There’s always something to howl about.

Category: Investment (page 17 of 20)

Time Really is Money

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.

Ben Stein Says Real Estate Is Easily Inferior To The DOW

First, I wish to make it crystal clear up front that I’ve always looked up to Mr. Stein. I have the deepest respect for him not only because of the life he’s led, but because of the kind of person he is. He’s a brilliant, hard working man who generally has not a negative word to say about anyone. In many ways I’ve used him as a partial role model when it comes to how I deal with people. He’s simply one of the kindest most empathetic public figures in America today. And even though what he said Friday in A Home Truth About Real Estate Investing is mystifying to say the least, my opinion of him hasn’t changed.

He’d just finished recalling the condo he’d purchased many years ago, and that the almost identical condo now, though worth much more, had “not fully kept up with inflation.” He then went on to say the following:

On the other hand, if the same person had bought the Dow in 1982, he would’ve made roughly 10 times the money by now, not counting dividends, which would have meant he would’ve made close to 20 times the money.

In order to avoid any confusion here, Mr. Stein is saying if you’d invested $100,000 in real estate back in 1982 and the same amount in the Dow, the Dow would have outperformed real estate by close to 20 times.

I read the piece over just to insure I truly got his intended meaning. I had. I’ve come up with two potential explanatons for this astounding statement.

  • He’s so entrenched in ‘old school’ thinking that when he compares the two investment vehicles he is not allowing for any financing whatsoever on the real estate side.
  • He simply has so little experience outside Wall Street that he literally isn’t aware that 99% of real estate investors use leverage.

Neither explanation makes sense to me. He’s way too smart. Given the history of the two investment choices is there anyone out there who would make that claim so clearly?

His entire position relies on hindering the real estate investor to buying only property for Read more

A Different View of Diversification

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

Ask The Broker: Is There Any Diversifying Alternative To Real Estate Investing?

Nick writes:

Hi. I often scan your site and you seem to have collected a group of savvy and knowledgeable contributors. Here’s my question for you and them: What is the opposite of real estate? I know diversification is a smart strategy and many investors limit their risk by investing in something that flourishes when their main investment founders. Is there any sector or type of investment that traditionally performs well when real estate investments do poorly?

I disagree with your foundational premise. Diversification is for those who don’t know enough about what they’re doing. They fear loss of investment capital so they ‘balance’ each part of their portfolio with something that will generally perform better if their opposite does badly.

It’s called Playing Not To Lose.

Diversification is centered on risk and its reduction. I submit that your risk is greater or lesser based upon the degree to which you absolutely know what you’re doing in real estate. Let’s take an example.

If a few years ago the investment choices in your local market were becoming less appealing, and you took the equity in your properties to Phoenix, how would your net worth look now? In 2003 in San Diego my clients were hard pressed to find units that still made sense on a month to month basis, and could be acquired with low down payments. They knew it would only get worse as prices continued to rise. (which they did of course)

They didn’t look for something to balance this move. Phoenix now is in the middle of a correction and my clients are still doing just fine. They’ve increased their net worth significantly, and later this year or early in ’08, will take their increased equity and trade some of it to yet another growth region.

The difference between those who stayed ‘safe’ in SD and those who took some or all of their SD equity to Phoenix is, in anyone’s judgment, staggering.

Knowing what you are doing reduces risk. Having generous cash reserves is what I’d recommend instead of putting a governor on your growth via diversification. I’ve included a link below which talks about Read more

Out of State Investing: All Sizzle, no Steak

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

The Right Time to Buy: An Investor Perspective

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

Your Retirement — A Few Questions

For those of you over 40, take a few minutes and contemplate your retirement. Here are a few tips on how to figure out more closely what it could be.

  • Bring into focus your current financial state. In other words, where are you now?
  • Recall the last time you thought about your retirement. How much income did you want to create?
  • Given your current age and retirement age, if you keep doing what you’re doing now, will that income be there?
  • Is that income, after tax, enough?
  • If you think you might need to modify your current approach, what would you change?
  • What should you do if you feel you may have to work years after your planned retirement age?
  • Do you know folks over 60, still working full time, and who may have to for the foreseeable future?

