Thank You. Now What?
June 16, 2009 – 3:47 pmThese are really interesting times. Sure, sure the economy stinks but it’s not as simple as that. I mean there is a tug of war going on as to whether the stink is getting worse or the fragrence of floral perfume will soon be wafting through our nostrils.
Just today I received an email from a financial wizard who tells me that we need to start acting on an inflationary economy. Then I picked up an article that points out we are in a deflationary economy. Yes says another article, but the government is spending money like water and huge inflation must follow.
Of course goes another pundit, but manufacturers are operating dramtically below capacity and even if the first tiny hint of an increase in orders is starting to show, it is no where near inflationary. Yes goes the counter argument, but money pouring into stimulating the economy is reving the engine with the parking brake on. Soon as the brake is released, off we go.
It makes sense says another expert but have you noticed interest rates have gone up and are still climbing? That will kill stimulation of the economy like a spike through the heart. The bickering goes on and on between the pundits, experts, gurus, geniuses, economists, mathemiticians and no one seems to getting the upper hand.
So now what? Good question. For a real estate investor such as me, the long term key is buying real estate with an understanding that both sides may be right. Deflation in the short run but inflation, or at lease moderate inflation for the mid run.
With this 2 part theory in hand one must buy real estate knowing that there is a good likelyhood of deflation in the next year and that the purchase price must account for that. If inflation sets in approximately 2 or 3 years from now, hard assets such as real estate are the very best hedges one can have. Although no one wants to sell low, the sales that are actually occuring are at prices that should offer the buy good protection through a deflationary economy until things normalize.
Tags: buy real estate, deflatinary economy, economy, government money, hedges, Inflationary, moderate inflation, purchase price of real estate, real estate investor, stimulating the economy
Are REOs Always Good Deals?
May 14, 2009 – 5:20 pmFor the past year or year and a half we have all been deluged with articles, blogs, newletters and television reports about the vast amount of residential REOs that have hit the market. These homes have really depressed the pricing on housing. Sales numbers are up for homes this year because of the depressed prices that have occured and lured many buyers back into the market.
That has not happened in commercial real estate. Pundits are predicting that the last half of 2009 and the first part of 2010 will see a plethora of commercial REOs hitting the market. There are many reasons for this to occur such as an inablility of current owners to refinance debt when it comes due as well as swollen office and growing retail vacancy rate.
However, does this mean that buying an REO is always the best way to go? The answer is really no because commercial real estate is much different than residential real estate. One has to be rather astute in real estate to tackle a commercial REO.
The reason is that when buying residential properties, even REO’s there are many protections for the future consumer or homeowner. There are warranties, and expectations that the seller is going to make all necessary disclosures and is not selling the buyer the proverbial pig in a poke.
When buying a commercial REO, the buyer is really buying a totally “as is” property. The lender does not have the same duty to find out what they do not know and disclose to the buyer. The buyer is assumed to be knowledgable enough to have everything check out and make his own decision based upon his own findings.
Certainly the lender selling the REO must disclose what they know to be a problem. But they usually do not go out of their way to find out the problems to disclose as they must do for residential property.
Therefore the unsuspecting and inexperienced investor may find himself with significant problems such as structural deficiencies, thorny tenant problems and possibly governmetal citations that must be corrected quickly or else heavy fines could be put into place. When any or all of these items come into place the large “as is” disclaimer in the contract is trotted out by the bank and they will say they simply never knew these problems existed.
If there are a plethora of commercial REOs coming to the market it may be that prices will be just as depressed for properties that are not going into foreclosure. Those may be the very best deals to go after. In fact even now, when there are not that many commercial REOs on the market, one may get a great deal by simply putting in a very aggressive offer and that may just be accepted.
Having warranties and representations and full disclosures from the seller are nothing to be ignored. Think things through before you react.
Tags: as is property, buying an REO, commercial real estate, commercial REOs, depressed prices, depressed pricing on homes, refinance debt, reos
Negotiating in a Tough Economy
April 24, 2009 – 4:10 pmAs of April, 2009, there is a great disparity between what a buyer wants to pay and what a seller wants to accept. I have never seen a gap as big as it is now. However, there are stil some buyers that want or need to purchase a property now and there are still some sellers who really need to sell their property now.
