Author: Cooksquared (page 3 of 4)

by Cooksquared

Real Estate Investor

Author website

It appears the Wall Street Journal has sniffed out major issues in the sub prime lending market only two weeks after Brian Brady broke the news here first. They focused on one of the strongest lenders, New Century, who is now poised to take the biggest fall because of their lax lending practices and perhaps illegal accounting. So why do I bring this up? Simple, it’s a great time to talk about some great investment opportunities on the horizon.

Let me start by saying that this truly is a tragedy. Many unsuspecting people will lose their homes because of poor lending practices. Additionally, many mortgage companies will go under costing thousands more their jobs. While this does not appear to be the 1980’s S&L crisis reborn, it will have some serious repercussions on the mortgage and asset back securities industries.

So where is the opportunity for the investor? Essentially, the foreclosure market will be flush with properties in the coming years. As defaults continue to rise, foreclosures will soon follow. Worse yet, many of the banks that make these loans will be trying to get them off their books as soon as possible. This creates great investment opportunities in markets that might have been inaccessible before. Lots of these loan products were/are huge in markets like California and New York, where prices have sky rocketed. Additionally, with the influx of bank owned properties on the market, expect housing price increases to slow in these markets.

Furthermore, many mortgage companies are now tightening their belts. Countrywide, the nation’s largest mortgage lender, has completely stopped doing 100% financing. Since they are the industry leader, it is safe to assume many of their peers will follow. This practice will push more people to renting because essentially less people will be able to afford to buy.

This is one example of a way to makes lemonade from some pretty bitter lemons. The ripples of the sub prime fall out will be far and wide, but make no mistake, there will be people that do pretty well because of it. Regardless of your opinion on how or why this situation Read more

by Cooksquared

Real Estate Investor

Author website

Some of you may have noticed a drop in my postings over the last two weeks. The driver behind this has been mid terms. For those of you who don’t remember what that was like when you were in school, imagine doing all of the work you do in a typical month in a week. All of my studying got me really thinking about this issue of theory vs. practice. One of my pet peeves about most educational experiences is that there is too much theory and not enough practice. Worse yet, many of the theories do not work in practice. I thought I would spend some brief time outlining a few higher level theories that work and their implications in practice (don’t click away, I promise there is good practical knowledge to come).

Theory #1: Most markets tend to have a natural vacancy rate and there is a mean reversion tendency if prices get too high or too low. A lot of very complicated math proves this out for most markets

Practice #1: Most markets tend to stay at a certain vacancy rate. If the level of vacancy gets too high, rents come down until the natural vacancy rate is achieve. If vacancy gets too low, expect prices to increase until this vacancy rate is achieved.

How can the investor use this? Take a look at the historical vacancy of a market. If you are technically literate a simple chart will give you an idea of the natural vacancy rate. If you are not, you can probably simply eyeball it and be close. Try to buy when vacancy levels are above the natural vacancy rate. Properties will be cheaper and you will experience appreciation by simply waiting for the market to correct itself. This is a simple strategy that really works in practice. Smart buying can keep an investor in profits in an up or down market. This point is an interesting twist on buy low/sell high. Essentially buy vacant, sell full.

Theory #2: Interest rates affect cap rates directly and indirectly. As interest rates rise, cap rates rise and property values fall. Additionally, Read more

by Cooksquared

Real Estate Investor

Author website

I thought I would take a brief moment to share a few interesting tips and tricks I recommend when considering real estate. I have compiled these in my limited years of investment and my brief time in school.

Tip #1: Use your mortgage like a bank account. One interesting phenomena in real estate (residential especially) that is surprisingly irrational is the treatment of mortgage. If you have a residential mortgage at 6.5% and your bank account nets a 2.5% saving rate, there is really no reason to put any money in your savings account (you lose 4% on every dollar you deposit!). Outside of cash needed to operate day to day, all of your savings should go to paying off your highest interest debt. A lot of people either don’t think about this or just do not know the true implications of this. Luckily, our newest writer, James Hsu has saved me some time by providing a quick analysis on the value of paying off mortgages early. Not only do you save yourself a tremendous amount of interest by paying off your mortgage early at no additional cost, but you also free yourself of future debt. My recommendation is to set a maximum emergency cash flow you need to live and funnel everything else to your loan.

Tip #2: Pay your mortgage more often. Interest is calculated monthly on most loans (based on principal balance at that time); therefore, paying bi-weekly essentially allows you to pay slightly less interest. While it may only save you several hundred dollars of interest payments a year, this money adds up. If you get paid bi-weekly, send in half your mortgage payment early. This can shave several years off your mortgage.

