The Guillotine and Sandpaper

I’ve been buying real estate for the last nine months because it’s cheap.

Steve Sjuggerud, whose instincts and research I trust, feels the same way as I do about this investment. In a recent Daily Wealth column, he said:

“Around the office, we have a saying about how the bust of a bubble goes: ‘First the guillotine, then the sandpaper.’ (It’s not our saying, actually. As far as I know, market legend Bob Farrell said it first.) The guillotine is the initial crash — like the Nasdaq bust in 2000. The sandpaper is what follows — like a decade of Nasdaq stocks grinding sideways, but going nowhere.

“I think we’re at the bottom of the guillotine now. And I think you have the opportunity to pick up a home incredibly cheap… way below market prices.”

He’s right about the sandpaper. I would not advise buying real estate now unless it provides a substantially positive (i.e., more than 5%) return on a down payment of 20%. And that’s 5% net of all costs.

I’m getting that — sometimes considerably more — on the properties I’m buying.

If you are interested in getting involved in real estate now — and learning more about how I’ve done it to protect myself from inflation — check out my essay in the May 2010 issue of the Liberty Street League newsletter. You can sign up for a trial subscription here. And when you do, you’ll not only get instant access to the LSL archives (and that article)… you’ll receive a free copy of my New York Times and Wall Street Journal bestseller on business building and entrepreneurship, Ready, Fire, Aim.