Of course if the Seller is desparate, that is different and all bets are off as to what that seller may accept. But what if the Seller is motivated for one reason or another but not desperate. How doe deals go together then?
As always, both parties need to recognize the market for what is is at the time they are negotiating the deal. The buyer can’t be thinking that prices will be 20% lower in a year if they need to buy now. The seller can’t be dreaming of the money he isn’t getting that he would have received a year ago. Only the hear and now count when putting a deal together.
Many buyers remind me of the old Groucho Marx line that he would never join a country club that would accept him as a member. That is, these buyers typically worry if they make a low offer and it is accepted. Now they start obsessing that they simply overpaid and that they are unmitigated jerks.
If one is knowledgable and has studied the market and predetermined what a good deal is, than they have a very good chance of buying a property. On the contrary, if they do not know the market and they what to see blood gushing from the seller before they will do the deal they will never buy a property.
Even in the marketplace I am still speaking to property owners who feel they have the golden goose and that their property is like no other. Of course they expect buyers to pay much higher prices for this prized piece of real estate. When that happens we can kiss the deal goodbye.
So the moral of this tale is to negotiate in the market in which you are negotiating in. Not the land of Oz. It also helps to know what is going on in the market in which you are negotiating.
Tags: buyers, negotiating, Sellers
Greed Is Not Good In Recessions
April 24, 2009 – 3:34 pmOne of the more famous lines from movies that will stay with all of us is when Michael Douglas says in the movie “Wall Street” , “Greed is Good”. In that movie and in that time frame maybe greed was good, at least for Douglas’ character. He certainly seemed to live the good life.
However, for most of us ordinary investors, greed is not so good, especially in recessionary times. I am specifically speaking about real estate investing although I believe that my thoughts may also be applied to the stock market.
Greed tends to make us think that we ought to be jumping into the fray and picking up investment property on the cheap. That is not a bad idea but the implementation of it can have drastic results if not thought out very well. Most smaller investors are not that tuned in to the real estate market, just as they are not tuned into the stock market.
This issue came to light when I read a promotion for people to take equity out of their homes in California by refinancing, and buying small properties such as 2 to 4 units apartments in other states. This concept is not new and can be very dangerous to the average investor. Of course this all presupposes that someone in California still has equity in their home.
The core problem is that the average small investor typically relates the market in most other states to that of Orange County. We happen to live in one of the wealthiest counties with one of the best economies in the United States. At least it’s that way in normal time. We tend to go into recessions last and come out first because we are such a desirable place to live and invest.
Most other states do not have the diverse population or economy that we have and do not have the population density we have. They often rely on one or 2 major industries and if those industries have problems everyone in the area suffers. Just look at Detroit. In fact many of these states do not rebound for years after a recession has ended. The population density can easily shift and apartments may have vacancies for years.
Moreover, the investor becomes dependent upon a local broker who is very motivated to make a sale. They may be sincere but they cannot relate to an Orange County economy or weather and what they consider normal may be far from we out here call normal. In fact properties need to be built to withstand very severe weather conditions, something we know nothing about in Orange County. They also must be maintained constantly to withstand the various weather conditions.
When problems occur with a property out of state the investor will suddenly find out that the property manager for a small building can only be of limited help without lots more money to be sent to them. If the investor owned a property locally they would drive over to it and see what the problem is, make an informed decision and tell the manager how they would like the problem handled. When they need to catch an airplane and kill at lease one day going back and forth, they have a problem. An owner’s decison may not be the same as the property manger’s but when you are a long distance away one has no way of knowing. The investor may have no idea if the property is being properly managed at all.
One also realizes the problems with out of state investing when vacancies arise. The local property manger or broker will typically put out a sign and hope for the best. In Orange County that may be all that is needed. But in another state with a poor economy one may need to do a whole host of marketing techniques in order to get a property rented. The out of area owner can only sit and mange their anxiety while the world seems to spin out of control and their cash flow dwindles to nothing.
