Re-runs of the 1987 movie “Wall Street” have been common these days. I rather think it’s not a coincidence that there is such a resurgence of interest in the movie lately, because it demonstrates the frailty of investments based entirely on over-leveraged and inflated assets whose bubble must burst eventually, almost like a grand pyramid scheme, certainly something that suddenly rings true today with stocks and real estate.
In the movie, corporate raider Gordon Gekko makes untold millions of dollars buying companies, breaking them apart, and re-selling them for more than he paid. He doesn’t really invest in or add value to the companies—he simply speculates on the price appreciation. He convinces his eager-to-get rich quick protégé Bud Fox that hard work and playing by the rules is for the poor, weak, and ignorant. Under Gekko’s wing, Bud also experiences the quick profit potential of buy-low sell-high and begins to lead the life he dreamed of. The dream is short-lived, however.
The movie made famous the expression “greed is good”, and many consider that line to be iconic of an entire way of thinking, at least for the Baby Boomer generation. I, however, think the real moral of the story is in the words that Bud’s father used as Bud was being hauled away by authorities for insider trading: “Create something instead of living off the buying and selling of others”.
Like Bud’s father, I have always resisted the here-today gone-tomorrow income associated with buy-low sell-high, especially with real estate. It’s not that it never works. It’s not that it’s never a win-win. It’s just that, like poor Bud realized, it usually doesn’t work so well.
With real estate flipping, the “system”, for lack of a better word, doesn’t want it to work so well. And where there’s smoke there’s fire. You have to question the underlying legitimacy of any transaction that is so hard to push through because of all the roadblocks put up by the system and the people who are affected by it. It’s obvious the real estate industry doesn’t want it to happen.
Banks, for example, clearly try to prevent real estate investors from profiting through quick flipping by their strict underwriting criterion, like requiring the owner to hold the property for a length of time before agreeing to lend money against that collateral, a condition known as “title seasoning”. Many title companies or real estate attorneys want nothing to do insuring or closing a transaction where the property is being sold more than once in a short period of time. Sellers resent the idea that the investor can make money off buying their house without the investor’s long-term commitment to fixing, managing, or otherwise adding value to the transaction. Buyers think they are overpaying when they find out how much money the seller is making for doing almost nothing. Many national speakers and authors go to great lengths to teach “investors” (and I use the italics for good reason) how to prevent buyers and sellers and their real estate agents from even discovering they are making a profit!
At GLSI, we hold properties for the long-term, not try to sell properties for a quick profit. This implies full-time management of the property and the people, which spills over into benefits to the neighborhood, the community, the tax rolls, the tenant, the contractors, and certainly for investors who lend money against the property. This is not for the faint of heart. It is hard work and can be quite stressful. We have many constituencies to please. But the result? You as lender are not speculating on price appreciation. Because all the parties benefit, there is a monthly income benefit that has the ability to repay the interest on the debt. No smoke, no fire. Gordon Gekko may be a flash in the pan, but our steady revenue stream provides security and high income without speculating on unknowns. This is the only tried-and-true formula in real estate that will stand the test of time.
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