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.

Watch the Private Lending 102 Webinar on our FaceBook page.  At the end of the Webinar download the information loaded PDF Private Lending FAQ’s.

 

 

Related articles

• Commercial Real Estate Lapse, Rebound, Relapse: Sunday Morning Thoughts 02 June 2013 (backedbyrealestate.com)
• Common Real Estate Investment Mistakes Win Comment from Industry Professional Yoram Eliyahu (prweb.com)
• 10 issues facing commercial real estate in 2013 (bizjournals.com)
• Metro Denver’s commercial real estate starting 2013 strong (bizjournals.com)
• Riggs: “Risk Off’ for Commercial Real Estate (Low Rates, Higher Commercial RE Returns) (confoundedinterest.wordpress.com)

 

Investor Driven Real Estate Recovery: Sunday Morning Thoughts 13 January 2013

The housing recovery is well underway in some areas, and stagnant in some of the most desirable areas.  So what is driving the housing recovery in those markets?

Cash brought in by investors and home buyers who have great credit, and the ability to acquire a quick home loan.

Markets such as Orange County actually had a slight decrease in property values overall but for the more wealthy areas the home values decreased slightly when compared with the rest of the country: Mainly because many of the property auctions were driven by investors.

In the Inland Empire areas such as Temecula, Lake Elsinore and Hemet are starting to have growth of 30% or better; Investors again bringing all cash to the closing.

So what does this mean for the housing market?  The recovery is investor driven but to have a healthier recovery, it does need to be driven by home owners.  This will come later in the real estate market as credit makes a bigger return to the economy.

As a lender to investors, this is the time to capitalize on the market showing signs of movement and the need for money to purchase homes.  Here’s a possible strategy:   If you invest in a property with a current worth of $188,000 purchased by an investor for $90,000 with a small amount of necessary rehab of $30,000 or less, then the rounded up LTV is 64%; Which gives a lot of room to resell for a profit and still leave equity in the property for the buyer.  Now what if the buyer is a solid credit risk, but cannot get a loan?

Well take a closer look.  The investor is using private money in the amount of $120,000 at 5% for 5 years.  Then decides to sell the property at $160,000 and holds a note for the buyer at 5% for 3 years.  Same interest but a $40,000 dollar profit which will be realized later.  With this formula the investor driven housing recovery will lead to a home owner driven recovery.

Keep in mind the aforementioned is an example.  It does not mean that you will find the property, or even the buyer.  But it is possible and being done by many real estate investors of SFR’s, multi-family, other commercial types of property, and even raw land.

Related articles

• Desert Property Investor Sees All Signs Pointing To Phoenix Housing… (prweb.com)
• Sarasota Bay Real Estate Reports Wall Street Bullish on Housing Recovery (prweb.com)
• Investing Strategies for a Struggling Real Estate Market: Sunday Mornining Thoughts 09 December 2012 (backedbyrealestate.com)

Are You Gambling with Your Retirement?: Sunday Morning Thoughts 04 November 2012

Gambling while in retirement is not the same as gambling with your retirement.  

When you enter the field of stock market investing, i.e. with a 401k, Keough, IRA, etc. the first person placed in front of you is an adviser.  They help you create a retirement model that may or may not work.  Most models look at the upside of saving and not the down side of the economy.

If you only know that your retirement will be a certain amount of money by the time you retire, and the estimated probability of having a comfortable retirement is at least 95% then you may want to ask more questions.

Occasionally the retirement models only tell of the shiny side of the coin.

But taking charge of your retirement and investing it ‘willy- nilly’, is not any better.  A balanced portfolio may prove to be better than having one in all aggressive investments, or on the flip side, in too conservative of investments.

Too aggressive opens your investment to high risk, and too conservative may not yield decent returns.

Finding the right balance for you tolerance level and growth strategy may prove to be what will get you to your retirement safely and comfortably, without the thought of outliving your money.

A few things to consider:

• How much do you want to live off of yearly? $70,000+-
• How long do you think you will live?   Many people are making it over the 100 mark these days, just ask Willard Scott.
• What type of savings do you currently have?
• Do you have an IRA, 401k Keogh, if not will you begin to save and open one and when will you open it?
• How much will/are you putting away currently?

Here’s a retirement calculator to get you started.

http://cgi.money.cnn.com/tools/retirementplanner/retirementplanner.jsp

Keeping these tips in mind may aid in the reaping of the rewards on your investment. 

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The Return of Foreclosures: Sunday Morning Thoughts 15 January 2012

Foreclosure is back and in a big way.