I won’t even mention the problems with selling a property for an out of state owner. That is for another session. Suffice it to say that one must harness their desires to be the next great bottom fisher that we will all read about in future sucesss magazines. So keep that greed in check and always always keep the basic investment criteria in mind. Not the least of which is that in real estate, you need to be relatively close to your property unless you are doing very large deals or are a pro.
Tags: 2 to 4 apartments, orange county real estate, Ordinary investors, out of state investing, real estate Investing, recessionary times
What’s a Good Deal?
March 27, 2009 – 11:54 amLife was so much easier in the old days, like 2006 or 2007 and maybe even the first 3 months of 2008. A good deal was when your offer was accepted by the Seller of the property. Your heart soared, flowers bloomed and everything was going well for the world.
Shift to March of 2009 and utter confusion reigns. Everyone seems to have their own vague idea of what a good deal is and few seem to agree. However, how can you have concensus when every day the economy seems to hit new lows. Is it even possible for a real estate transaction to be a good deal at any cost?
Although it seems certain that we still have time to go in a declining market I feel that there are certain identifyable good deals to be had if we take the time to think about them. Of course it depends on various criteria we set for ourselves.
Following are some examples of what I believe are good deals;
1. An owner wants or needs to buy a property for his business or professional practice. It is possible now, for the first time in years, to purchase a property based upon what that company would pay for in rent. During this decade owners paid far more than they would have to pay in rent to purchase their own building or condo for their business. Now we can once again establish a relationship so that it actually makes economic sense to buy the property.
2. Income property such as shopping centers can now be purchased at cap rates that are equivalent to the interest rate they are borrowing at. The rule of thumb is that if you purchase a property at a cap rate below the interest rate your cash flow diminishes. The converse is also true. Therefore anytime you can get the cap rate at least the same as the interest rate on the loan you will do well.
3. Property values are starting to decline towards building costs. For years we have been paying far above building replacement costs for properties. This is always on the adventurous side of investing. The closer to replacement costs the safer the deal is and the lower the rent you can charge to stay full.
4. It is becoming more and more possible to increase your leverage today on apartment buildings and still have a cash flow on your invested dollars. That is because mortgage rates are lowering on apartments and the loan payment to income ratios are starting to fall in line once again allowing 75% loan to value loans to be made once again. This is good leverage but not silly risky leverage.
So once again I will say that there are good deal to be had today. They are not overly plentiful yet but the camels nose has appeared under the tent, as the saying goes. In the coming months more and more deals will be coming up. The question is; will be ready for them?
Tags: building costs, cap rates, cash flow, economic sense, good deals, income property, interest rate, leverage, property values, replacement costs
Stimulation Within Reason
February 16, 2009 – 4:25 pmBeing stimulted can mean a lot of things to a lot of people. Books can stimulate, music can stimulate, caffeine can stimulate and money can be a stimulant. The big question these days is can a goverment stimulate?
We’ve seen hundreds of billions of dollars go to banks and Wall Street and so far not much stimulation has occured. We hear that much more money is need to be a proper stimulant and maybe thats true. In fact most of America is staking their financial future on the premise that the government’s Stimulus Package will work.
In the meantime property owners are often being put in a position of having to offer their own Stimulus Plan in the form of rent concessions. Many times tenants feel that the property owner has no cost of doing business and what ever money comes in goes to the bottom line. That is borne out but the size of the rent concession tenants often request or even demand.
As a property manager and owner we are getting more and more requests from tenants to reduce the rent. However, many seem to think that the property owner is going to have to cave in to these requests or will lose the tenant. The request can be a 50% rent reduction as though there is no hardship attached to the landlord taking such a cut in income.
There is little thought given to the fact that if income is reduced so drastically the landlord may be in jeopardy of losing the property to the lender. There is also little thought often given by tenants that perhaps they should speak to their own bank to see if they can get a break on their loan payments or do a total loan modification, perhaps in combination with some sort of rent concession so that everyone can get by these tough time.
