Category: General (page 14 of 23)

by Cooksquared

Real Estate Investor

Author website

The greater fool theory is simply this: Even if doing X doesn’t make sense, there is always someone dumber than me I can sell X to. Replace X with inflated real estate, sub-prime mortgages, stocks, garage sell junk, etc. This is the crux of bubble thinking. The major problem with this theory is that someone is always the greatest fool. It may not be you this time, but keep playing Russian roulette with deals that don’t make sense and it will be.

I learned of the greater fool theory first hand as an undergraduate in college. In the bubble year of 2000, I started my first online stock trading account with a hard earned $2,000 from my summer internship. I had a run of success you would not believe with a very simple (and very stupid) strategy. The strategy: watch what Internet firms report positive earnings, and then buy. Obviously I didn’t have a good concept of a DCF model or really understand what a P/E ratio was, but I did know that I was making a killing. In a matter of weeks I was almost up to $20,000.

Little did I know that I was simply profiting off the greater fool theory. Every stock I was investing in was insanely overvalued. With no real fundamental values to hang their hat on, the stocks in my portfolio fell as quickly as they rose. When all was said and done I had less than $500. I went from hero to goat in a matter weeks, wondering where I went wrong.

I am sure most seasoned investors have a similar war story. However, most new investors feel invincible. The problem with most new investors is that they have not gotten caught up in the frenzy of investing. It’s something akin to lemmings, when investors continuing buying even though they know there is no justification for their high valuations. Eventually, the first lemming falls off a cliff (sub-prime lending perhaps?) with the others soon to follow.

The question is why so many investors lose their grasp on the fundamentals? The irony is that it is usually fear of Read more

by Cooksquared

Real Estate Investor

Author website

People have asked me what it takes to succeed in real estate. Honestly, I really think it only takes one thing, persistence. Many people eliminate themselves right away by never starting or quitting after one bad experience. This business certainly has its ups and downs, but the people that keep trying eventually succeed.

Here are a few examples where persistence pays off. First, let’s look at the tenant from hell. No matter how great your screening process is, eventually the dice come up snake eyes. When a tenant refuses to pay rent or destroys the property you put in a lot of sweat and equity into, it can really push you to the edge. When you realize you just can’t throw them out on the streets, change the locks, and tell them to go to a hot place (and I don’t mean Florida), what do you do? How you deal with this situation defines how successful you will be in the business.

So how do deal with them you ask? First, begin the eviction process early. If a tenant is commonly late with the rent become familiar with the eviction process because you will probably need it. Additionally, never get antagonistic with the tenants. You can never win this battle because an angry tenant is a destructive tenant. Many new comers in the business feel like they can sue tenants. Think again. While you certainly can sue tenants, if they are being evicted they will probably not have any money for you to get from them. After the eviction process has started, the best situation is to convince the tenant to leave amicably. I have known some landlords to actually pay tenants to move out. On the surface this seems crazy, but paying a tenant say $100-$200 vs. spending $1000 (or more) for eviction plus repairs makes financial sense.

Another common situation that requires persistence is dealing with contractors. I have never personally had a project come in on or under budget. The bigger the project the more financial padding you should put in your budget estimates. Always have more money than you need. Read more

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