It’s shocking to me the number of people I know personally who are at least partcially supporting their parents, and still haven’t asked themselves those questions. The average guy in his mid-late 50’s has less than $60,000 saved for retirement — usually in a 401(k) or IRA. He doesn’t owe much on his home, and figures if he can figure out how to pay it off in the next 10 years he’ll probably be ok. Between the safety of his free and clear home, Social Security, and his savings, retirement should be just fine. That brings up one more question.

How do you feel about that?

Don’t Drop That Listing Price…Just Yet

Real estate agents have consistently used pricing as the primary mechanism to sell your home. Don’t forget owner-financed terms as a selling feature. Let me give you an example of how to offer a seller-carryback (and cash it out):

You listed your home at $500,000 and it isn’t selling. You are getting nervous and your real estate agent thinks you should lower the listing price to $460,000 to attract more potential buyers. You’ve already come down $50K. Don’t drop the price… just yet! Try offering a seller-financed second mortgage at 12% for $150,000. You can sell that note as early as one day after COE (settlement). You may only get 80 cents on the dollar when you sell the note but that is only $30,000 (less than the proposed reduction). If the home was fairly priced at $500,000, it might make sense to offer terms before reducing the price.

Let’s see how this would work:

Buyer obtains a 70% first mortgage for $350,000 (that isn’t too hard to get, even with lousy credit). You offer a $150,000 second mortgage at 12% and sell it for $120,000 after closing. You net $470,000.

When you offer terms, you open the property to people with recent bankruptcies, past credit problems, and hard to verify income. Seller-carrybacks significantly expand the pool of buyers. Your real estate agent can advertise in the paper and attract many buyers who need this help.

Realtors: Customers who buy on “owner terms” are grateful and become excellent referral sources. You will also develop quite a list of buyers from your advertisements to call when your next listing is not moving.

So what’s the downside?

1- You have to have equity in your home or you’ll be bringing cash to the closing.

2- You have to employ a savvy mortgage broker (or note broker) to market that owner-financed note. The secondary market for private mortgages is not large and highly illiquid.

3-The seller may have to hold that note for a period of time (and collect 12%).

4-The buyer may eventually default on that Read more

Ask the Broker: An undisclosed verbal easement?

This is one for The Hardy Boys: The Case of the Stolen Dirt.

As a buyer what rights do I have in the following scenario? I purchased a tract of land in 08/06. Closed on the deal 10/06. Visited the tract in 12/06 to find extensive excavation was performed for road building material without my approval. When questioned, the Broker/owner informed me that he forgot to mention that the developer (real estate agent that works for the Broker/owner) had a verbal agreement with the individual that sold the agent the 1/2 section for subdivision that if any material was needed to complete a road project further up the road and on a separate subdivision that it would come from the existing parcels. The agent owned and was attempting to sell two remaining parcels that she could have taken material from. She however gave approval to excavate mine. As a buyer I was never informed of any verbal agreement regarding this and there were no disclosures to this agreement. What rights do I have short of taking this disingenuous realtor to court?

The bad news is, your recourse is probably a lawsuit. The good news is, at least in Arizona, you will almost certainly win.

In Arizona, there is no such thing as a verbal easement. If a previous owner had given a developer verbal permission to remove dirt from your parcel, that verbal permission lapsed when you closed escrow on the land. The person removing the dirt since you took ownership is guilty of trespassing, theft and, reasonably, is liable for damages.

Having said that, I’ll bet you can guess the next part: You need to take this up with an attorney. You are aggrieved, and you have a right to be made whole, but this won’t happen without at least a little saber rattling.

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From forty links to infinity: Apprehending the full scope of the RE.net

Okay, here’s the meme game I mentioned yesterday.

I want to build something like a canonical list of every weblog in the RE.net. By this I mean weblogs created by Realtors or other real estate agents, including commercial brokers; lenders, appraisers, investors or other real estate professionals; mainstream media real estate weblogs; and vendors marketing to real estate professionals.

I’m giving things a kick start by citing 40 weblogs from the BloodhoundBlog blogroll. Here’s your challenge:

1. Add to this list by linking to real estate weblogs not listed here. Please be judicious. We’re interested in true webloggers — helpfully informative and not too self-promotional — not blog-based spammers.

