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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Arbitrage, Profiting from the Spread: Sunday Morning Thoughts 19 May 2013

Arbitrage The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.  http://www.investopedia.com/video/play/arbitrage/

 

Understand when you look up the word arbitrage, you will find many varied references to the stock market, for this post the term will be applied to real estate investing.

In real estate as a private lender arbitrage will be the spread between the costs of monies.  If you borrow $100,000 at 3% interest then loan the same money at 6% interest then you would have 3% interest as a gain.  Many private lenders and real estate investors have taken advantage of arbitrage.

Flipping houses is also a form of arbitrage.  The method is slightly different today but it is still the buy low/ borrow low and loan/sell at a high rate and the difference will be the profit.

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How to Keep the Goose Alive, FOREVER: Sunday Morning Thoughts 31 March 2013

Let’s recap last week’s post about a steady income flow during retirement.  To keep the goose alive and producing golden eggs, you must have at least one stream of steady income into the goose, also known as your retirement account, or life savings.  Please understand retirement does not mean you quit your lifestyle, but that you no longer go to a job/work/run your business.

But all play and less business/work can lead to poverty.

We all live on a fixed income, regardless of retirement status.  We make a budget of fudget, encounter surprise expenditures, and maximize the money we have.  So working on your retirement before you retire is the ideal, but everyone always puts it off until later.  Set up your retirement account, also known as your golden goose, to continue to have an income when you have gone into retirement.

How do you keep an income, when you are no longer working?

Have your non-earned streams of income continue to work for you, such as private lending.  With a private lending contract the work is minimal.  The deals literally come to you.

You examine each deal to ensure it will give you the return you are looking for, and for the period of time you wish to be involved.  Remember; never place all of your eggs (investment money) into one basket.  Diversify your types of lending investments.  You can invest in a few SFR’s, a few small and/or large multifamily units, offices, and businesses either start-ups or businesses which are already generating a steady income.

The only way the goose will remain alive is to feed it a steady income.  If you live off of the money you put away without adding to it, it will eventually run out, become depleted, and the end result is  a dead goose, and no more golden eggs.

But, the goose can live forever, if you plan for it.

So how do you make your goose live forever?

Private lending is one way.  But, before you dive in, get an education on private lending first.  We have an on demand webinar and will be adding two more educational webinars soon.

Ask questions, we will answer your questions.  So take a moment, bookmark our Facebook webinar page and watch Private Lending 101 at your leisure.  Private Lending 102 and 103 coming soon.  May your goose live long and give you prosperity.

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Real Estate Retirement Investing Part 2: Sunday Morning Thoughts 09 September 2012

Retirement (Photo credit: Wikipedia)

Instead of wracking your brain over how long your retirement will last, why not give a lot of thought to understanding how you can use other non-conventional investments to make your money for retirement work for you.

Everyone either understands or pretends to understand how their 401k works. 401ks have been an investment vehicle for a long time, but there are many options for your 401k investment.

You can invest aggressively, moderately, or very cautiously, but will you still be able to have returns that will be viable when you retire?

Not necessarily.

You have to consider all of your fund options, and a diverse account is normally the best route.

What about if you are already in retirement, and your account is not going to last you for much longer and your greatest fear is out living your money?

No one should be afraid to live.

Precautions before your money runs out is best, whether you are safe guarding what you have, or you are trying to make what you have grow larger; sound investments are your key to living in a happier state of being, without the worry of your money running to low or out altogether.

Diversifying your portfolio to include real estate investments may prove to be a great option for growing and/or maintaining your retirement nest egg.

Being a private lender, also known as being the bank, is a way of earning interest without the risk of owning a property.

As a private lender you are investing in the vision of someone else, but only the vision is backed by real property, something tangible, sellable, and if calculations are done properly can also be profitable.

So even if a borrower defaults on the loan you have given them, you will still have an asset that you can resale or keep for yourself as an investment.  Of course, you will already know from the documentation given to you in the initial evaluation of the loan, if the property is worth equal or more than your initial investment.

Retirement does not have to be bleak future/present if prepared for and maintained properly.

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Profiting as a Real Estate Private Lender

Real estate investing does have its risks, but with a properly structured deal, the risks can be kept to a minimum, making the return on investment reach maximum potential.  A private lender should never allow their investment to be the down payment on a property.  Instead having a seller held second if a down payment is still needed is a better option, but it should not be lender money.  A second position is riskier than a first position but a down payment position, the money is not secured by the asset and possibly not collateralized.

There can also be a primary position coupled with being an equity partner.  As an equity partner, a private lender will contribute to the down payment in return for a percentage of equity in the property.  This strategy tends to lessen any down payment issues since it’s shared, while reducing risk of the down payment money by having an equity partnership in the property.

Syndication is also a possibility if you have a group of people wanting to invest and everyone in the group is contributing varying amounts of capital.  If an equity position is also in play, then the syndicate would be the equity partner, not just a few of the members.

The other consideration for impact on your return of investment would be fees.  Fees accompany many investments such as CD’s, Stocks, bonds, etc.  Those fees can cut into your final profit.  With private lending, secured by realty, there is a tendency to not have maintenance, origination, or any other type of fees involved.

In conclusion, as a private lender, after being presented with a deal, then checking the numbers for yourself, remember to keep in mind:

• The cost of money
• The impact the cost of money will have on your profit
• Level of risk
• Covering the downside if the loan should go bad
• The profit/ return of investment

These are just a few tips for being a private lender in real estate with minimal effort.  Keeping these tips in mind may aid in the reaping of the rewards on your investment. 

