was having patience. Many around me were purchasing homes, leveraged up to their eye balls. The hot topic was real estate in many discussions and I couldn’t partake the way others were. My usual response was “I’m still looking…”. I remained disciplined and upheld my principles. I admit this was not easy. Whatever your principles may be, setting them is one thing but living by them is another.

“Patience is bitter, but its fruit is sweet.” – Aristotle

The lessons were clear. Leverage is a beautiful thing but the importance of fully understanding the risks was another. I’ve seen close relatives, business associates, and friends who have lost it all from being over-leveraged in business and investments. As unfortunate as it was, I studied their every move and saw the outcomes unfold in real time. The decision was clear. I wasn’t going to make the same mistakes in my life.

I am reminded of a quote from Warren Buffett that had a profound impact in my life.

“It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.” – Warren Buffett

Life is too short to make too many mistakes. Mistakes may bring lessons, but it also creates setbacks. I believe if you have enough setbacks in life, you may be limiting your full potential to reach higher.

I’m not saying not to take risks! Understand your risks well and take well calculated risks.

One of the greatest skills to learn is perhaps the ability to internalize the mistakes of others and truly learn from them. Thank you for reading.