2. Link to those blogs on your weblog, repeating the text from this challenge.

3. Add your links to a comment to this post, as well, since I may not see them by trackback or Technorati citation. (The moderation bot will eat your comment, but I’ll pull it out.)
Permanent link to the original post on BloodhoundBlog:

From forty links to infinity: Apprehending the full scope of the RE.net

If you can send more than 40 unique links, you’re my hero. I’ll build all of these links into a page on BloodhoundBlog, with a link to the source HTML if you want to mirror the list.

Note: This is not quite a tag game. Just because you’re not listed below, it doesn’t mean you can’t play. The goal is to leverage all of our information sources to get to a highly-comprehensive, strongly-vetted picture of the RE.net as it exists right now.

Once we’ve assembled everything, Cameron or I will put together a form for adding new weblogs. And if someone should want to volunteer to organize and maintain this list, your link will come first, lexicology be damned.

Here are my 40 links:

In a Rent vs Buy Bind Right Now

Eric writes:

Hi Greg!

I am writing because I really enjoy your blog. I’m licensed, but haven’t worked with realty in years due to being back in IT (which you also seem to have a passion for), so I enjoy hearing from the experts. I’m in a rent vs buy bind right now. I have someone that can help with a rent-to-own (agreement for sale I believe?) situation, but the main reasons I have for buying a house is that I can take deductions for home office and mortgage interest.

Owning is several hundred more, but temping. However, if during this rent-to-own deal, I’m not able to take those deductions.. I think I’d prefer to save the money, rent something equally as nice, and watch the market, rates, and my credit very carefully.

Are you familiar with this? I see plenty of rent-to-own/lease option etc. wording on craigslist rentals, but do you know if the tax man allows you to take deductions on places you are “renting to own”?

Appreciate any feedback, have a GREAT week πŸ™‚

Eric

Hi Eric, Russell here. The Ask the Broker questions get passed on all of us – so I’ll toss my hat into the ring on this one.

It is my understanding – and also logical, if you think about it – that you can only deduct the interest if you are actually paying the interest. With a rent to own agreement you aren’t liable for the interest, aren’t actually paying it and therefore can not deduct it. So, based on your question, you would be better off renting. But that isn’t the only reason you would be better off renting. There is probably some exception to just about any financial “rule” one can write and I’m sure there are some who will disagree with what I’m about to say here – but I’ll go ahead and say it anyway.

Combining a lease with a purchase agreement is, for most people, the worst of all possible worlds. If you are the tenant/buyer you usually wind up paying more in rent than you ever would if you “just rented”. As most agreements of that Read more

Compounding, Return On Investment, & What Matters To Investors — Invest $1 Get $2 Back

The miracle of compounding is what it’s called. The ability to earn interest on interest is the simplest way to put it. Start out with a hundred bucks at 8% annually and beginning the second year you’re earning 8% on $108. Keep that up for about nine years and you have $200. So if at age 30 until age 65 you put away $4,000 yearly, compounding annually at 8%, you’d end up with just under $690,000. And if it was in an IRA or 401k that money is taxable as it comes out. Of course, if for some reason you don’t need it, and wish to have it continue compounding, tough luck. Uncle Sam will force you to begin taking it out and paying taxes on it. But I digress.

What does return on investment mean? Try getting three investors together to decide the answer to that one. Is it cash flow? Do tax benefits come into the picture? Is it simply a function of money in and money out? Cash on cash? All the above? None of the above? I’ve heard all kinds of definitions.
Does it really matter?

If you invest $100k today and upon selling receive your original capital back plus another $100k in four years, do you care what your ROI is? No, you’re too busy bragging to your brother-in-law, who wouldn’t go in with you at the beginning, how you doubled your money in 48 months. Your ROI is the pained look on your sister’s face, right? πŸ™‚ All you care about is you put $100k in, got $200k out, and you’re ready to rock ‘n roll again.

But what does it take to accomplish that? In rough numbers, if you bought $455k in income properties at 20% down, with about 2% closing costs, you’d have needed $100k to close the escrow. If for four years those properties increased in value at 7.6% each year they’d be worth in the neighborhood of $610k. (And yes, there are places where properties are going up at that rate.) If your total cost of selling was 8%, you’d have roughly doubled your money Read more

Predatory Lending Legislation Can Prey on The Responsible

New Minnesota Attorney General, Lori Swanson, vows to put an end to predatory lending. She formed an 11-member task force to come up with proposals to curb the practice.

