REAL ESTATE INVESTING - INVESTOR'S VIEW

Here we go again.  There is another government bailout on the horizon, commercial real estate.  It begs the question: When are we going to get to an industry that is not "too big to fail"?  There is an article this morning in the Wall Street Journal, "Office Rents Slide on Drop In Demand", that contains a great lesson to be learned by those who invest in commercial real estate.  The article summarizes how "commercial property investors who paid top dollar for office buildings in recent years, relying on easy credit and projections of continued rent growth." are going to pay the ultimate price if they cannot figure out a way to refinance the debt on these projects.  And with this, industry executives have asked the federal government for help.

OK, go ahead ask; when is enough, enough??  When do we stop rescuing people that told us all not to worry because they were smarter than the rest of us? 

Enough.  Here is the lesson.  Too much debt on a real estate investment just adds unnecessary risk on top of the risk inherent in investing in real estate.  Vacancy rates for office buildings have risen from a national average of 12.2% a year ago to 14.4% now.  Proper underwriting of a project should account for such increases and have some cushion built in to account for them.  If a 2.2% rise in vacancies sinks the industry then we who invest in real estate deserve whatever happens to us.  The one fact left out of this article is that office vacancies have returned to 2005 rates.  In the last three years vacancies have been between 11-14% nationally, not much change in the fundamentals in this period of easy money.  Of course there are markets, such as Detroit, in trouble with 20% vacancies and my simple example using national average is not 100%, but I think it makes a very interesting point.  The commercial real estate industry is in trouble because of the lure of easy money and big returns due to high debt.  Shame on those who chased that shinny lure only to be hooked.

Hopefully the federal government will stay out of this one and let the real estate market correct on its own.  The economy will always have a cloud hanging over it until someone isn't "too big to fail".

Hope everyone is having a great weekend.  I am sitting in my kitchen watching the PGA Championship and planning an investment meeting.  I would love to hear from everyone why they think that real estate is  becoming a hard investment to translate to people.

Here are my top reasons:

1. Too many TV shows about people flipping houses that look like too much work and don't work out a lot of the time
2. Too much bad media coverage of the brokerage houses holding sub-prime mortgages
3. People don't understand and they are scared
4. They think they are going to get scammed by another "real estate guru"
5. Anything with 100% returns in 2 years can't be real

I would love to start a discussion on this.  So let me know what you think.

Steve

This is a message that should be shouted from the roof tops.  TIGER 21, the very exclusive, high net worth, peer to peer mentoring and investment group has 23% of their investments in real estate.  Everyone that is in real estate industry should be telling this story everyday.

The direct ownership in real estate is THE Hedge against the markets.  It does not correlate to stocks or bonds.  As the Baby Boomers rollover their IRA's they should be placing a  percentage in a self dircted IRA so that it can be invested in real estate.

The people that I partner with to buy apartments have enjoyed very high returns by investing in commercial real estate.  Personal wealth and passive streams of income can be built with the correct strategy. 

What are your thoughts?

Steve

ssaunders@e2-property.com

Scarcity: (1) Insufficiency of amount or supply (2) A trap of FEAR (F-alse E-xpectations A-ppearing R-eal)

A majority of America is trapped in a mindset of Scarcity.  This is true for everything from the air we breath to money we save for retirement.  The ice cap is melting, we are running out of air and I can't save enough for retirement.

The popular mindset and theory on retirement is to save up as much money as you can and then die before you run out of money.  I don't know about you but I don't want living too long to be a defeat.  People get trapped in the mindset that "I can only make money if someone else looses money."  When you are stuck in this mindset you miss the opportunities to make more money and not have to worry about running out of money.  Your only thought is to hord and save and not put your money to work.

Creating passive streams of income by owning real assets that throw off income is the way to retire without worry of living too long.

I am not the first person to advance this theory but it is always worth repeating.  Authors and speakers such as Robert Kyosoki teach this and have changed many peoples' mindsets.  The only problem with this is that they never give you the "How" to get you over the wall to the promised land of owning assets and creating passive streams of income.