I advise business people to prepare a thoughtful business plan that may include a reasonable rent concession. This plan should show the businesses ability to survive during hard time with all creditors involved in keeping it afloat. If the tenant waits until they are already in serious default on the rent it becomes problematic to solve their problem either with the landlord or their banker. Waiting until hope is gone is not a good way to keep one’s business functioning.
Lets hope that the government Stimulus Plan will achieve it’s purpose and bail America out of its financial doldrums. In the meantime business and professional people in need of rent relief will hopefully look at the entire picture for relief and not put all their eggs in the landlord’s basket.
Tags: Add new tag, default, landlords, rent concessions, rent property management, tenants
Property Management in Tough Times
January 15, 2009 – 3:57 pm“I can’t mpay my rent on time this month” is the beginning of many a conversation that that I have had in the past 2 or 3 months. The next sentences is something like: ” my hours at work have been cut”, “my business has fallen off dramatically” or “my wife (or husband) lost his/her job and we’re having a tough time”.
In the past 5 years our response to these problems has been something like “I’m sorry to hear that but we just can’t carry you while you solve your problem”. Maybe a little cold sounding but we really hadn’t heard very much of those kind of issues and secondly there were plenty of other tenants to take the current tenant’s place. Maybe, if the tenant had a good record with us we gave them a little time to catch up and they almost always were able to. Times were good.
In today’s upside down world, things are very different. We are having lots of these conversations and we need to do lots of analysis and thinking about what we are going to do. There are no longer lots of other tenants waiting in line and if there are they may well be planning on paying much less than the current tenant. In addition a vacancy that once leased up in a matter of days or weeks can now take months. More to the point is that so many people need some help it behooves us to try to mitigate their problem in some way.
Commercial rent concessions are commonplace these days where once even the thought of a concession ellicited a sneer and a scoff. In many cases commercial tenants are demanding to reneogitate their leases or are just walking. The landlord can sue of course but it takes a great deal of time and money to do that.
The goal of Property Managers is to enhance the property owners asset value by operating the property efficiently, maintaining it for the future and to provide profits to the owner. How do you do all that in an economy where there is so much hurting going on and that seems to be going further and further downwards towards a possible depression (whatever that is defined as)?
The answer lies in running a tight ship, mitigating rent losses by working out payment programs with good tenants with good payment histories, trying not to incur large vacancies problems by keeping the better tenants if at all possible. Saying all that it is important that tenants are not allowed to fall too far behind because many will never be able to get caught up. If they are unable to pay any rent then it is probably better to have a vacant office or store.
Maintenance must be kept up but perhaps some projects can be delayed awhile and still keep the integrity of the physical plant. Costs for the more sizable projects can be negotiated down to some degree these days where that was almost impossible just a year or 2 ago. Obviously stretching the dollar in tough times becomes a necessity.
Good management is key to success today, more than it has been for many years. I believe that those that have it will get by the next couple of years without too much pain. Those that don’t will have to start planning their comeback in 2011 or 2012.
Tags: commercial rent concessions, keeping better tenants, landlord, mitigating rent losses, property management, renogiate leases, vacancy
Too Good To Be True
December 17, 2008 – 5:48 pmIn the past 2 weeks we have all been following the almost totally unbelievable gigantic Ponzi Scheme pulled off by one of the world’s most respected investors, Bernie Madof. For over 40 years he produced astounding yields year after year that pleased and attractred billions of investment dollars so the newspapers say.
The crazy part of this was that not only were those returns unbelievable, they were not supported, even by the monthly statements sent to his investors, per various newspaper, magazine and internet articles. Anyone given the returns and the information given to support those returns would see that they were impossible to have occured. But no one questioned him and it was he and his sons who finally confessed his wrong doings, not some disgruntled investor.
Whether it’s pure greed or our human need to believe in other fellow human beings, I don’t know. After all who would be low enough to steal and ultimately bankrupt charities, friends and even relatives. Sure, we have all seen and heard of people stealing some toys from children or the collection plate at church but those perpetrators are hardend criminals, probably on drugs and likely very poor. Not some centimillionaire or billionaire that couldn’t possibly need to steal.