That sounds pretty good unless you don’t know how to define predatory lending. Arizona Governor, Janet Napolitano, pursued this fight back in 2000. She was Attorney General Napolitano then and proposed that Arizona adopt legislation that mirrored the North Carolina predatory lending bill. Napolitano had the good sense to listen to banking industry representatives before moving forward and was surprised with some of the things she didn’t know:

1- No “over equity loans”- VA loans are 103% value loans when a buyer purchases a home; that got cast aside as Arizona has a large military presence.
2- No negative amortization loans- three staff members had loans on their homes that were considered a violation of that guideline. They explained the usefulness of those loans as a financial planning tool.

3- No prepayment penalties- It was quickly realized that prepayment penalties reduce the overall costs of the loan and encouraged responsible home ownership by encouraging homeowners to view real estate as a long-term investment

4- No balloon payments- balloon payments can reduce the overall cost to the consumer and are now extendable with a good payment history.

This sounds like I’m an apologist for my industry; I’m not. There are some despicable originators in my industry who have taken advantage of consumers by:

1- “Steering” them in to more expensive first liens when refinancing for as little as $5,000 cash when a less-expensive second mortgage would have solved the problem.
2- Engaging in the practice of “flipping” loans through serial refinance transactions.
3- Encouraging borrowers to borrow more money they can afford.
4- Making loans to borrowers whom have not demonstrated an ability to repay the loan.

I wonder if legislation is really the answer to these problems facing our industry. I have repeatedly claimed that legislated loan guidelines stifle creative loan products that encourage homeownership and penalizes the 96% of the consumers who benefit from these loans. Borrowers make poor decisions, often against the advice of an originator. Prepayment penalties, negative amortization loans, Read more

Real estate in Deadwood: How Fremont Street in Las Vegas became a ghost town . . .

My mother gives us money for Christmas every year. This year we used the lucre to buy seasons one and two of Deadwood, the acclaimed HBO television series about gold-mining, lawlessness and profanetasizing — a condition afflicting screen writers, who pretend to affect to believe that people in the past were even worse potty-mouths than they are. In any case, the show is filled with dubious real estate deals, just the thing to keep us entertained as we wait for the next purple outburst.

Here’s an example: In the first few episodes, laconic hero Seth Bullock and his more loquacious partner Sol Star rent a lot for their hardware store from Al Swearengen — pimp, faro hustler, saloon keeper and curator and conservator of the Deadwood Hall of Fame of Outrageous Profanity.

What’s the rent? Twenty dollars. A day.

Deadwood is growing fast, and the bloom is barely off the boom. This is a seller’s market such as we have never seen. So when Bullock and Star offer to pay $1,000 to buy the lot free and clear, in fee simple — what should Swearengen do?

It’s worth $600 a month in rent. Potentially, it’s worth $7,200 a year. Why would Swearengen sell it at all? Why wouldn’t he lease it to the hardware store? They can improve it all they want, but those improvements and the underlying dirt would revert to his control when the lease terminated.

Better yet, why not write a participation lease? The hardware store planned to sell much-needed equipment to the prospective prospectors arriving by the dozens in Deadwood every day. Why wouldn’t Swearengen want to cut himself into a piece of that action, in exchange for surrendering for a term the right of possession to his lot?

If we stipulate that a gold rush is a short-term phenomenon, this would have been Swearengen’s optimal strategy for maximizing his own profit from the lot.

But what happens when a short-term windfall turns into a long-term travesty?

Last week I wrote about two multi-billion dollar multi-use projects being built on Las Vegas Boulevard — “The Strip.” Kirk Kerkorian’s MGM-Mirage will spend $7 billion to build Read more

Carnival of carnivals . . .

BloodhoundBlog is broadly represented in this week’s weblog carnivals:

Kris Berg‘s post Kibble and Bits can be found at the Carnival of Real Estate at @ House Values.

Jeff Brown‘s entry The S & P Is Up Over 16% In 2006! is among the winners at the Carnival of Real Estate Investing at Cash Flow Treasures.

Sadly, Dan Green‘s excellent article detailing What Isaac Newton Knew About Mortgage Lending did not make the list of finalists at the Carnival of Business at My Money Forest.

But: We thought Dan’s post simply killed, so it is this week’s Carnival of BloodhoundBlog Winner…

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