I want to open this discussion of how people can change their mindset, turn their financial futures around and create a life that doesn't have to worry about whether the government will buy my perscription drugs or how much the stock market can go down before I have to go back to work.

My passion and career is commercial real estate investing and helping my investment partners create passive streams of income.

Let me know what you think and stay tuned for more stuff.

Steve

Investing your money on emotions is the most dangerous thing you can do.

Real Estate calls it by name..... REAL ESTATE.  Invest in something REAL and build your ESTATE.

I love reading the business section of the paper every morning to see what excuses the traders on Wall Street can come up with to explain why the markets are down, why gas is up and why the value of you house is down.  The real answer is emotion.

There is an AP story this morning by Tim Paradis that is headlined "Wall Street woes overshadow positives."  POSITIVES???  If you have money in the stock markets are you positive?  Positive you are getting killed this year.  Worst start to a year since 1970, that's 38 years for those of you that have not had coffee this morning.  He goes on to describe the markets as not having confidence.  Do you want you investments to have confidence or to produce returns.  The worst part of this article is that he tells you to invest in stocks that are going up (no kidding) and then goes so far as to have a quote a broker suggesting that you buy options!  Oh sure, let's trade on the emotions of the people that might buy the stock in a couple months based on the emotions of the people who buy it today from the emotional wrecks that own it today.  I would rather bet my teenage daughter that she will not cry at some time in the next two days.  Good Luck.

I am not suggestinig that real estate is the only investment you should make but it sure does work well and if you do it right you never have to wonder how much money you would have if you had not put all that money in a 401k because you never did the math on the true effects of matching and tax avoidance, but that is a topic for another day.

Greatest hedge against human emotion (market volatility)  - Real Estate

Greatest hedge against inflation - Real Estate

Greatest tax efficient investment with appreciation - Real Estate

Greatest income producing investment - Real Estate

Greatest investment to own no matter who is in the White House - Real Estate

Don't get drug around by the emotions of a "confident market" or a bunch of traders on the floor of the stock exchange that are going to retire millionaires no matter which way the market goes, go buy some smart positive cash flowing real estate.

I buy and manage multi-family, apartments, and would love to talk to anyone who would like my opinion on that topic.  I won't be like Mr. Paradis and just tell you to go find a great investment and get rich.

That's all the time I have to rant this morning, Later

ssaunders@e2-property.com

As e2 Property began to plan for 2008 we started talking to our team of experts about how the events of 2007 would affect the apartment business for the year ahead.  Our team consists of apartment owners, property managers, finance brokers and apartment brokers.  This is our take on what they had to say.

We believe that this could be one of the best years to be buying apartment properties.  Mike Ellerkamp calls it "The Perfect Calm".

Supply of deals on the rise

The expected number of foreclosures on apartment properties is projected to be between 500 and 700 in the Houston area.  When there is a supply greater than demand prices trend down. 

Pool of Buyers is shrinking

Easy money is gone - Underwriting for apartment financing has gotten much tighter due to the "credit crunch".  Tighter underwriting causes two things to happen; buyers who in the past have depended on very high leverage (90%) will be shut out of deals and riskier deals that would have been tried by inexperienced buyers will not get financing. 

First time buyers could be shut out - Potential buyers without apartment management experience will either not be able to close a deal due to the lenders' underwriting not allowing "no experience" loans or they will make them put up much more equity and reserve money which could price them out of the deal.  First time buyers will be faced with the prospect of taking on a third party management company to run their property as a condition of the loan.  Taking on this expense could kill the deal.    

Financing is Cheap

Most financing rates for the purchase of apartments are based on a spread over the rate of return on products like the 10 year treasury or borrowing rates such as LIBOR (London Interbank Offered Rate).  The 10 year is 3.648% as of January 20^th.  The spreads currently are around 1.8% which would make a Fannie Mae rate around 5.5%.  LIBOR is now 3.8% with spreads in the 3% range which is great for loans that are floating in relation to LIBOR.  The experienced apartment buyer with leverage of 70-75% will thrive with these rates available for financing.

