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Author: Cooksquared (page 4 of 4)

Real Estate Investor

January 29, 2007

Touchdown in Greensboro: What makes a good investment?

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Real Estate Investor

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The rubber has finally hit the road. After a lot of researching, speaking with agents, and working with mortgage brokers, I finally touched down in Greensboro. Armed with financial models, a few perspective properties, and a lot of appointments, I set off to find a good investment. Today, I want to talk briefly about what kind of property makes a good investment.

Keep in mind that a good investment for me may not be a good investment for you. Before you begin to look for your good investment, have a good understanding of your goals, timeframe, risk tolerance, and expertise. These three aspects make up the first step to finding a good investment. Investing should always be goal oriented. Goals help you focus your investing. If your goal is to become a millionaire in a year (not recommended) then your investment strategy needs to be very aggressively focused on leverage and Net Present Value (NPV). On the other hand, if you want to save for your child’s college fund or your retirement (Thanks Jeff), you may want properties that generate consistent cash flow in markets with a lot of potential buyers (easy exit and entry).

Additionally, timeframe and risk tolerance come into play as well. One person might be a skydiving, fast car driving risk loving young man, while another might be a little old lady looking to supplement her pension. A good investment will clearly be different to both of these individuals. While this is nothing new, it is surprising how many people do not truly understand the risk behind investments. Many people look at real estate investments as very low risk. Perhaps if you are buying core buildings in a major market, you might be able to be fairly certain of your cash flow. However, to capture those certain cash flows investors pay a significant premium up front in the form of a very low cap rate.

Besides meeting the above requirements, good investments are not obvious. Good investment properties require looking at a property and seeing something different than 90% of the investors who would normally look at that Read more

January 29, 2007

Time Really is Money

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Real Estate Investor

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This is a message to all the real estate agents out there. Timeliness represents professionalism. I bring this up today because I am still getting calls from emails I sent over a month ago to agents asking about assistance finding a property in Greensboro. From an investor prospective, first impressions are everything. If it takes you a week (God forbid a month?!) to get back to me with a simple request, why would I work with you?

When I look to buy an apartment complex, I know what I want and I always want to close quickly. An agent should be an ally in this process, not a stumbling block. Perhaps some agents out there think that the perception of busyness shows perspective buyers that they are hard workers. While that may be the case with some buyers, many buyers (especially me) are turned off by this. Additionally, since agents typically work hardest for buyers in their first month, what are buyers to expect after the second or the fifth month?

I’d like to think that I am easy to work with (my wife might disagree, but luckily I am the writer here). I do all of my financials, have good credit and easy access to financing, and know exactly what I want in terms of property. An agent could make an easy commission by simply spending half of a weekend showing me properties. Since I am sure many buyers try to portray this, I can understand why agents might be caution. But, is that an excuse for not being professional and simply following up the next day?

I will very soon be employed as an investment banker. I cannot imagine what kind of business I would be doing if I waited a week or more to call my leads back. Bottom line, a simple three minute phone call can get you off on the right foot. In this business reputation means a lot, and being elusive will send your reputation in the tank very quickly. Even the most outlandish request deserves the courtesy of a three minute phone call.

January 24, 2007

A Different View of Diversification

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Real Estate Investor

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Greg brought me on with the quote, “I think you would be a good counterpoint to Jeff Brown.” Well, I guess its time for me to start earning my keep. I fall on the opposite side of this diversification issue. The benefits of diversification outside and inside of real estate clearly outweigh the incremental positive returns because of the volatility. Additionally, I feel like Jeff and some readers make a mistake when they reflect on the past to judge whether diversification is a benefit or a negative. Hindsight is always 20/20. The purpose of diversification is to limit risk, while maximizing the return for that risk. To look at any one specific past example is not to look at diversification, but to look at one point along a timeline of investing. Diversified investments over time have proven to be better because of the elimination (or minimization) of specific market/property risk.