Many lenders took a lot of flack for the robo-signing of foreclosures.  But now with all the waiting and re evaluating period coming to an end, the banks will be stepping up the pace of foreclosures, thus creating a bigger real estate surplus.  All types of real estate from residential to underdeveloped land and everything between.

How will it all impact housing, buying, selling of real estate, and an investor’s bottom line in real estate?

The current buyers market will continue, but the heating up of the market will still be in the distant future due to the stricter changes in lending.

A new bottom may develop in some areas with more foreclosures due to enter the real estate market.

What is a possible strategy for buying properties in this weird market?

Being flexible.

Flexibility in your thinking of purchasing and owning real estate will be a necessity.  Buying and holding, leasing, and renting are all standards in real estate, but now the implementation of those standards will have to be examined.

Start thinking out of the box, because frankly, the box is an ever-changing structure and the rules are temporarily set in stone as we await the other shoe falling in our global economy.

But there is another question on the horizon, “What is going to happen with Fannie Mae and Freddie Mac?”

Diversifying Your Stock Portfolio with Real Estate: Sunday Morning Thoughts 04 December 2011

Many stock market investors are beginning to diversify their current stock portfolios with real estate.  REIT’s are gaining a renewed interest among stock holders.  Not all REIT’s are created equal.  The one REIT with the best gaining potential is multi-family.  Whereas mortgage REIT’s are obviously not considered a sound investment at this time due to the housing glut.

Multifamily REIT’s are not necessarily a bullish investment, but they are expected to see more gains in the coming year.   With the current drop in unemployment, and the overall stabilizing of our economy one could wonder, has the bottom been reached and when will we begin experiencing an upward movement in the real estate recovery?

The foreclosure waves have not finished.

In previous posts we touched on commercial foreclosures barely getting started.  There will be more commercial foreclosures in the New Year, for both commercial and residential.

So why diversify my portfolio with a “loser investment”?

Real Estate is not a losing proposition.  Now is the time to invest in many, many lucrative deals, especially when it comes to multifamily.  A lot of commercial lenders are going to foreclose on commercial properties due to over leverage, or the property has become an alligator due to neglectful management.  Either way once a commercial property becomes a losing investment and a loan is due a reassessment then the lender may not re-qualify the original owners for a new loan or extension of the same loan.

During the residential housing boom there was a commercial, multi- family housing, boom as well.  Interest only loans and low down payments made it easy for a novice to enter the commercial market.  Now with the market reassessing itself, many of the same novice owners have had an obscene rise in vacancy rates, and even worse deferred in maintenance.

From the banks perspective if a commercial investment is losing tenants, and has deferred maintenance and is now unable to support itself on its Net Operating Income, then when the reassessment time arrives an owner may lose the property even if current on payments.  For a commercial property, the net operating income will still have to support its debt.

So how can this scenario be avoided?

Do not defer maintenance, keep your tenants happy, and have an outstanding management team.  This can be the difference in apartment community having no vacancies while the other community has an abnormally high vacancy rate.

So if you are in vesting in a REIT then you may want to consider investing in something as a private lender only so you can be closer to the actual investment.

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

Image via Wikipedia

 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

Level of Risk in Real Estate Investing: Sunday Morning Thoughts 22 May 2011

Image via Wikipedia

As with all types of investments, there exists a level of risk.  Risk can range from low to high.  The range also has an impact which can be directly proportional to your return on investment.  Often times, the more the risk the better the profit.  But does that actually apply when considering real estate investing or private funding of real estate?

In a previous post we explored the amount of risk and the impact on return of investment.

Using the previous examples from part #1, the lower risk investment was the 60% occupied apartment.  The high risk and low yield was the strip mall.  The medium risk investment was the SFR.  But even then the determination of level of risk is based on what we already know about each project.  This isn’t to say we will jump into either investment of low or medium risk without knowing more information; now it is purely a judgment at first glance, to see if the potential investment warrants any more analysis time.

First we will examine the apartments with 60% occupancy and knowing the current management/owner is tired of owning rental property.  And for good reason, the tenants always seem to have some sort of an issue; maintenance always has to be performed from general maintenance keeping the grounds neat and tidy to fixing other issues such as plumbing, electrical, etc.

Now with the current owner letting things go, his rental income property has become his nightmare.  As long as the property can support itself, and generally 60% occupancy can do that, then the investment becomes a steal of a deal for another owner, one who will make sure the property has great people oriented management.  This one would definitely garner a request for the financials and a deeper analysis in order to make a reasonable offer.  This investment would be a medium with a superior yield even in its current state.

