Investing Strategies for a Struggling Real Estate Market: Sunday Morning Thoughts 09 December 2012

What subprime crisis? Affordable houses are everywhere. (Photo credit: woodleywonderworks)

It should not matter if the glass is half empty or half full, it has something in it.

So in a flat real estate market, how can you make money?

Having control over a property and not owning the property can prove to be a fast way to improving your bottom line, but what about another option?

Becoming the bank, becoming a private lender; some of the benefits:

• You don’t own the property

• You don’t have to pay the property tax

•  You don’t do maintenance and repairs

•  No dealing with tenants

Private lending is a way to be involved with the real estate recovery, but without the risk that a property owner would have.

As a private lender you can invest a sum of money for a specified period of time, at a nice rate of interest.  You do not spend time mowing the lawn, or fixing the minor or major problems, you lend money secured by real estate and collect either a monthly payment or a lump sum after a specified holding period.

Being a private lender is a viable option in a buyer or seller’s market.  A private lender can lend money to buyers and refinance sellers, so it would not matter the type of market, your investment could appreciate.

In our current financial economy, the buyers are looking for money sources since many lending institutions are having trouble with lending.  Sellers are looking for private lending sources to refinance or sell their property.

No matter what type of real estate market, your investment can still earn.

For more thoughts on lending read our other articles.

Private Lending Retirement Investing Part I

Private Lending Retirement Investing Part II

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Related articles

• Spotlight on REITs: American Real Estate Investment Corp (moneymanager.com)
• Money360 the kick in the ass that banking needs (banklesstimes.com)

How to Avoid a Ponzi Scheme: Sunday Morning Thoughts 15 July 2012

The Ponzi Scheme (Photo credit: Wikipedia)

How did Ponzi scheme get its name?

Like most things, it is named after the man, Charles Ponzi, who defrauded many people out of their money in the 1920’s under the guise of high profit and a no to low risk of investment.

All investments have risk; nothing is going to give you a 100 percent return on your money. Each investment with us has its own risk factor as well.

We are an investment real estate company, and each individual property has its own types of risk, some higher and others lower.

For example, a multi-family apartment with 85-99% occupancy has a lower risk than a multi-family apartment in the same area with equivalent number of units but has lower occupancy, such as 50-65% would be a greater risk of investment.

So how can you recognize a Ponzi scheme? (From the SEC website)

Many Ponzi schemes share common characteristics. Look for these warning signs:

• High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.

 

• Overly consistent returns. Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.

 

• Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.

 

• Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
  Secretive and/or complex strategies. Avoiding investments you don’t understand or for which you can’t get complete information is a good rule of thumb.

 

• Issues with paperwork. Ignore excuses regarding why you can’t review information about an investment in writing, and always read an investment’s prospectus or disclosure statement carefully before you invest. Also, account statement errors may be a sign that funds are not being invested as promised.

 

• Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters sometimes encourage participants to “roll over” promised payments by offering even higher investment returns.

As a private lender in real estate has a measure of risk, which changes with each property type. Properties are listed and handled by licensed real estate agents, although some properties maybe for sell by owner. But as the lender, or in other words being the bank, your investment is secured by real estate.

Payments on your investment go through a mortgage servicing company, which is what the banks use. Properties go through escrow with instructions that you will have a copy of. You are named as lender on the loan papers not owner of the property, so property taxes are NOT your responsibility.

Although investors ask us to keep their investment in the “gap” we do not. Once a property has sold or is refinanced through another source, we return the initial investment. Although some lenders opt to have monthly payments, others decide to wait for a property to be transferred to a new owner or to the completion of the exit strategy.

Each property is different and exit strategies will vary. All of which we will let you know up front before you make a decision on whether to invest in a particular property.

Do you have a Diversified Portfolio?: Sunday Morning Thoughts 19 November 2011

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 What Does Diversification Mean?
A risk management technique, that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated.
Read more: http://www.investopedia.com/terms/d/diversification.asp#ixzz1eDze88iz 

Since we are a real estate investment company we will use the definition in regards to stocks and real estate. 

When considering which types of real estate investments to make most people run for the fix a residential property and then flip said property, with as little holding time as possible.  This strategy still holds even in this current down economy, provided the end buyer can qualify for the loan.  

