June 5, 2017

Think Beyond California

Most people go to college because it's they path they've been told to follow. If, on the other hand, you view school as a step along the path to getting rich, you have to make deliberate choices.

To give you some context, I have some experience in business. I developed an educational Web site in 2005 and sold it for a profit. I left California in 2006 at the top of the real estate bubble and moved to Oklahoma City, one of the most undervalued housing markets in the country at the time. The Oklahoma market had been in a twenty-year slump and was just starting to come back, and it managed to avoid the real estate crash that plagued most of the country from 2007-2012. The private school I'd been working for in California laid off a significant fraction of its teachers during that time.

I worked for a real estate company developing quantitative models to value properties and taught science and ACT at a private school, then back to California in 2016 after seeing oil (and Oklahoma oil companies) crash in 2014-15.

Good timing has helped my career as an educator indirectly. I've had all the work I can handle, and I've never had to watch my co-workers get fired due to a recession.

If you want to get rich, you have to take greater risks than I did. You have to borrow money to go to business school, to buy rental properties, or to start a company. Your chances of success will be much greater if you minimize your debt, keep your living expenses low, and buy assets in an undervalued market that's unlikely to crash.

California, with its high cost of living, is a risky place to get rich. The problem is magnified if buying residential or commercial real estate is part of your plan. Housing prices are so high in the Bay Area that the income from a rental property won't even pay the taxes and interest on an 80% loan.

Of course, there's a reason prices are so high. Some people who live here are already rich. Others need to be close to high-tech opportunities in Silicon Valley.

If, on the other hand, you want to be a real estate mogul or open a chain of restaurants, your start-up costs will be lower and your cash flow higher if you move away from the coast. If you're in an undervalued real estate market and your properties appreciate in value, you'll experience higher gains with lower risk.

Real estate is a relatively illiquid market. People buy homes even when they know they're too expensive, and they wait to sell until they absolutely have to. Most people won't buy property out-of-state or move somewhere just because rental properties are cheap. Overvalued and undervalued areas take years, if not decades, to correct to fair values.

If I were a high school student wanting to get rich, I'd choose a college in an undervalued real estate market, something that's gone down for the past twenty or forty years and has just recently started to recover. A college in a depopulated area like that is going to be eager to get students and might offer me a scholarship. I'd have years to find the local business connections I needed, and my living expenses would be low. If I had the money, I might even buy some houses and rent them out to college students.

The map below, from 2014, suggests that the overvalued markets are on the West Coast and in the oil patch (Texas/Oklahoma) markets. A 2016 Forbes article suggests the same pattern.

If I were 18, I'd consider moving to Detroit. The median home value is only $40,400. That's 1/22nd of San Jose's $885,000! The median rent is $750/month or $9,000/year: 22% of the median home value.

Detroit has just started coming out of a forty-year slump. The charts below show that the collapse in its real estate market continued well past 2008. The market has just turned around with a 19.2% year-on-year change.

Detroit as of June 5, 2017

Residential Median Home Values: Detroit, 2007-2017

Residential Median Home Values: Detroit and San Jose, 2007-2017

An undervalued housing market looks a lot like a value stock. A multi-year collapse in prices leads to favorable financial ratios and the potential for capital appreciation.

Detroit isn't the only city that's undervalued, of course. It just happens to be a market I've watched since 2008. I've waited for it to start coming back, and it looks like it finally has.

If you decide to pursue this plan, expect a lot of resistance from people you know. Being a contrarian isn't easy, and that may be why most people don't take advantages of the opportunities that are in front of them. You need a college admissions counselor who can think outside the box and recommend schools in areas that people don't want to live in (yet). Most of all, you need to define your own goals and bring them to your counselor. You're paying her, so you're the boss. Tell her about your long-term plans and ask her to help you reach them.

If you move forward, contact me so I can hear your story. After you become famous, I can say that I knew you when you were still in college!


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