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Category: Investment (page 13 of 20)

June 25, 2007

Buying Foreclosure Properties? Don’t Be the Early Worm…

by

Real Estate Investor

Author website

The old adage “the early bird gets the worm” points to the advantage of being first to market. But, has anyone ever thought about the early worm, clearly he was not so lucky. Many of the people who are jumping into the foreclosure market now may be the early worms.

Typically, I am the first one to support jumping into a market that has sustained a significant decline in fundamentals and an increase in the foreclosure rate. The problem with today’s market is the lack of an exit strategy for this type of investment. Take Michigan for example, I luckily got out of this market in 2005 during a downturn. While I made a healthy profit, the investors who bought properties during that time are now the same investors in foreclosure.

The difference between the 2005 market and today is simply access to capital. Many foreclosure markets have two types of buyers. The most common buyers in these markets are low-income families looking to move into their first or second home. In the past these buyers were able to secure subprime or other credit neutral financing. With these vehicles gone or very hard to find, these buyers have been taken out of the market.

The other buyers in these markets are investors. Typically, savvier than families, investors like to get in for a bargain. Unfortunately commercial interest rates have been steadily rising and the prospect of moving these properties has been declining. The commercial interest rate directly affects the value potential of the property. Consider an increase in the commercial multifamily interest rate from 6% to 7.5%. On a $100,000 loan, that is about $100 a month payment increase. With rents holding steady in many markets, the investor will probably have to eat this increase.

Two to five years ago investors could simply rent a property out while waiting for a sale. That option has almost been taken away with the increase in interest rates. Additionally, having a renter in the property opened the buyer pool up further to cash flow investors. Now, the only investors left to turn to are the speculators, looking to Read more

June 22, 2007

The Real Risk in Real Estate Flipping

by

Real Estate Investor

Author website

New investors rarely stop to address the subject of risk tolerance. People who have never done a single real estate deal see others making a lot of money in real estate and want to jump right in. They never stop to understand the true risks of real estate.

Most investors and books will tell you that real estate is a pretty safe asset class to invest in. This is certainly the case if you are buying core buildings or if you are employing a reasonable buy and hold strategy. Sadly, many investors hear safe investment and assume that opportunistic investing is just as safe.

If an investor is solely a real estate flipper, he/she is taking more risk than investing in the stock market. That might be a surprise to some, but consider the returns. On average the stock market returns 9-13%, while flippers should expect 15-20% returns on their capital investment.

This higher return is certainly accompanied by more risk. First, consider the fact that in the stock market your downside risk is typically capped at 20-30%. Very rarely does the stock market lose more than 10% in a given year. Additionally, a single blue chip stock is not likely to even have that kind of a loss. In contrast, a flipper has a very real chance of losing all of the money invested in a deal. The odds of this are even higher for a novice flipper.

Another aspect of real estate investing is the sweat equity or opportunity cost of the investors time. I can go into my E*Trade account in about two minute, buy a Dow Jones ETF (exchange traded fund), and essentially guarantee myself a 9-13% return on that money for 20 years. However, if I decide to flip property I either have to hire a property manager or I have to act as general contractor, organizing the work to be done. Either way, investors will still spend a tremendous amount of time working on site or dong something with the investment.

Taking Read more

June 21, 2007

Can an $8 Billion Private Equity Fund Affect a $1 Million Commercial Investor? It Certainly Can…

by

Real Estate Investor

Author website

Addressing several people’s concerns about the state of private equity and the possible assertion that private equity could be the next fallout candidate, I thought I would look into this situation a bit more. For those of you who think that this discussion will be outside of the scope of commercial real estate investing, read on and I am sure you will be pleasantly surprised.

At the 8th Annual US Real Estate Opportunity & Private Fund Investing Forum several very important items of note were mentioned. The most significant item is the increase in fundraising efforts, which has moved up from $35 billion in 2005 to $60 billion in 2006. On the heels of that announcement, Morgan Stately Real Estate has just announced it has raised an $8 Billion fund designed to invest in Real Estate in established and emerging markets.

Before I discuss how these numbers will affect the common investor, I want to take a step back and clearly outline what a Private Equity Real Estate Fund or Opportunity Fund does. First, these funds begin by raising investment capital. The larger funds typically bring in money from pension funds, hyper wealthy individuals and governments all over the world. Then, they take these funds and make leveraged investments. An $8 Billion fund will probably invest in about $30 Billion worth of real estate. Investors typically expect returns of 12-20% based on the investment strategy and they expect to exit the fund within the span of 7-10 years.