If the end buyer does not qualify for conventional financing, the transaction is not a lost cause, but an investor will have to consider other strategies which will help the end buyer purchase the property in as little time as possible.  “Flipping” properties is still doable in this current economy but a little more creativity may be needed to structure the deal to be beneficial for seller and buyer.

In real estate diversifying your portfolio requires a little more foresight than just buying and flipping residential properties.  To not have your investments become a job, one must also consider holding properties for cash flow, and appreciation; an ideal situation, which can be achieved.  

But a portfolio of only fixing and flipping is very one sided.  To be better well-rounded one would consider buying multi-units, such as 5units or more, better known as apartments.  In this current economy the need for apartments is on the rise in some areas, plus the commercial market is due for a similar fate as the housing market, making apartments a more lucrative investment.  People who are on the wrong side of a foreclosure still need a place to live.  Renting an apartment or house is the next best option for most. 

To make and/or keep your real estate portfolio diversified make sound investments in residential and commercial with holding properties for the future appreciation while they cash flow in the present

Bull or Bear Market, Food For Thought: Sunday Morning Thoughts 13 November 2011

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The day before Thanksgiving many of us will be preparing our homes to receive guests, or making the trek to a friend, or relatives gathering.

But the 23rd of November is D-day for the congressional debt committee.

There are many factors to consider:

Will Greece’s economy fail, causing them to no longer have credit whereby having to move to an all cash system?

What will be the outcome of the Italian issue, and its subsequent effect on the global economy?

There are many questions, with speculations disguised as answers.

The bigger question, what are you going to do about your situation?  Your personal finances are just as important as the global economy because you are a part of that same deteriorating economy. 

What are some of the ways you plan to protect the money you currently have from the future impending inflation, and will you still gain interest on your money?  Will it be enough to either live off of, or will you use it to build for the future?

With the rocking and rolling of the stock market, should you place your money in bonds?  But didn’t the analyst say the bond market is a bubble waiting to burst?

Should you move to tangible assets such as gold, silver, etc.? 

Will futures be the new ‘now’ market for growing an income, or retirement portfolio?

What’s happening with mutual funds?

The answer to all of these questions is everything has a cycle.  Study the cycles and you may be able to predict an outcome.

The stock market currently appears to be in a sideways pattern and with a new cycle starting around the year 2016, but what type of cycle will it be?

Are we in for a Bull or Bear market future?
Only time can really tell.

All bubbles do burst eventually, the futures market may be having gains at this time of the year, and gold’s value is through the roof and moving higher with silver riding its coattails. Mutual funds are currently stagnating, but some will gain with the shifts of the S and P.

Real Estate is still a viable consideration for investing, if done wisely.  The area, growth rate, employment, and expanding or shrinking housing availability are factors when considering an investment property. 

With all time lows on residential and commercial property it would only make sense to have an implemented strategy to invest in real estate.

If you decide to buy a house to rent out, check to make sure other homeowners are not doing the same thing, and if so then how many other homes will be for rent and at what price.

If you decide to invest in an apartment then check to see if there is a shadow market from residential.  If a shadow market exists, how much of an impact will it have on being able to rent your units, and still being able to not only break even on the new investment but also realize a profit?

For which ever investment vehicle you are going to utilize to guard against an uncertain future, ensure you weigh all the pros and cons and make an investment choice which will work for you, yielding you appreciation in the present and future.

Knowing what you know now, would you have invested in the stock market and real estate after the crash in the early 1900’s?

As with all cycles and time, change is always on the horizon.

 

Today’s Housing Slump Equals Tomorrow’s Appreciation

As a private lender the current falling property values would alarm the most seasoned investor.  Most people are saying this is not the time to invest in real estate.  This theory or rationale has been said throughout time, and has proven itself, in most cases, to be wrong.  This is where having knowledge of the history of cycles in the housing market can make it less stressful and more profitable to invest in real estate.

The housing bubble was going to eventually burst, but of course no one thought it would rupture along with the demise of credit and the economy.  But as with the cycle for growing areas, we have already experienced a sharp decline in property values, then there was a slight rise, and now another decline, (this is pretty much happening as we posted in a previously).  After the slight decline there will be a flat line.  A flat line will be little to no improvement in housing values.  But this will not last; people will begin buying and shrinking the foreclosure surplus, and then finally buying properties from owners not in foreclosure.  The flat line will then become a housing market increasing in property values.