Tip #3: Consider a second loan to avoid paying PMI. This can be tricky because you want to make sure the second loan cost you less than the mortgage insurance (obvious, but it has to be said). Optimally this will be a second loan that you can repay early, avoiding most of the interest payments. Check with your mortgage broker or banker to see if this Read more

by Cooksquared

Real Estate Investor

Author website

Cooksquared Enterprises is very close to taking its first humble step back into investing after a two year hiatus. After a disappointing stint in Greensboro, we have settled on 32 units in Winston Salem, which is about an hour away. Over the past two weeks I have been going back and forth with the broker, asking a ton of questions, clarifying local business practices, and doing my best to get in touch with the seller. Through all of this I thought it might be helpful for other investors to understand the major questions I ask of my realtor when looking at a deal. For you veterans out there, read on and feel free to add some value in the comments section if I miss anything.

First, I am more of a new age investor. I do everything in Excel, using my own personal models painstakingly put together through trial and error. Even if you are not an Excel investor, I personally suggest writing down key learnings from every deal. It’s always good for a laugh when you look back at how long the list was from your first deal, plus it really helps you reflect on what you did well and what you can improve upon. For those of you interested in a very simple model to get you started, I am more than willing to share one if you email me (mc140@cornell.edu). Please remember that I am an apartment investor, so all of my models are based on purchasing apartments.

Once I put the deal in my model, the analysis begins. Typically, the first question to my realtor is where the numbers are coming from. There will be three main areas to focus: Rent rolls, expenses, and cap rates. Typically, Net Operating Income (NOI, which equals Rent roll minus recurring expenses) will be projected and then divided by the current cap rate. Watch out for two seller tricks. The first is to project an unreasonable NOI. For example, many sellers will simply increase rent rolls by 5-10% (or more) and not include a market vacancy rate. The second is either not Read more

by Cooksquared

Real Estate Investor

Author website

Have you ever negotiated your way out of a good business relationship? I certainly have and I have often regretted it. Novice investors typically fall into two camps: the pushover or the bulldog. While there are certainly times to be both, the context of the situation should remain paramount. Some times the biggest winner in a negotiation can really be the biggest loser in the long run because of relationships that get crushed over a few dollars.

I will start by sharing a personal story. First, let me say that I fall squarely in the bulldog category. I have been getting my way since I was knee high by just about any means necessary (all ethical of course). Add to this all of seedy things I have heard about contractors and real estate agents and I became a real pain to negotiate with. In my first rehab, my wife and I were able to secure two workers, who happen to be down on their luck. They did great work, but really needed to be micromanaged. We really had all the power in this situation because they needed the work and didn’t really have any other leads. Long story short, they did a lot of work very cheaply, but as soon as they began getting other jobs we got the shaft (deservedly so). I squandered an opportunity to build a great relationship with two good contractors to save myself a few thousand dollars.

One of the most important life lessons I have learned is to pay people what they are worth. There will always be times when you have the power to under pay someone. I suggest you steer clear of that apple, no matter how good it may look. The hidden cost of putting the screws to someone when you can is evident in the form of decreased loyalty and a deteriorating relationship. Reflect back on the personal story I just shared. At the rate my wife and I were buying houses, we could have keep them in work for years. We would have enjoyed the benefits of getting honest reasonably Read more

by Cooksquared

Real Estate Investor

Author website

Interest rates and the small investor, is there really an effect? Beyond the obvious cost of borrowing, I have wondered if the small investor really notices a change in the Fed Funds rate. While I am not going to make the same mistake of asking you all to humor me, I am going to try to show that the small investor is less sensitive to smaller changes in rates. I am also starting with the assumption that smaller investors tend to invest in markets with higher cap rates.

First, let’s get some things clear so we are starting from the same page. If we consider the value of commercial real estate, we can approximate it with a simple formula, Net Operating Income (NOI) divided by the cap rate. Additionally, let’s assume that the cap rate acts as a proxy for investor demand. This makes sense because NOI is simply based the rents collected, while cap rate is the return investors will accept for those rents. In markets with very low cap rates, investors are willing to pay more for rents now because they expect a higher rate of future rent growth than lower cap rate properties and/or they expect lower volatility in those rents or they expect even lower cap rates in the future (appreciation).

Next, let’s think about investing. Most investors try to leverage their properties as much as possible. Banks understand this, so they enforce strict standards. Typically investors can get 80% Loan to Value terms, as long as Debt Service Coverage Ratios (DSCR) comes in at 1.2. The DSCR is simply NOI/Debt Payments. In markets with lower cap rates, this becomes more important because the higher value creates higher debt payments. This situation creates a cap rate floor for smaller investors, who have less financing options. Investors who focus on $1 Million and under properties do not have the same access to financing because their loans are not as profitable and harder to move in the securitization market.