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Private Lender Tips If a Loan Goes Bad: Sunday Morning Thoughts 05 June 2011

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The goal for many private lenders is to make a return on investment better than CD rates.  If you chose the real estate investment wisely, you could stand to make more than CD rates, which is currently 2.39% for a  5 year term offered by Ally Bank.  Also to note with the volatility of the stock market, if you continue to invest in the stock market, then you will need to have more resolve than in previous years.  But with growth comes a little pain, does it have to be that way?  Short answer, no.

A private lender, with an investment secured by realty, may realize a profitable and safe return on investment.  Safe can be accomplished by being the first lien holder or as close as you can be to being the first lien holder.

As a second or third lien holder, a default can wipe-out your investment if the first lien holder files foreclosure first.  This isn’t to say that the second and third lien holder cannot file foreclosure if they are defaulted on to protect their interest in the property.  Most defaults begin with the lesser liens than with the primary.

So if you are the second or third lien holder then you can proceed with foreclosure per the contract you have with the borrower.  The loan servicing company can help with the process of foreclosure.  After filing foreclosure on the property, as the second or third lien holder you will have to begin making payments to the first lien holder or suffer foreclosure.  If the first loan has become delinquent then you will have to negotiate to bring the first loan current.

If you are the third lien holder on a property, you still can file foreclosure and you may be able to buy out the second lien holder’s position to make your interest in the property more stable, and if you can acquire the first lien holder’s note, then that would make you investment in the property even more stable.

Being the first lien holder not only yields you a better return on investment, but can also give your investment better stability.

Foreclosure on a bad loan is not the only option.  As a private lender you can allow the borrower to have another entity assume the loan. So instead filing foreclosure, if you or the borrower can find someone else to assume the loan, and use the down payment to bring all liens current, then that would be a win—win situation without the cost of court.  Being a private lender gives the flexibility to do more than just a standard few things as long as it is agreed upon by all involved parties.

Another option as a private lender is to allow the borrower to exercise a deed-in-lieu of foreclosure.  This can also avoid costly legal fees and you can either sell the defaulted note, or property.

Quick recap on what to do if the loan goes bad

1.    Be the first lien holder or as close to being the first lien holder
2.    Use a loan servicing company
3.    Have contracts in place for the what if’s
4.   Allow the loan to be assumable
5.   Use deed-in-lieu of foreclosure over a traditional foreclosure

Covering your downside can make all the difference in having an upside in passive income.

 

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

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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.

If Warren Buffett is looking for Deals Shouldn’t you be?: Sunday Morning Thoughts 27 Feb 2011

Well if you have been keeping up with all the latest news, you will notice that Warren Buffet’s letter to his investors is choc full of information not only for his businesses but for all Americans.

Warren Buffet is looking for companies to purchase and he’s paying cash.  Berkshire Hathaway is worth 52Billion dollars, with 38Billion dollars in cash reserves.

“Money will always flow toward opportunity, and there is an abundance of that in America.”  Warren Buffett

Warren also made a bold claim that the housing industry would bounce back in a year or so, although the bounce back is more or so than a year, if Warren is taking time to mention it, it can only mean take time to invest in it.

People do not realize that investing in real estate is still a safe bet, and waiting for the rock bottom you may miss it and be involved with the buying frenzy.

America is on the cusp of the recovery, it has been a long and hard road.

Take time to evaluate what, how, and when you want to invest.  Make sure the risk does not out weigh the return.  We have seen many people sitting on the sidelines waiting, but think, if Warren Buffet is no longer waiting and is actively seeking investments,-his elephant gun is loaded and his trigger finger is itching.

Is the U.S. Housing Market Bottoming out?

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According to Mark Zandi, Moody’s economist the current data is showing that the housing market has not hit bottom yet.  As stated in our last post, the housing market in the more desirable areas will experience leveling out after hitting the bottom, then a gradual increase which will pick up momentum.

We have not hit bottom yet but we are a little closer.  New construction of homes dropped in December, coupled with the existing homes sales rising and eminent foreclosures stalling, all this can equal home prices increasing moderately.  This is actually a false positive of a housing market recovery.

The more stable recovery is to come.

Once all the foreclosure robo-signing is sorted out and no longer favoring lender nor homeowner then the market will finally be back on track for a recovery.  Remember we spiraled into our current real estate slump with the subprime lending now it’s time to right the wrongs. 

If you are thinking about investing in the real estate market visit our website.

Neutral Arbitrage and the Effect on ROR: Sunday Morning Thoughts 19 December 2010

Quick recap, positive arbitrage is when your investment return increases with financing.  Negative arbitrage, your investment return decreases with financing.  Neutral arbitrage, your return on investment does not change with financing.

So how can an investor have positive or neutral arbitrage, picking the right loan is key to having a better rate of return.  When considering commercial property, such as multi-unit apartments, a low to no interest loan is best.

Interest only loans were only meant to have a life of no more than five years, after five years the loan could become upside down.  In today’s credit climate having a no interest loan would be difficult.  Lenders were admonished by the government for offering what is known as an investor’s loan to the average American.  This offering to the average person caused many to be in over their head at the time of the loan reset, contributing to our current foreclosure crisis.

All three arbitrage can be present when private lending, of course not at the same time; it just depends on the deal.

Related Articles:

http://backedbyrealestate.com/2010/11/14/arbitrage-and-real-estate-sunday-morning-thoughts-14-november-2010/

Negative Arbitrage and the Effect on ROR:  Sunday Morning Thoughts 12 December 2010