The adage that if it is too good to be true it probably isn’t, kicks in here. Yet we all want to believe that we can trust the wealthy investment advisor or the public corporation. Unfortuanately that trust is often misguided.
I have seen people, time after time, pushing to buy a commercial property based upon projections that not only show wild increases in income but spectacular inceases in value. Try as you might to bring a modicum of reality into their calculations they just don’t want to hear it. In fact if you are a Commercial Real Estate Broker, they will forget about you and find someone who sees numbers through the same rose colored glasses if you don’t agree with craziness.
Although I do not deal in apartment properties with less than 5 units, I have been approached numerous times by so called investors who wanted me to find them a triplex or 4 plex that they could buy with 10% down (which they could until about a year ago) that would be a good investment. Well the fact of the matter is that in the last 6 years buying a property in that way would invariably end in a substantial negative cash flow. Interestingly enough for about 3 years people could buy that way and sell the property at a profit albeit less than they thought when one counts the money needed to feed the property during the holding period.
There are many California investors who levereged into Florida properties that became virtually worthless in 2007. Not only were they left putting substantial cash into the property every month but they had no one to buy the property from them at any price. Foreclosure was the only avenue open to them. I am not saying these were crooked deals but they were often over sold by zeolous sales people who knew better or in many cases were so ignorant they didn’t know better.
Because the theory of leverage investing in real estate is so attractive, people often forget that the same basic principals pertaining to buying a business or investing into a company still apply. If the property doesn’t pencil when you buy it then you better have a good business plan to rationalize what is gong to change to make it pencil in the near future. That rationalization needs to be clear and based upon current data not pie in the sky projections of the market always going up wildly.
As of December 2008, I am just starting to see some decent real estate investments come up. Prices are starting to be based upon today’s numbers not what may happen in 2 or 3 years time. Financing is tougher to get but we are still getting commercial real estate financed if the borrower is qualified and the property has real numbers attached to it.
Is it wise to start getting back into the investment real esate market? Yes, because buying when property values and interest rates are low makes solid sense.
Will investment real estate prices fall some more in 2009? Probably, but one can get a deal at any time in the market if solid investment parameters are followed.
Will investment real estate prices start to rise again? Yes but may not until 2010. However, if a property was bought right and a holding period of 3 to 5 years is part of the plan then the investment will probably be a winner.
Should we never trust anyone again? That would really be a terrible way to live. It’s nice to trust people but it is also nice to do your due diligence when dealing with someone responsible for your money. Americans are very trusting people which makes this a great country in which to live but it also allows for the scoundrels among us to flourish.
Lets just agree to trust in a prudent way.
Tags: caluclations, commercial broker, commercial real estate, due diligence, investment real estate, leverage in real estate, trust
A New Tomorrow, But What About Today
November 17, 2008 – 6:11 pmWe have a new President staring on January 20, 2009 and people have strong opinions about it one way or the other. Actually, it seems to me that the division is not nearly as much as it has been in the past 8 years. That is, even very conservative thinkers, in the main, are hoping that President Elect Obama can bring us a “New Tomorrow”.
After all, not many people can really be pleased with a financial system that is in the toilet and a general economy on a roller coaster ride that at this point is hurdling straight downwards. Most people know that in a matter of time things will turn around but they are also hoping that a new administration can expedite that happening.
It is apparent that the new adminstration will put many measures to stimulate the economy into the mix. People who are mostly worried about their taxes going up are really missing the point. We need to get things moving and what ever steps are necessary to do that will most likely be employed. Paying lower taxes on half the income doesn’t really make sense.
So if things start getting back to the upward track again in, say 1 to 2 years, as many people seem to think, what do we do today? Well in my mind the answer is easy and it’s real estate. I know that there are lots of people who say that over the long term the stock market has done better than the real estate market.
That may be but for one thing, it takes a very strong stomach to plow money back into the market in this climate unless you won’t need it for 5 to 10 years. For another, I believe most of the statistics comparing the real estate market ot the stock market are focusing on housing, not commercial real estate. I also think that they are not looking at the equity gain one gets by paying down a mortgage, especially with rents generated by the real estate. That sounds awfully good right about now.