Then, we have to analyze the effect of a 1% change in interest rates on loan terms. Looking at a $500,000 loan with Read more

by Cooksquared

Real Estate Investor

Author website

Value may be easier to find than you think. A few days ago I read this article about Florida Mobile home buyers and thought, man; I need to get into mobile homes. To be fair, I am probably not going to get into mobile homes (certainly not because of this article), but it is clear there is value everywhere. This off the wall scenario happens all the time, heck; it’s what makes real estate an exciting business to be in. So if value is easier to find than you think, where do you start looking?
First, start in your own backyard. I have shared my views on out of state investing in a previous post, so it should not come as a surprise when I say that value can be found close to home. I say this because the small investor knows this environment best. Investing at home is a lot more feel, than numbers because an investor has developed a great sense of the market. As investors move further and further away, information gathering and financial modeling become the chief tool. Of course, this is not to say that you should not use these tools in local investing, however; it is to say you have other tools that may be more valuable (intuition and market knowledge).
Second, find the crowd and look to the peripherals. If you see an area that has grown rapidly, go another half a mile or mile out. If this area is still lying fallow, it might be a good place to invest. This takes a small bit of market timing because you don’t want to be on the very back end of a trend. However, this kind of investing can net significant gains for those of you who buy and hold. There will always be buyers who want to live in the mix, but can only afford to live close to it.
Third, buy the worst of the best. If you can afford the worst house in the best neighborhood, you can usually find great value there. In good markets, great neighborhoods tend to get hot fast. Read more

by Cooksquared

Real Estate Investor

Author website

Partnerships can be disastrous, but they can also open the doors to investing for many individuals, who could not otherwise invest. Personally, I think many investors are too eager or not eager enough to partner with like minded individuals. On one hand, everyone has a friend who always has that “great idea” (you know the liquor store across from the church or the ice cream store in Antarctica). These people should clearly be avoided. But what about people who actually have good ideas or have found good investment properties?

A good partnership begins with common goals. Each partner should have a clear expectation of the investment type, expected return, and reinvestment rate. If the goal is to get a better understanding of the real estate investment process, the partnership should focus on smaller, easier to manage properties. If maximizing return is the goal, everyone should be clear about their risk tolerance. Partnering on a land development deal might not be appropriate for someone with a lower risk preference. More importantly, everyone should understand the risk of every investment. This is easier said than done. Many real estate deals seem simple, but can get very complicated very fast. Keeping everyone well informed of the details is a must.

After common goals have been established, a clear investment strategy should be laid out in writing. It is important this is in writing because it should be referred back to as each investment is considered by the group. It is very dangerous for the group to stray away from their investment philosophy. When things go well this is typically not an issue, but when things go poorly this can be an issue of contention (outside and inside the courtroom). Additionally, by putting the investment strategy in writing, the group is forced to flesh it out. This process will often eliminate extraneous ideas or bring out ideas that people may not have been comfortable with. Either way, it puts everyone on the same page.

Next, bring in the legal and the accounting team. For smaller, less complicated partnerships this step is as simple as paying a Read more

by Cooksquared

Real Estate Investor

Author website

If you have been reading my posts, it may seem like I am all over the board. One day I am talking about mortgages, the next I am talking about agents, and today I am talking about landlords. The coherent theme behind all of these things is smart real estate investing. Commercial investors must have a strong skill set across areas because they represent the cog that brings different real estate functions together. Today, I want to talk about one of the most value jobs a residential (commercial and non-commercial) investor will have to do. This job is that of being a landlord.

People have typically had one of two experiences with landlords. First, they may have rented an apartment growing up, in college, after college, etc. Second, they may have seen one of the many comical landlords on television (Mr. Roper from Three’s Company for example). Regardless of where your experience comes from, being a landlord is never as easy (or as comical) as it appears. This is especially important for the first-time investor, who has no idea what to expect from tenants.

First and most importantly, new landlords must understand that people will not treat their property like it is their own. This is true with just about anything that is rented. Everyone remembers how much more recklessly they drove their rental cars or how poorly they treat their hotel rooms. It’s just a simple fact of life; ownership creates a sense of pride, while rentership (not really a word, but you get the point) creates a sense of carelessness.

Once that very important lesson has been absorbed, investors should go into the process well informed. This means finding every book, article, blog, and person you can to help you gain a better understanding of what it really means to be a landlord. Don’t just listen to the people that say it’s easy. Look for the horror stories. Watch one of the many day time Judge Shows. Ask yourself if you could handle the worst of the worst. Once you feel fully informed, you are ready to begin the process of becoming Read more