Many have seen the need to be on both sides of the down turn and subsequent upswing.  Buying and holding, and waiting for appreciation will prove to be a more than viable strategy in real estate investing in this current down market.

This is not the time to wait to invest in real estate.

Private Lending Tips: Sunday Morning Thoughts 15 May 2011

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So you have decided to become a private lender.  You have considered many options on the types of deals you will choose to provide lending.  You understand that private lending is not a REIT, but is more like being the bank.  There are things you should keep in mind when private lending.  This is a short list given in a series of posts.  As you become more familiar with lending you will without a doubt make a few additions to the list for yourself.

Cost of Money

Level of Risk

What to do when a loan goes bad

Profit/ Return on your investment

Cost of Money:  How much is money costing you as a borrower?

You should not use your life savings.  This should not even be considered as a viable option.  Keeping a reserve is even a strategy Warren Buffett utilizes.  Answer a basic question-how much can you afford to lend and at what cost?

Borrowing to lend is a viable strategy; many people use the leverage of other people’s money to make money.  An example, a homeowner buys a house then takes out a second mortgage to pay off credit cards, cars, and to free up currency.  They are making payments on the second mortgage but are saving money in interest and possibly receiving tax advantages.

You can use a line of credit if you own something which can be used as collateral, such as a house, property, etc.

Using your IRA is also an option.  When using your IRA the profit goes back to the IRA aiding in the building of your future savings.  With an IRA you are using the money in the IRA versus borrowing against the IRA.   For more on IRA account usage please read our past post.

What is important to remember, how much interest you are paying on the money you are borrowing, and then subtract that from the interest you will gain from the lending.

For example you are the private lender, and are looking to earn passive money.  You do not wish to own the property but would like an investment with a decent return, something better than a CD.  You find an Investor who has a deal which needs funding.  The investor offers you 8% interest on terms for the use of your money to quickly close a profitable deal.

For arguments sake, let’s say you as the private lender decide to use a line of credit from your property to fund the deal.  Always remember you will be responsible for the repayment of the line of credit.  The investor as a borrower from you is responsible to repay the loan you are extending to fund the deal. If the bank gives you a line of credit with 4% interest and you loan the money to the investor at 8% interest you will have made a 4% earning on the difference in loans.

In short borrow for less interest than you loan.

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Risk Management Covering the Downside

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When investing in real estate risk comes with the territory, but minimizing risk to a manageable tolerance is crucial.  Some investors can tolerate huge losses while others would find a small loss difficult to handle.  It is a matter of considering all your options and then proceeding from there.  You do not need to have a vast knowledge as a private lender for a possible deal but you will have to make a consideration of many aspects of the deal.

Aspects to consider is the structure of the deal, what is the percent collateral to debt, which position are you 1st or 2nd, etc., and when will you receive your profit.

With the four aforementioned considerations you may be able to limit high risk and maximize profit. Remember the four points are when you initially look at a deal, if these things are not answered the way you want, then you can let the deal go or improve upon the deal to make it profitable for you.

The structure of the deal, how will the property be obtained?  Will it be seller financing and at what percent and length of time?  Will it be bank financing along with private funding, if so then how much bank financing is needed?

With seller and bank financing are you the second lien holder or even further away from the collateral?   Are you the rehab money?  The first lien holder is the best position especially if the borrower goes into default.

These are just a few things to consider when minimizing risk.

The downside would be being the 3^rd or even lesser lien holder on a collateralized note, a property having no to low occupancy (occupancy under 55%), a property with major rehab needed, and a property with poor management.  This is not the end of the list but only a few of the normal problems which can be encountered on a real estate deal.

Of course each one can be covered to help benefit in profitability.

Lien holder position, find out what it will take to make you number one or number two.  Funds necessary may only be the difference in $5000 or possibly less.

Having no to low occupancy; many profitable deals have started that way.  The upside is having new one year leases in a multi family property, or a buyer or a lease option for a single family residence.  In a no occupancy situation, finding the best management company for the area is a great start to a profitable finish.

Major rehab projects may be a time factor downside.  Time of year for weather concerns for certain areas, and or time of investment return.

A property with poor management, the remedy is to find the best management company in the area or build a team for the property.  Hiring people with people skills is the biggest key.  Many companies with less than stellar products may have high sales due to the people skills of the sales staff.  People have a tendency to stay when they have been treated fairly and respectfully.

