Commercial Real Estate Lapse, Rebound, Relapse Part II: Sunday Morning Thought 09 June 2013

After a lapse, there is almost always a rebound, which is the current state of the commercial real estate market.  The rebound even includes areas of cities which were once abandoned many years ago, and are now going through a city revitalization project.

During the lapse many investors created a buying market for many new investors of commercial real estate.  The lapse being caused by lenders either not refinancing properties, which became deals with lending already in place for an investor who has access to cash to pay off a note which balloon has come due.  Or from an investor who entered the commercial real estate market trying to wear multiple hats, like managing the property, doing the maintenance and up keep for the property, and acting as the handyman as well; the proverbial jack of all trades, but master of none.

A formula for an unsuccessful leap into the commercial real estate market, driving an investor into a frenzy of disappointments, ending in a loss of the investment and resentment of land lording.

Real estate investing is mostly the K-I-S-S method, simplicity in all things.

So with the current rebound, history will repeat itself with the new commercial investors, as the commercial real estate market is now poising itself for another relapse.

The rebound is being driven by higher purchase prices which are substantially impacting the capitalization rate of properties which are the “bread and butter” types of commercial real estate. So what may have been a multifamily property which sold with a cap rate of 8.5%, goes up for sale in this rebound market, and after a bidding war, sells with a current cap rate of 4.5%, a recipe for higher rents to try and bring the cap rate back towards 8.5%.

But, the shadow market of house rentals may prove to cause another relapse in the commercial multifamily sector.  With renters having a choice of either renting a house for the same price as renting an apartment in a 100 plus unit complex, the house with a front yard and backyard may become a better option for many.

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Commercial Real Estate Lapse, Rebound, Relapse: Sunday Morning Thoughts 02 June 2013

What caused the lapse in the commercial real estate market?   

Many would think sub-prime lending, but that is not the cause.  Commercial lending is based on the income of the property.  The lapse has been caused by easy lending.  Similar to sub-prime lending in that it was easier to get a loan and purchase a commercial property, without regard for knowing how to manage a commercial property.

Many people had never learned about managing commercial real estate but entered into the arena believing they could handle the demands of commercial property.  Many of the properties were multifamily apartments.  Although many of the investors sold off items from the apartments, such as , microwaves, refrigerators, washing machines, dyers, etc. and then skipped out on their loans, and leaving in their wake the rubble of what was once a viable housing community.

Many of these properties were left in a horrible state, but was it really that horrible?

Not necessarily so.

It had been noticed that many once viable properties, in thriving rental areas, had fallen into low occupancy, disrepair, and higher than normal expenses due to mismanagement; with many units in a community becoming uninhabitable from some type of damage such as fire, or property destruction such as knocking holes in the walls.

The lapse was a time of finding a plethora of value-add properties, which are still present at this time and many more like type properties entering the commercial market weekly, if not daily for lucrative rental areas.

Next Sunday’s post the Rebound part II.

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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.

Will the Real Estate Market continue to Decline?

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We are currently in the eye of the storm of impending foreclosures.  The foreclosure pace has seen a slowing in the past few weeks and will slow even more in the coming weeks.

For November the decline was caused by the robo-signing scandal which forced lenders to slow the roll of foreclosures until they made sure all of the blank spaces were filled and all sentences made sense.  The triple checking of paperwork caused a slow down in foreclosures.  Many people on the chopping block were given a temporary reprieve.

Starting on the 20^th of December banks will get into the holiday spirit, and halt foreclosures for the last two weeks of the year.  But then promptly restart foreclosures on the 3^rd of January.  These factors contribute to what will look like a slowing in foreclosures for the end of the year, then January will see a hard spike in foreclosures due to the catching up by the banks.

What impact will this have on property values?

Property values for the end of December will flat line then in January; there will be a decline due to a housing surplus from lenders proceeding with foreclosures.  The robo-signing scandal did have a positive impact on property values.  With lenders going at a slower pace, making it appear that the overall inventory was shrinking.