Buyers will lower prices as income increases

Usually apartment properties increase in value as income increases but this could be the environment that proves that this is not an automatic dynamic.  Income and occupancy are on the rise due to the large number of home foreclosures but because of the large supply of properties on the market and the shrinking buyer pool current sellers will not be able to take advantage of the higher yields produced by their properties. 

 

Fewer buyers, competing for more properties, at lower prices, being purchased with cheap money......

The Perfect Calm.

www.e2-property.com

Happy New Year!! 

As I began to plan for 2008 I heard a local radio station ask "How would you live if you only had 30 day left?" 

Let this be the year with no fear and no regrets.  Let this be the year you grow a monster business.  What if you lived January like you only had 30 days to live?

How would that change your outlook, your relationships, your business, your faith?

Just think if you only had 30 days to build your business so that it could take care of your family when you were gone.  There would be no stopping you.  There would be nothing you would put off.  No phone call you wouldn't make.  No deal you wouldn't try.  Hopefully there is not anyone of us in that position but imagine if you worked that hard and fearlessly for the next 30 days.  Your business would reap rewards for years to come. 

• Thank- Remember all of the people that have helped you get where you are today and thank them again.  No one ever gets ahead by themselves.  This includes clients.  You don't have time to pass up people who already trusted you with one of the biggest decisions of their life.  Thank them and ask for a referral.
• Forgive- To all those people who burned you or you are holding a grudge against, you must forgive them.  Let them go....you only have 30 days to make a huge impact so there is no time to waste on them.  Remember this includes you.  You must forgive yourself for past defeats.  Defeats make great battle crys "Remember the Alamo"  "Remember Pearl Harbor" "Remember 9-11"
• Execute - Gather all those great ideas you are always thinking about and get them started.  The biggest deposit of great ideas is a cemetery.  Don't leave any bullets in your gun, shoot them all.
• Call - Call all of those leads you have been putting off until you have time.  Guess what....you are out of time.  You must live with no fear.  Rejection is just a quick way to get to the next deal...and you only have 30 days.
• Turn it off - TV.....Would you even turn it on?  Now you must make time for your family.  What would you tell you spouse, children, parents or friends if you knew it could be the last conversation you would have with them.  It might be.

OK, here is my parting thought for settings goals for 2008:

If you would live your life like this only half of the time you would have abundace like you can not believe.

Thank you for a great 2007 and here is to a HUGE 2008!!!

www.e2-property.com

In this down market one way to pick up sales is to talk to your clients about all of their investments.  In today's Wall Street Journal there were three very interesting facts that can increase your business buy finding new investors and educating them on why now is the time to buy real estate.

1. Home prices have dropped an average of 4.5% in the third quarter.  This is a much cheaper investment now. 
2. The average large-cap value fund is down 2.6% on the year.  Investors thought that if they invested in "value funds" it would protect them against down markets.  WRONG!  The only way to protect yourself against a down stock market is to have money invested somewhere else besides the stock market.
3. Large institutional investors are increasing their real estate holdings.

With these nuggets you should be able to show your clients how they can diversify their investment portfolio by buying a rent house.  Everyone should have up to 10% of their investable assets in the direct ownership of real estate.  So if you have a client that has $100,000 invested in the stock market you can show them that if they take $10,000 out of stocks and buy a below market priced, cash flowing property it will beat their stock market returns this year.  In this bull market of the last couple years there has been much "irrational exuberance."  Or maybe you could just call it crazy.

Educate your clients that diversity of investments in real estate will hedge against down stock markets.  But remember the Investor's Golden Rule : Only invest in cash flowing properties. 

www.e2-property.com

There may never be a better time to invest in income producing real estate than right now.