Here is a quick example. If you own two apartment buildings in similar areas but different location you have the same risk for each location. However, when considered together the investments are far less risky than one building of their same size. The same principles apply in stock investing. Thinking about the Sharpe Ratio, it is very easy to see why this is the case.

As an investor I have always specialized in one asset class, residential (mostly apartments). Recently, however, in the search for Internal Rate of Return (IRR) and diversification I have considered changing course. With so many investment alternatives in the market, I would like to briefly talk about the positives and negatives of asset class specialization. I want to say in advance that I am certainly not an expert in this subject, so I welcome any comments or rebuttals to any statements made here.

First, I decided to specialize in one asset class because I wanted to build an expertise. While I certainly don’t know all there is to know about buying commercial residential properties, I do know exactly what to look for when evaluating an investment. Additionally, I have a lot of experience dealing with tenants, particularly low income Read more

January 23, 2007

Out of State Investing: All Sizzle, no Steak

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Real Estate Investor

Author website

As I prepare to go down to Greensboro this Thursday to make my first out of state investment, I thought I should talk briefly about what it takes to do out of market investing. Based on my experience too many people jump into a real estate market because it is hot and not because they have in-depth market knowledge or ties to that area. Real estate will always be a relationship business. Going into a market where you have no relationships and minimal knowledge is like playing the lottery. Some times you win, but most times you lose.

Here is a brief example from my past. Living in Detroit, my wife and I bought our first investment property about 15 minutes away from our home. Having developed a few good relationships, we were able to get a lot of work done on the property at a discount and we were able to sell quickly because we had a great agent. Eventually we sold this house to an investor in San Francisco, who was looking for a low risk investment. On the outside, this seemed like a great opportunity for her because the tenants showed consistent on time rent payments and the monthly repairs were minimal.

Here is the catch though. Many of those things happened because we were local and had great relationships. My wife personally drove by the tenants home to collect the rent. Additionally, she built such a great rapport with the tenants they would pay us instead of paying their other bills. Many of the repairs were done by a local contracting crew we had working on other properties, so we were able to get things done fairly cheap and quick. Most importantly, however, were the battles we had with the Detroit Water Company (grrr!). Being local we were able to go down there in person about once a week for two months to get everything straightened out.

While I knew this would be a very tough property to run from out of state, a sale was a sale. Unlike most sellers, we actually disclosed most of this during the sales Read more

January 22, 2007

The Right Time to Buy: An Investor Perspective

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Real Estate Investor

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As we considered when to restart Cook Squared Enterprises, one question we had to ask ourselves was if it was the right time to buy. With interest rates creeping up and home values creeping down, is now the time to make a large purchase? Additionally, in my spare time I dabble in a little econometrics. For those of you who are unfamiliar with the term, it is essentially taking a lot of past factors and trying to predict something in the future. In this case, I look at past real estate value indicators and trying to predict future trends in real estate. For those of you who think this is getting ready to get technical, don’t worry, it is definitely not (sorry to those of you who thought it was). I only do this to see if there are clear markets I should avoid, markets like Las Vegas and Florida that have shown obvious signs of over building and over investing.

Back to the topic at hand, when should you enter the market? First and foremost, it is always a great time to start investing. There is always value in the market, though some times it is harder to find that value than other times. There is always a house or building that has not been taken care of properly, with motivated sellers. These are great properties to buy, just about anytime. More importantly, the real estate market is cyclical. Predicting cycles can some times be like predicting the weather. Since many of the greatest economists cannot seem to do either, it is not worth trying to jump in at the trough and get out at the peak. If anyone tells you differently, ask them if they have any swamp land they can sell you as well.

Buy and hold investors almost always make money because of the nature of real estate price increases. Even if you get in at a peak and hold, real estate typically comes back to bail the hold investor out. Established investors who only work in certain markets have even more of an advantage because they have seen Read more

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