These funds make a variety of investments. First, they typically invest in all major commercial property types (hotel, industrial, office, retail, and apartments) and minor ones as well (storage units, trailer parks, malls, etc.). Additionally, they may purchase Real Estate Investment Trusts, Mortgage Companies, Real Estate Services firms, etc. With $30 Billion to invest, any and all real estate investments are fair game.

Over the past 20 years the private equity industry has grown tremendously. While the major players (Blackstone, KKR, etc.) get all the headlines, many smaller private equity firms operate in lower tier investment categories. If KKR looks for Billion dollar deals, these firms will Read more

June 20, 2007

Subprime Lending Fallout Goes Upstream to Take Down Two Major Hedge Funds: What does this Mean To Real Estate Investors?

by

Real Estate Investor

Author website

Two major Bear Stearns Hedge Funds face foreclosure due to their significant exposure to the subprime lending market. While this does not fall under the category of real estate investor, I spent last summer working for Bear Stearns and interacting with many of their hedge funds. Based on the very limited details of the stories out now, I cannot be certain if I have worked with these two particular funds. I can be certain; however, that it would not be a good time to be in the mortgage space at Bear Stearns.

In my three months at Bear Stearns, I met some of the smartest people in the businiess. While this is not an advertisement to work at Bear Stearns, I think they are a very well run organization with smart people. This of course begs the question, how could something like this happen to such smart people? Furthermore, with all of the subprime lending issues out there, what does this mean for borrowers who are less creditworthy?

Simply put, in my humble opinion, the subprime market will be doomed for some years (at least five or more). Since I know this site is filled with a ton of very smart mortgage brokers, I will outline my reasoning.

Consider the following information:

1) Many subprime lenders have filed for bankruptcy

2) Major buyers of Mortgage Backed Securities (like Bear Stearns) are having issues with subprime mortgages

3) Despite what the National Association of Realtors says, the housing market seems to be taking a slow and steady turn for the worse

4) Major Banks have tightened their lending policies

Lets take an example of a typical transaction before the subprime fallout. A low creditworthy borrower applies for a subprime loan. Some intermediary or mortgage broker, supplies them with the best loan for them from either a bank or a conduit lender. The bank/conduit lender then sells the loan to an investment bank (like a Bear Stearns or Goldman Sachs) to free up more money to lend and to remove the risk off their books. Finally, the investment bank packages this loan in the form of bonds that investors looking Read more

June 19, 2007

Status Quo Real Estate Investors Don’t Make Real Money

by

Real Estate Investor

Author website

I have never been a huge fan of the status quo. While I have some appreciation for the mundane, I would rather blaze my own trail than do things as they have always been done. Interestingly enough, this really comes in handy when approaching investment properties. Doing what makes sense to me may not be the status quo, but it makes me feel comfortable.

Recently, I was looking to close a deal on a 32 unit apartment complex. When asked by my agent how many of the units I wanted to look at, I remarked, “Uh, all of them.” He seemed taken aback by this, and then mentioned that taking a sampling of the units was the status quo. Perhaps looking at five or ten and then extrapolating what the other units look like is a tremendous timesaver. Lucky for me I had all the time in the world.

Interestingly enough all but four units actually looked good, but those four units looked really bad and had a material effect on my offer and the amount of concession I asked for. Looking at all the units would have saved me about $8,000 had I closed this deal. Even as an investment banker, I cant make $8,000 for three hours worth of work.

I will also take this brief interlude to point out the inherent conflict between realtor and investor. That extra two hours actually cost my realtor about $380 (3.5% x $8,000), plus two hours of actual work he could have done securing additional deals. Clearly the status quo worked in his favor. I don’t mean to suggest that is why he mentioned it, but I do mean to suggest that it is harder for him to work in my best interest when our incentives don’t align.

