Consider the story of a dairy farmer and his favorite cow, for which he paid $1,000. Every day, without fail, old bossy produced 5 gallons of rich, creamy milk for the farmer. The cow was happy and so was the farmer!
Then one day, for reasons puzzling and unknown to the farmer, the market for cows crashed and you could hardly give them away at the livestock auction. The $1,000 cow suddenly was only worth $700, yet the same cow STILL produced 5 gallons of milk every day.
Was the farmer sad about this? Puzzled? Maybe … but sad? Not at all. He had no intention of selling this cow that consistently made so much valuable milk because he still got his milk every day, ESPECIALLY when no one wanted to pay a fair price for it. The old farmer never sold anything when the market was down.
Do you see the connection here to what happened to the real estate market, starting in 2008? The same thing happened then when a home (the cow) suddenly lost 113 of its value, yet what it produced as a rental (the milk) didn’t change at all. Like our farmer, for real estate investors holding for the long term this meant that the RATE OF RETURN on their rentals had simply SKY ROCKETED.
Before 2008: a 1,200 sq ft 3 bedroom rambler worth $125,000 rented for $900/month (net), yielding an 8% return on value.
After “the crash”: that same home’s value fell about 30% to $87,000, but it still rented for the same $900 I month, yielding 12%!
WOW! Everyone else was complaining about their investment losses, but people that owned rentals? … not so much! Never sell your “CASH COW” when the market is down, dazed and confused. Wait for the return of better times and higher prices, THEN … maybe … sell.
So why did those rents remain constant thru the storm of 2008? Because good times or bad, everyone needs shelter. The NEED remains constant. Renters don’t care about property values … all they know is that they need a place to live and that they must rent it.
And what about values? VALUES HAVE INCREASED. In many areas of Western Washington they are at or near their old values before the crash, and in Seattle, real estate values are now HIGHER than ever before.
So how is the old real estate “cow” doing 7 years after the “Crash of 2008”? Well, it’s worth $1,000 once again (even more at the Seattle livestock auction house!) but NOW it produces 7 GALLONS of milk every day instead of 5 … more milk than ever before!
Like our dairy farmer friend and his favorite cow, many of the most successful people in America got their wealth from building up a herd of real estate rentals, remaining calm during the storms of life, sheltering their dependable livestock and hanging on to their oh-so-productive “cash cows”!
What’s in your barn?