The other medium risk investment would be the SFR.  The SFR is in a middle class area without too many homes for sale.  The area is considered desirable for families to move into.  Once the house has been rehabbed and cosmetic touches have been applied then we would have either a passive investment property as a rental or sell it for at the fair market value.  This property could also become a lease with the option to purchase.  This one would also garner a further look to make sure the numbers are in order, and that the return on investment is worth all the hassle of the rehab, if rehab is necessary.

Not all houses are worth the rehab effort.  Some houses may only have a value due to the land which they have built on, versus the amount of work needed to fix the place.

As for the high risk and low yield investment, the highly vacant strip mall or office space, would be an investment that would not receive consideration if the typical strip mall/ office space in the area are almost empty or empty.  It would be a matter of evaluating employment statistics for the area, in addition to taking a look at the local demographics.  All of which is just a mouse click away.  Most of all the information can be found quickly on the internet.

But if the area is dense with vacant strip malls/ and or office space then it might be best to move to on to a more viable investment.

As a private lender, the investor presenting you the deal for funding should have already checked the numbers and made sure the deal is profitable.  But as a private lender you still need to look for profitable characteristics in all possible deals before funding.

Minimizing Risk in Real Estate Investing

Image via Wikipedia

In real estate investing as with any investment, risk is a factor.  Minimizing risk entails covering the downside and investing in a deal which makes sense.

Real Estate investing ranges from Single Family Residence(SFR), 2-4 units, 5+units multi-family, apartment building complexes, office space, mixed use, land, and agriculture.  Each type of investment has a built-in downside, or does it?

When real estate investing, a great investor falls in love with the numbers, not the property.  So the type of real estate should not matter as much as the numbers.  Stock investing and real estate investing are alike in this respect.  You can like a business but if the businesses stock is non-producing or poor producing stock investors are less likely to invest in it.

In real estate investing if the area is mostly abandoned buildings most real estate investors are less likely to invest in the area, although these non-producers may actually be diamonds in the rough.  We will save that for a future post regarding emerging and re-emerging areas.

Food For Thought, which investment poses less risk?

•      A SFR which needs rehab and is unoccupied in a middle class area with only a few houses for sale.

•      A 60% occupied 28 unit apartment complex where the owner cannot take it any longer.  It being the tenants.  With minimal   rehab necessary.  In a middle class area with a low vacancy rate.

•       A strip mall with 10 spaces total but only two are occupied, and the surrounding area has many vacancies of this type.

The less risk is the apartment complex.  60% occupancy in an area with few vacancies indicates mismanagement of this particular complex.  The SFR, well it does make a return but not until after rehab and finding a buyer or leasee.  As for the office space, find out why the businesses are moving out of an area.  It could be that jobs are moving to another area, or the main employer has moved out-of-town.

But each possible investment has it’s own upside and downside   too numerous to mention in a short post.  There are more things to consider for each type of property, but when faced with a choice, choose the one with the best numbers and advantages to maximize profitability.

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 Robo-Foreclosure mess and the effects on Private Lending: Sunday Morning Thoughts 16 January 2011

If you read last Sunday’s post then you will understand that the robo signing scandal has become the bane of most Banks.  Judicial foreclosures have been thrown out by Judges.  The reason, there was not enough proof on the lender’s part of owning the note; seems as though the process of foreclosure is going to take even longer.

With all the shoddy paperwork, what type of impact will this have on the real estate market?

A slowing effect on foreclosures, so basically property values should see an increase in markets that are considered desirable and a leveling in values for harder hit areas where every other house is a lender owned vacancy.  The future, the harder hit areas will become popular again as home values begin improving in the desirable areas, against the lower priced harder hit areas.  New inventory will also begin to pick up but not just yet that’s on the horizon.

How will this effect private lending?

Well not the same as it is affecting large banks.  Aside [If you buy paper from any institution then you better scrutinize the paperwork to make sure they are the current note holders among a myriad of other important things.]

The upside to the robo-signing  scandal, banks maybe a little easier to work with for short sales and loan modifications.

Private lenders will find themselves in a better investment in a shorter period of time, due to the slowing of foreclosures and the appreciation of various types of property. Even the DOW is showing appreciation in the REIT’s being offered.  In the coming months and years private lending will prove it self to be a very lucrative investment strategy in this weak yet improving real estate market.

Take advantage of the wave of our near future.