As investors it is important to remember that a deal and all of its components must make sense to you. While the status quo is surely there for a reason, it may not be in your best interest to follow the status quo. Many first time investors or investors who are unsure of themselves fall back on Read more

June 18, 2007

Real Estate Relationships: Do What you Say you Will Do

by

Real Estate Investor

Author website

The long absence is finally over. After a grueling finals week and graduation, a two week vacation, a move to New York City, and a failed real estate deal, I am back with the pack. Based on the great content that I have seen coming from the site, I can assume my absence has gone unnoticed. In order to come back with a bang, I thought I would share a quick life lesson about real estate. The lesson: Real estate is a people business, so it is important to do what you say you will do, and maybe more, but certainly never less.

Here is a quick example. My latest deal to buy two apartment complexes in Greensboro ended in utter failure because one person simply did not do what they said they would do. Before considering this deal, I wanted to be sure there would be enough financing in place to make it happen. While I could have really stretched, begged, and borrowed to get all of the 20% that I needed for the down payment, my trusted mortgage broker recommended I partner with a local investor. He assured me that he could find me a suitable partner within the 30 day due diligence period, so I proceeded with the deal.

To make a long story short, no partner ever materialized and I was forced to bow out of the deal shortly before the end of the due diligence period. Given my upfront nature, I had already informed all parties that this deal hinged on me finding a suitable partner, which over a group dinner my mortgage broker ensured everyone would happen fairly quickly. Fairly quickly, turned into days, then a month and still a partner had yet to emerge.

In the end the mortgage broker’s reputation was trashed after this deal. My agent, who does a lot of great commercial work in the area, has decided not to work with the mortgage broker again. Additionally, the seller’s broker has also black listed this broker, and I think it is obvious that it will be a cold day in a very hot place Read more

June 5, 2007

Point Weak — Shout Loud — Keeping Up With Everything Frank Doesn’t Know

by

Real Estate Investments Broker

Author website

Several days ago I wrote a piece talking about qualified plans, better known as IRA’s and 401(k)’s. It was titled 401(k)’s IRA’s & Urban Myths, and discussed some of the false beliefs many people have on the subject. It also brought an alternative to the table — investment grade insurance.

Though you should read the post to get context, in a nutshell here’s what I said.

By putting your tax deferred money into qualified plans you’re setting yourself up for a nasty surprise upon retirement. Your income will be taxed at a rate for which most folks won’t have planned. Therefore, they should stop contributing to those plans and begin putting that money instead, into investment grade life insurance. It’s not really for the insurance, but has some really cool results — especially when compared side by side with qualified plans.

For instance, the income produced by the insurance which from now on will be called FIUL – Fixed Index Universal Life, is tax free for life . You’ll notice maybe what it’s not – a VUL or Variable Universal Life. One guy decided I was talking about VUL’s — wrong again. He was a reasonable guy, wanting to maybe hear from my in-house expert. He will. I often find it entertaining the way some wish to compare apples to lizards when they disagree. One such example is a guy who wanted to compare the results of $350/mo into FIUL’s vs $750 into his qualifed (employer matching) plan. As good as your investment guy might be, nobody is going to beat someone who is investing more than twice the amount as the other guy. It’s a silly comparison. Now to give him the benefit of the doubt, I did compare taking $350/mo vs $500/mo — and the 401(k) lost big time. (For the record, the annual after tax retirement incomes were the same, but the FIUL income was available for life, not subject to rising future taxes, and upon the death of the taxpayer there was literally no tax owed, as it wasn’t part of his estate in the first place.)

I will tell you Read more

June 4, 2007

Coming Soon — How Ignorance Can Yield Golden Opportunities

by

Real Estate Investments Broker

Author website

I’m back in the saddle, but will have the promised post on qualified plans vs. investment grade insurance tomorrow or Wednesday, as my energy level didn’t return as quickly as I’d hoped. Ignorance can produce golden opportunities, as long as it runs into real knowledge. Again, the plan is for that to happen in a day or two. Thanks for your patience. 🙂

Meanwhile, you can take a look at what might happen if you look through the wrong end of the telescope.

May 29, 2007

401(k)’s IRA’s & Urban Myths

by

Real Estate Investments Broker

Author website

In a recent post, Retirement — A New Class Being Created, I predicted a new class of retiree living a life tied to their free and clear home, with little monthly income. It inspired some interesting comments, and a question that is the inspiration for this post. One reader, Eric, was surprised to hear his 401(k) would be taxed when he retired and began taking distributions. So he asked the following question.

Help a young man out here – what tax bite do you speak of? Early withdrawal? I was under the impression that so long as a 401k built up to a certain age (65?) that it was relatively tax free?

