How Did Real Estate Investors Stay Profitable in the 70's - 80s?

[Jeff G.]

During the stagflation era (1973-1982) when interest rates were sky high, prices were rising due to a weaker and weaker dollar, and and wages weren't rising to match, how did investors make money? What strategies did they use to compete? What previously successful strategies tended to fail in that environment? What can that era tell us about the present and near-term future? What, if anything, will likely be different this time? Will it last as long as it did last time?

[Frank Chin]

I started investing in the NYC area beginning in 1983 after following the market from 1971 when I graduated college. Got interested because my dad bought a mixed-use property in 1963 for $25K and it tripled in value by 1972 to $75K.

I started my investing with duplexes and triplexes in 1982. From 1972 to 1982, they tripled in value from $75K to over $200 -$225K. Fortunately, owners and investor was unaware of the quick rise in prices, got confused, that you can get undervalued properties. The first property I got for $150K has an ARV of $200K in 1983. The second property I got for $180K in 1984 has an ARV well over $225K. The trick here is I kept looking and find flukes. The second property I got was listed with the wrong price, advertised by the realtor. The realtor staff got confused as the broker promised to get $180K for the buyer after commission and expenses, not listing it for $180K. I made an offer around $180K but was rejected. I kept checking back, every week, and they were still trying to find a buyer, for months, and several months later decided to take my offer if I raised it by $5,000, so the broker can make a commission. There was a contract signing, an argument broke out and my wife decided to leave. The broker chased after us and begged "ok, I'll take $2,000 commission on this deal if you go through with it, and it's better than nothing for me".

Finally, I invested over 25% to 30% cash as the interest rates in 1983 ran 13% to 14%. I lived in the first triplex, rent free, with the tenants covering the mortgage. I made several hundred a month on the second property. When interest rates dropped to the 7% to 8% level by 1993, i refinanced, from 13.5% to 7.5% and because of DTI issues, kept the mortgages the same amount, and was able to live rent free and have cash flow of close to $2,000, including another SFR I got. My wife quit her job.

All in all, I did OK. Other investors gambled, overpaid, negatively cash flowed, and got wiped out. The market tanked in 1986, and people who got in at that point got wiped out. The triplex next to my triplex that I got in 1983 for $150K was sold in 1986 to a flipper for $350K and he put the property on the market for $399K. By 1990, he lost money for 3 years, can't make his payments and sold it for $300K. He lost over $100K. The guy who bought it for $300K sold it 3 years later at $275K also negatively cash flowed and lost another 100K.

Answering your question, 1973 to 1982 everyone did OK, prices tripled. Problem was mortgage rates hit historic levels in the 80's up to 18%. From 1986 to 1993, not so good. The market recovered till it reached its next peak in 2006. Triplexes in 2006 went for $800K, for a short while dropping to $600K here in NYC a year later.