Real Estate Pyramids

Sfgate.com tells how a couple Buys, Borrows, Buys with leverage to build an empire of eight vacation properties.

In the three years since Sacco and McCook put their faith in real estate, the couple have embarked on what might conservatively be called an E-ticket ride, pulling equity from appreciating properties to provide down payments for the next investment. They have bought eight vacation properties - four homes in Florida, three in California and 100 raw acres on top of a mountain in Lake County.

They move from home to home, depending on which one needs work, which one isn't occupied by vacation renters and where they are shopping for the next property.

Sacco readily admits that she and McCook have made mistakes -- mistakes she would like to help her clients avoid. This summer, the couple ignored their own formula (don't invest in the market that's going crazy -- invest next door) and bought two high-end condos in Florida before learning how competitive the vacation rental market was there.

Now, only a few months later, they are putting them on the market to reduce their debt and stress. "We broke our own rules," she explains. "Vacation (rentals) are not for the faint of heart."

Sacco estimates that along with McCook's mother, who has been a silent partner, they've made $1.3 million since they began their buying spree, but all of this is still in equity on their properties. Their monthly reality is more sobering. They have $2.3 million in mortgage debt and negative cash flow that ranges from $5,000 to $15,000 monthly depending on the season.

So how do they pay the bills?

"We sort of count our equity loans as our income," she says, with the slightest wince. "If we had real jobs, we'd be fine, but we just need to get some money in. Some people call it a pyramid, but I don't like to think about it that way."

Surreal financing? Bubble economics? Perhaps. But it's also the way people are increasingly approaching real estate: as a bet that in the long run can't be beat.

Some of these stories are almost too hard to believe. Then again truth is often more unbelievable than fiction. Let's see... They have zero outside income, negative cash flow of $120,000 a year or so, and living expenses while they hop from home to home are 100% dependent on cash out refis from rising home prices. After having "made a mistake" on Florida vacation rentals, this advice is offered: "Vacation rentals are not for the faint of heart." Like the rest of what they are doing is standard procedure? Heck what do I know, maybe it is.

"If we had real jobs, we'd be fine, but we just need to get some money in. Some people call it a pyramid, but I don't like to think about it that way."

No, if they had "real jobs" they would not be fine on negative $120,000 cash flows.
They may not like to think of it as a pyramid but that is exactly what it is.

Mish question of the day: Which is more amazing?

1. That someone is silly enough to build a pyramid like this?
2. That someone else is silly enough loan them money to keep their pyramid growing?

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/