So remember, covering the downside by taking proactive steps to maximize profitability can result in less risk of investment.

What Risk Would You Take? : Sunday Morning Thoughts 24 April 2011

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Risk—[risk] – n. 

To venture upon, the degree of probability of loss, take or run the chance of injury or loss.  To be under financial or legal obligation; held responsible.

 

In any investment one must be willing to take a risk.  The types of risks low, medium, and high, which are proportional to profit from taking the risk; normally the greater the risk the greater the profit.

A low risk investment yields a profit without much consideration for a loss.  Something comparable to a FDIC insured savings account at a banking institution.  This type of investment normally has lower profit and very minimal loss, even if the banking institution were to go into receivership.

A medium risk investment normally has a better profit than a low risk investment, but the risk is greater although the investment may still be a safe bet with a nice return on profit.  A medium risk can be something similar to investing in a slow growth fund or even a real estate investment such as a lease with the option to purchase or a class B multi-unit rental property.

The higher the risk the more likely you will have a greater return.

With that said, a high risk investment normally has a larger profit margin but if a loss is incurred it could be of a large amount, and in some cases more than what you invested.

So a good question to ask, how can I minimize the risk of loss?

Always be aware of the downside.  In any investment there is a downside.  The downside can range from a very long-term wait (5 years or more) to realize a profit, to a negative profit at the end of maturity for the investment.

How to gauge how much risk you can take, answer–what do you feel you can tolerate?

Increase in interest for Commercial Real Estate: Sunday Morning Thoughts 30 January 2011

If you input ‘commercial backed securities’ in a search engine you will see approximately 12.3 million results, give or take a few, and depending on which search engine you prefer to use.  Among the plethora of results- ‘Cantor prepares to debut commercial mortgage backed bonds.’

Many other institutions already have commercial backed bonds.

The commercial real estate market and SFR (single family residence) market are at most times opposing one another.  When the interest for one is up the interest for the other is down.  As everyone is running to the nearest, next and best SFR foreclosure, there also exists over valued over bloated commercial foreclosures in abundance just like houses.

Also like houses, commercial real estate is many and varied- From 5 unit multi-family, mixed use, retail commercial, business commercial, and apartments.  When home foreclosures increase, so does the demand for apartments; displaced home owners need some place to live.  The choice is either family or find a rental.

During the housing boom vacancy rates for rentals increased.  Now that so many people are becoming non homeowners, there is a shift from ownership back to renter.  This shift contributes to an increase in value for apartments.  Increasing the net operating income by $1 increases the value of the property by $100.

At this time with more foreclosures on the horizon apartments and other types of rentals will be in an increasing demand for at least another 8-10 years.  As a private lender having a note on these types of properties which normally have a maturity of 5 years is a low risk investment with a very nice yield.

The Rising DOW and Falling House Values

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It seems as though with the raising of the DOW property values are on the decline.  The DOW, even in its unsteadiness, has made more gains over the past few months than real estate.  As long as the DOW maintains its cycle it will end the year with a positive gain.

 But, what about property values?

With the onslaught of more foreclosures and less and less successful loan modifications, property values will continue to decline.  This means you will be finding more and more deals, especially since credit lending is becoming tighter.  Loose lending practices which landed home owners in the current foreclosure mess are now a thing of the past, or are they just taking a break for now.  Our past banking system has taken a bad toll on our economy. 

The economy will not improve until people begin to feel more secure, and lending institutions become more accountable with the extending of credit.  More individuals are continually moving towards using cash only at the registers, and at home are using scissors on the once preferred method of spending.  

Will being a liquid society help the economy to stabilize and have growth? 

Becoming liquid will cause a slow down in the growth of our economy.  How many people are able to buy a car, house, or any other big-ticket items with cash only?  It takes time to earn, and save. 

Does this sound like bad news?  Yes in a way it is.  But if you are able you can take the bad news and turn it to the benefit of yourself and others.  How can the average person extend a helping hand to a snowballing problem?  By understanding the principles of arbitrage whether it be negative, neutral, or positive.  Money invested wisely can make money no matter which arbitrage is present. 

So which is better the DOW or real estate?  Learning to capitalize on situations with diversification is best.