Rain on my parade, I’m wearing my parka. 🙂

It’s not Eric’s fault (at least mostly) he thinks his withdrawals would be ‘relatively’ tax free. I’ve had many people in my office tell me what they know on the subject, most of it based on what some expert at work told them. But alas, it is taxed just like you’re being taxed now Eric. And if you’re not taking out what Big Brother thinks you should be by the time you’re in your early 70’s, they’ll make you take out more, or penalize your butt.

That’s when Chuchundra came in to soften things up for poor Eric. Chuchundra then offered some advice to Eric using the number one urban myth out there on the subject. In his comment, Brian Brady recognized this advise for what it was — pure urban myth. Chuchundra said:

If you have a standard, pre-tax 401K or IRA, you pay tax on your distributions. It’s considered regular income. You didn’t pay tax on the money you put in or on the capital gains that money made over the years, so you pay when you take it out. The idea being that you’ll be in a lower tax bracket when you’re retired, so the tax bite will be smaller.

Now that might very well be true for those who followed the Grandpa Economics school of How To Retire With A Free & Clear Home While Learning To Live On Coupons, Read more

May 25, 2007

Retirement — A New Class Being Created

by

Real Estate Investments Broker

Author website

In the seminars we’ve been conducting in San Diego and out of state, we’ve been noticing a common denominator that is becoming more and more troublesome to us. It’s the number of stories being told of parents, grandparents, or the storytellers themselves.

It often begins with, “My dad is in his 70’s, healthy, and owns his home free and clear. He has Social Security, a small annuity, plus the income from his life savings. It all adds up to around $35,000 a year or so. His retirement years aren’t anything like he planned — and he’s becoming more disillusioned each year.”

That’s sad enough on its own merit. How would you like to live your so called Golden Years pinching pennies in a 50+ year old house, and enough after tax income to survive? Now imagine what his kids must think as they begin to enter their 50’s. “Is that my future? Why bother?”

Why bother indeed. Let’s crank up the way-back machine, and see if we can’t shed some light on Dad’s thinking when he was in his 20’s and 30’s.

Let’s say he was 25 in 1957. What if…..

What if we found Dad in ’57 and gave him a choice. He could work hard, invest in real estate, make some sacrifices early in life, and end up with a pretty nice retirement. His other choice would be in the form of a guarantee. How about we guarantee him a $35,000 annual income AND a free and clear home? The median income back then was no doubt less than $10,000 a year. I’ll bet he’d have taken the guarantee. To him it would have been a no-brainer. Yet folks who today find themselves in that exact position are leading lives far different than they ever envisioned.

True Story

I was talking with a prospect the other day, who lives in another state. His parents live in an adjoining state, are retired, and in their 70’s. They enjoy very good health, and are able physically to travel. They are living the very life described above — an old free and clear home, with a little less Read more

May 21, 2007

Posts You May Have Missed & Staying Under The Radar

by

Real Estate Investments Broker

Author website

Some developers apparently didn’t get the memo

The end of a nearly decade long march to the stratosphere of real estate prices has brought out the media predictions of all that is dire and painful. Though I said it another way in today’s post on my own blog, here’s what I think of this particular market correction. Compared to the early-mid ’90’s S & L crisis meltdown, this market is like the sudden realization that you’ve left the house wearing two different colored socks. Apparently there are some developers in Boise (Eagle to be exact.) who haven’t got the word. Yesterday, In a post written by Phil Hoover, he talks about an article in the local paper about the plans for — you can’t make this stuff up — 20,000 new homes in Eagle, Idaho. That would literally double Eagle’s current population. Don’t those builders know these projects are doomed to failure? Have they not heard of the doom that is real estate as we know it? Don’t they read the papers?

Buyers with stealthy agendas

Even though it was last week, I fear too many readers missed Kris Berg’s post “You hate me, don’t you?”. It’s the perfect illustration of the old saying, “You can’t make this #%$& up!” There is a new level of chutzpah on display in her story, that makes you wonder what new form of dope is being hawked these days. Kris makes Mother Theresa look like a hack. 🙂

Thinking of one special word

Going into the weekend the guys at Duct Tape Marketing published a very interesting piece wondering what ONE word describes what you do well. I still haven’t come up with just one word. Is that even possible? It must be because they did it for their own company. It opened my eyes as to how people reduce what we do best to a single thought. That could be incredibly cool, or a disaster.