In my opinion, if one can buy a property generating positive cash flow, using rather conservative numbers for rents, that person should do pretty good. Using this concept, apartments are the safest bet, retail next followed by industrial and office investments. Establishing a price must be calculted on actual income not projected income as has become the custom in recent years.
When current owners sell using realistic numbers, they will be able to move their properties without much problem. At this point, the majority still want to price their properties as though this were 2006. That does not and will not cut it in this market. However, there are more and more owners starting to pay attention to the market if they are sincere in selling.
The bricks and mortar of real estate may seem old fashioned in todays ecommerce world but it still works. We probably will never replace the value of owning a hard asset such as real estate.
Tags: bricks and morter of real estate., commercial real estate, equity gain, financial system, general economy, income property, New Tomorrow, positive cash flow, real estate market, taxes going up
Now What?
October 21, 2008 – 4:45 pmSo here we are as a nation with a slumping stock market, frozen lending market and a financial market in disarray. Our national leadership has come up with a $700 billion bail out/rescue plan that may only be the beginning of the fix. We now own part of the largest insurance company in the world and will soon own part of the largest banks in the United States and in some cases, the world.
The most unsettling thing about all of this is that no one seems ready to say that this is the final fix. After all these heroics we don’t really know what will work because nothing quite like this has happened before. It sounds like the next step will be taking a hint from the FDR New Deal days and start massive public works projects.
The most striking image that I have in all this is that our financial and political leaders insist on saying that no one could forsee this. Well, that is not exactly true. My wife Barbara forsaw it 3 1/2 years ago.
You see Barbara does our property management for our or our client’s properties. The apartments that we manage tend to slant toward the lower socio economic strata of our society. Around 3 1/2 years ago tenants who were barely able to pay $800/month rent for an apartment suddenly gave her notice that they were moving.
In come cases these tenants had been in their apartments for years. When Barbara goes to the various buildings she tends to say Hi to the tenants and spend a few minutes chatting with them. She knew their economic circumstances such as where they worked, how many hours they worked and the way they managed to get through the high cost of living in Orange County.
Most of the tenants were moving to the Inland Emprire where they could live the American Dream and buy a home of their own. The warning signals that came up were that they were buying homes for $300,000 to $500,000. How could these people who struggled to pay their bills each month possibly come up with a 10% to 25% downpayment for a home in that price range. How could they possibly pay 2 or 3 or more times their monthly rent for their new housing. How could these well meaning and hard working people possibly qualify for a loan, much less actually service it.
The answer of course is that they couldn’t. Loan officers were blind to this, banks were blind to this, investment rating agencies were blind to this, the Wall Street packagers were blind to it and the ultimate buyers of the loans were blind to it, not to mention Congress being blind to it. That is a lot of people that simply did not want to think about future consequences. But Barbara did.
Actually there were a great many people who could see the danger in all this. However, they were the ones who were not making money from this national pastime of kidding themselves. In reality anyone who has any business background at all knows that not checking on credit and an ability to service a debt is flirting with disaster. The subprime mortgage business was a disaster waiting to happen. The only thing I believe that most people did not forsee is that this fiasco would take down the entire world.
Sooo now what? Well I wish I knew but I don’t. In my commercial real estate world things have really slowed down while people are scratching their heads wondering what to do next. The strange thing is that commercial real estate in Orange County is still in fairly good shape. Sure prices are softer than last year but they haven’t plunged. Office vacancies have opened up more than is comfortable but industrial is not terribly out of whack. Retail vacancies are still relatively small and are threatening to open up but they haven’t yet. Apartments are doing well but it looks like rents will not be climbing much in the next year or 2. Vacancies may open up more as homes and condo rentals increasingly come on the market.
Basically commercial real estate is sort of tip toeing in the dark right now. It has not been horribly affected by the current recession in our country and it’s hoping to get through all this intact. Let’s hope it does.
Tags: apartments, banks, commercial real estate, loan officers, office vacancies, rating agencies, recession, retail vacancies, subprime mortgages, Wall Street packagers.