It doesn't matter whether you are buying one rent house or a 1,000 multi-family units.  This became crystal clear to me yesterday as my partners and I played a game of chicken with a very large owner of apartment properties and they blinked.  Owners that have to sell due to the damage in the credit market are ripe for the picking.  The days of free money and playing for appreciation are over and the day of the investor is upon us!

I am an investor and 2008 is setting up to be a great year investing in real estate. The Wall Street Journal today had and article stating that pension funds are fleeing from the US stock market for the comfort of foreign markets, private equity, hedge funds and REAL ESTATE.   

The pretenders are out of the game- The pretenders, the no money down instant gratification "investors", either are getting wiped out or can't borrow money now.  This will help to keep prices down for properties that will become great rentals

Rates are down - The price to borrow money is going down.  As interest rates drop so do the expenses on income producing properties.  Remember the Investor's Golden Rule - "Only buy cash flowing properties!!!!"  Expenses decrease....cash flow increases. 

Foreclosures increasing- More foreclosures to choose from among a smaller pool of buyers, there are deals to be had.  Buy below market prices with payments that are more than covered by rents.  Fixed rate mortgages that make between $150-200 per month per house are a good deal.  Or find and experienced apartment operator and invest with them.  You knew I couldn't go without a shamless plug for myself in here somewhere.

More renters - As foreclosures increase...renters increase, this is the relationship that makes investors smile.

Investors have a clear playing field.  Fewer buyers, more properties to choose from, more renters, cheap money.

IT'S GOING TO BE A GREAT YEAR!!

www.e2-property.com

I had an old football coach that used to preach, "Practice like you play."   I found this to be pretty good advice throughout life.  He used to also say "Prior Proper Planning Prevents Poor Performance."  I think this is especially true in real estate investing. 

I see folks all over the place making really bad decisions about investment properties.  The commercials have already started in Houston on the radio and in the local papers for great opportunities in the foreclosure market.  The foreclosure classes being taught by "experts" are being advertised like this; "This is the biggest foreclosure market ever and you would have to be really dumb not to make money in real estate now."  I just want to pass along my P's of investment properties for anyone about to take the plunge.

Plan 

Have a plan.  Know exactly how much you have to invest, how much you want to make in returns and do not deviate from it.  Know how you are getting in and know what your exit plan is in the beginning. 

Pulls Cash Flow

If you are going to be a real estate investor, buy and hold property.  The only way to build passive wealth in real estate is to own income producing property.  The lesson here is to make sure you know exactly what your expenses will be and subtract that from the market rent and make sure that what is left is a POSITIVE number.  Don't bank on appreciation and throw more money into a property every month. (See the first P-Plan)  Stick to your plan. And a word on flippers; they are only as good as their last flip and have no way to control their carrying costs waiting for the house to sell.

Peace of mind with inspections

Don't leave anything to chance, hire an inspector or inspectors.  Your due diligence of the physical property is probably the most important thing you can do to save your budget.  Don't let hidden repairs destroy your project.

Pay a good mortgage broker and realtor

Don't go it on your own here either.  These professionals may cost a little up front but they can save you thousands in the end.  Ask everyone you know in the real estate business about your planned acquisitions.  Get as many points of view as possible.  You may get some free advice and these people will then know you are in the business and may bring you future deals.

Prescreen tenants

Don't let just anyone have control of your $100,000 asset.  You probably don't let your friends drive you $30,000 car.

Keep your Powder dry

Have your investment capital in cash, or a money market, so you are ready to take advantage of a good deal.  Some times when you have been watching a submarket or property for a long time it becomes available and you want to be ready to go when it does.

Patience

The most important P is Patience.  Don't ever do a deal that has to be done on an impossible deadline.  If you have not had time to do your due diligence and keep to your plan, pass on that property.  There will always be more opportunities.   

These are just a few of the hundreds of things you will learn about investing in real estate, but they will help to keep you out of trouble.

Steve is the VP of Investments for e2 Property in Houston, Texas, buying and operating apartment properties.  He can be reached at ssaunders@e2-property.com or  http://www.e2-property.com/