Once the banks begin to pick up the foreclosure pace again we will see another decline in property values.

This is great for buyers but sellers in areas where pre-foreclosures and foreclosures are on the rise, the value of the property may suffer.

How can this benefit a private lender??

Even with a decline in property values a private lender may still make a profit in a real estate venture.  Lending on commercial property– people who have been foreclosed on will need to rent a place- or lending on a single family residence then taking quarterly, monthly, or a one time payment depending on the situation of a particular property.  So even in a down market you can still realize a return.  Visit our website to learn and possibly earn more  http://www.BackedByRealEstate.com

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.

The Real Estate Investment Scam

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Yes we were all scammed by predatory lenders; the economy along with the housing market, ruptured horribly.

As we are now trying to steady our feet some are touting out how real estate is not a good investment, this is the new scam, misdirection.

Why invest in real estate now?

Warren Buffett said: when others are greedy be fearful…

People were gobbling up all the real estate they could with the subprime loans, jumping into the deep end of the pool without any basic knowledge of how to float let alone compete in a race they had never trained for.

Many investors as well as home owners bit off much more than they could chew, which resulted in our current housing slump.

So, while others were greedy those in the know stood still, watched, and waited.  What everyone saw in the news “Housing bubble will burst”.

 

The housing and commercial real estate bubbles have both burst.

Warren Buffet:  When others are fearful be greedy.                                               

Many investors have called our current down economy the perfect storm.

Bargains Everywhere, America on Sale!

 

The housing and commercial real estate glut equals much lower prices on once coveted real estate.

Houses people once could not afford are now priced at half or less, but some of those areas are now less appealing due to having more vacant homes than neighbors, the appeal for the areas will return as new owners move into once vacant foreclosed homes.

If the past has taught us nothing, it has shown us things will come around again and again.

After the housing bust of the 90’s, people purchased homes that were bigger for the same price or lower than their current residences–more rooms, more square footage, and more space- for their families.

In this market we have a lot of “sideline” buyers, people who were priced out of their preferred areas, and now can afford to buy.  So just because the housing credit is due to end on 30 September it does not mean people will stop buying real estate.

First we had the rush, now the slow down, after 30 September will be the step up.

People will step-up to buying foreclosures but only in areas were there are jobs.  New housing will also find it’s niche buyers, most people love new, never been used before.

Commercial real estate is one of the best real estate investments at this time.  Many people bought investment real estate such as apartments without understanding the pitfalls of commercial investing.

Many newbies decided to buy multi-unit apartments and would manage it themselves from a few states away.  Not a good idea.  Managing apartments means you are customer service, maintenance, salesperson, and problem solver.

For those with low maintenance apartments and tenants self-maintenance is a good option.  But that’s not the case in a majority of scenarios.

One of our recent ventures is a foreclosure, a 42 unit community in a desirable part of Fort Worth, Texas.

The original owner was an investor from California, two states away, who decided to manage the property himself.  We will call him Buster.

Buster did not check references, nor did he do a credit check, etc. before approving his tenants.  Buster found out the hard way, approving any and all applicants can lead to a negative cash flow.

The better tenants began moving out in the droves due to a lack of management, complaints going unheard; people expect a response and a solution ASAP.  Complaints about leaky sinks, light bulbs blown out, tubs slow to drain, and or problem toilets should be looked at as soon as possible to keep it from becoming a bigger problem in the future.

Without paying tenants, Buster’s investment apartments became a money pit, in short he busted.

Buster was not the only new investor to find it challenging to maintain so many units.  Others have fallen with pretty much this same type of scenario.

Not all commercial foreclosures are lack of maintenance issues; many investors are having issues with the refinancing of their loans.

The credit crunch strikes again.

 

This is why Private Investors are so very important to our economies recovery.  It does not take an extremely large investment to become a private lender.  The returns on investment may out perform the stock market, depending on your current investment strategy.

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