The proper action when things are going well is to pay off debt and consolidate your position. Then you will be financially strong and can go for further expansion without fear of loosing what gains you already have. When you are not deep in debt you do not have to worry about your creditors getting paid. Since
usual history of a business is cyclic (boom and then every 7 years (plus or minus) bust) you can predict when it is time to consolidate. When prices are “too good to be true, they are.” In two years just before top of market is reached, prices are going up at very incredible rate. I have seen real estate go up 25%, per year, right at top. This is incredible and I guarantee you it cannot sustain itself, at that rate. As hard as it is to give up a profit, it is harder still to sell an investment when it is going straight up. But, understand this is when you need to sell. If that is not what you want to do then you need to go to plan B: pay off your debt and get ready for market drop.
If you are debt free you can survive drop and then be solvent and financially secure when recovery comes. I would like to tell you a story of largest apartment owner in Hollywood.
It was 1980 when I met Nick. He owned 11 buildings at that time. He bought worse buildings in town. These had best cash flow. He owned mostly brick buildings. This was because they cost less money than stucco and wood buildings. This lower price allowed Nick to generate higher profits. Nick would buy a building. He then did a market study, and figured out what size apartments and what numbers of bedrooms were generating highest rent, per square foot. Then he remodeled his building to get highest price per square foot he could. He spent over $100,000 per building to do this. He also had to earthquake proof all of his buildings.
One of reasons that brick buildings sold so cheaply was that they needed to be earthquake reinforced. When Nick finished remodeling a building, it was producing a very nice cash flow. Nick would use that cash flow to buy and remodel next building. This was very smart thinking. Where did Nick fall off rails? First he would find a great deal, while he was still in middle of a remodeling job. He just couldn’t pass it by. He borrowed on one of his finished buildings to get down payment to buy building. Then he would borrow on a second building to get money to remodel new building. Now he was remodeling two buildings at same time. By borrowing on two of his successful buildings, he now had to pay loan payments on two new loans. The rents from older buildings now went to lenders instead of to Nick’s remodeling project. The new building, just bought, didn’t produce enough income to cover new loan on it because half building was empty due to remodeling. Nick now needed to keep borrowing money to fix buildings and pay loan payments on buildings that didn’t generate enough income. When a building was completed it then supported itself very nicely.
Was Nick happy with that? No, he wanted more and more buildings. If at any time Nick had stopped borrowing to buy new buildings, and just finished all his buildings in remodeling, he would have been able to catch up with himself and started expansion from a new level of security. That was, using buildings profits after paying all of his loan payments to buy and remodel more buildings. Nick just couldn’t wait and consolidate his position. He had every building he owned loaned up to maximum value that he was able to. The rents were more than enough to cover payments on each individual building. So what happened?