A meeting in Paradise

Seems there’s a meeting in Del Mar, California the first Monday of June. Brian Brady is running the show, and has invited some local celebrities. He’s calling it Read more

May 14, 2007

Mortgage Brokers — How Everybody Can Win

by

Real Estate Investments Broker

Author website

Almost three years ago we kinda sorta beta tested doing invitation only seminars for past clients of local mortgage brokers. It went like this.

The mortgage guy went through his data base looking for clients who either fit the investor profile, (as defined arbitrarily by some bald dude) or folks who had actually spoken to them about their investments, or how they wanted to get started. This resulted in a ’10 best list’. We’d decided to keep these seminars small and intimate. We didn’t want to play the numbers game. By limiting the invitees to those who were actually interested in real estate investing, we felt 10 people (or couples) was about the right sized group.

This turned out to be correct, as the atmosphere was more like having a conversation instead of being talked to. It also resulted in more time getting their questions answered than listening to me talking at them — a good thing.

I wrote in more depth on this topic several days ago.

So far, the mortgage brokers who have hosted these seminars have increased their production significantly, and their clients have begun the march to a great retirement through intelligent real estate investment. The very first mortgage broker to participate ended up inviting only five clients. All five became our clients. In the eight months immediately following our first client meetings, he closed almost 30 loans. In the year after that he did another dozen.

I invite you to contact me if you have interest. We don’t charge for the seminars, but the host is responsible for our travel and hotel expenses.

Our last seminar of was held in Boise, and the response was incredible. We ended up having to do two of them. All but one person decided to seriously consider becoming a client. So far, over half have indeed signed on. This will mean by the end of the year our Boise host will be busy providing about 10-20 new loans — all a direct result of the seminar. This also means that whatever these clients do in the future, the original seminar host will be the go-to Read more

May 7, 2007

The Carnival of Real Estate . . .

by

Suburban Phoenix Real Estate Broker

Author website

…is up at Lansner on Real Estate at the Orange County Register. Writing from The San Diego Home Blog, Kris Berg took fifth place for her playful rant on open house signs. Russell Shaw came in second place with his not-at-all-playful rant on the folly of real estate discounting.

The Carnival of Real Estate Investing is at the Real Estate Investing Blog. We entered a great Jeff Brown post, but Jeff and the CoREI are writing the other chapters of The Secret — The Law of Mutual Repulsion — so he didn’t win. He’ll be crushed if he ever does, so here’s to his unbroken streak of ratifying if not totally gratifying disappointments.

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May 6, 2007

So, Boss…You Want I Should WACC Dis Guy?

by

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

You know how lenders are. We’re always talking about WACC-ing a guy who borrows money. Do you REALLY know what we’re tawkin’ about, though?

The Weighted Average Cost of Capital or WACC, is a corporate finance term used to measure the true cost of debt. You can find that figure in any bank’s annual report, on the Sources and Uses of Funds Page. They refer to it as a Cost of Funds.
It’s a pretty simple analysis. I use WACC analysis to determine whether you should refinance your home loan.

I can just WACC a property, I can WACC a certain person, I can even WACC your whole family if you want me to. Here’s how I would do it:

Let’s assume this homeowner has a $210,000 first mortgage at 6%, a $60,000 second mortgage at 9%, and $30,000 in consumer debt at 12%.

1- Add up all of your debt.

$210,000 + 60,000 + 30,000 = $300,000

2- Determine what the percentage each loan is to the sum of all the debts.

First mortgage= 70%, Second Mortgage= 20%, Consumer debt = 10%

3- Multiply the loan rate by that percentage for each loan.

First Mortgage= 70% * 6.0= 4.2, Second Mortgage= 20% * 9= 1.8, Consumer Debt= 10% * 12= 1.2

4- Add up all of those figures. That’s your WACC

WACC= 4.2 + 1.8 + 1.2 = 7.2%

Now, compare that WACC to the loan you could get to refinance those debts. If it’s lower than 7.2%, dat’s an offer you can’t refuse. Pretty simple, huh?

Fuhgeddaboudit.

P.S.- I tried this earlier and it seemed awfully confusing. You can figure for after-tax WACC to be more accurate but this post is probably easier to understand.

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