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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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.

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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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Separating a Winning Deal from the Alligator: Sunday Morning Thoughts 30 July 2012

Alligator eating Money Sculpture 14th Street – New York Subway (Photo credit: Annie Mole)

With so many great deals out there and even more on the horizon, how do you pick a winner?

Analyze.

For each type of invest there are hard and fast rules of analysis to apply.

For instance you would not analyze a residential deal the same as you would analyze a multi–family deal.  Even within residential evaluations, a two bedroom one bath is not analyzed the same as a five bedroom 4 bath.

But there are similarities of analysis for all properties. The A, B, C’s of evaluating properties.

So how do you tell the difference between an alligator and a profitable investment?

An alligator is an investment which someone tries to sell you on with the promise of making a profit somewhere down the line, somewhere in the future.  The typical time period is five years.

So while you are waiting for the profit period to finally happen, the investment costs you money out-of-pocket to hold on to.  This is also negative leverage with a negative return on initial investment.

It may be better to not make that investment.

In real estate if the cash flow of the investment does not cover the maintenance costs and debt service, then it is classified as an alligator;  A losing money investment.  Which means it would no longer be an investment but a liability.

When investing in real estate you can make an investment positive by having a positive return on investment, also known as a positive cash flow property.

If your deal does not bring you a positive cash flow from you take over the property then you may want to reconsider or restructure the investment.

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The A, B, C’s of Real Estate Investing: Sunday Morning Thoughts 22July 2012

 

 

now renting? sweet! can I get the one with all the broken windows plz? (Photo credit: tray)

 

With so many great deals out there and on the horizon, how do you pick a winner?

 

 

 

Analyze.

 

 

 

For each type of invest there are hard and fast rules of analysis to apply.

 

 

 

For instance you would not analyze a residential deal the same as you would analyze a multifamily deal.  Even within residential evaluations, a two bedroom one bath is not analyzed the same as a five bedroom 4 bath.

 

 

 

But there are similarities of analysis for all properties. The A, B, C’s of evaluating properties.

 

 

 

“A” classified investments are located in high-end areas.  Generally people with higher incomes and educations reside in “A” type areas.  The area can be all residential or mixed with multifamily units.

 

 

 

Generally, these types of properties are considered prime real estate, have a low cap rate, normally around 2-4%, they also have a higher tenant turnover if it is a rental property.  Most often investors purchase “A” properties for equity and cash flow.

 

 

 

 

 

 

 

“B” and “C” class properties make great rentals and are in middle class type of areas.  Investors tend to refer to these types of properties as ‘bread and butter’ investments.

 

 

 

Rental turnover is normally low to moderate for properties which are well-managed.   These type of properties can have cap rates ranging from 5%-13%, have great cash flow, and moderate equity.  Equity gains can be increased with improvements and minimal to moderate rental increases.

 

 

 

“D” and “F” properties, well just like in school you may want to avoid these types, but why?

 

 

 

“D” and “F” property investments coupled with strategic planning on improving can be a lucrative investment.  Keep in mind people who live in “D” and “F’ areas may not have a checking account and may work lower blue-collar jobs.  They may also receive some form of government assistance.

 

 

 

 

 

 

 

This does not by any means, mean for a person of more wealth to take advantage of someone by becoming a slumlord or slum investor.  Where you are not making improvements, or taking care of maintenance issues.  People of all walks of life deserve to live a happy life regardless of circumstances.

 

 

 

So which type of investment are good, better, and great?

 

 

 

All are profitable with the right types of strategies.  Remember entry strategy, holding strategy, and exit strategy, are all phases of a great investment.

 

 

 

 

 

 

 

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Home Sales Up Foreclosures Going Up: Sunday Morning Thoughts 22 January 2012

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Home sales ended 2011 with an overall gain.  Mostly due to lower affordable prices, low-interest rates and a better outlook on the foreseeable job market.  It looks as though a real estate recovery is underway.

Homes sales were up but real estate prices were down and with the foreclosure crisis reigniting itself prices are due to go to new lows.  Many of the current sales for homes have been from foreclosures.   Short sales, once the dreaded enemy of many impatient investors is now the vehicle by which many real estate assets have been purchased and at hefty discounted prices for the more savvy investors.

So has flipping properties become a thing of the past?

Not at all flipping in a depressed market is still alive and well, and a well used strategy for many investors.  Only change has been the rules by which a flip can be done, but flipping nonetheless is still a viable practice.  Not all of the would-be homeowners will be able to negotiate with banks for a foreclosure let alone negotiate a short sale.

With more banks heating up the foreclosure pot, inventory is set to rise, more and more real estate deals will be sourced and made by savvy investors and home buyers alike.

But most foreclosures are sold by realtors.

Not all realtors can move foreclose properties, if the area is inundated with foreclosures a confused buyer may fall out of escrow on a few properties before finally deciding which property to close on.

So although the bleakness seems to be disappearing in some real estate markets, it is a matter of time before another cooling period will begin.

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.

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.

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.

Buy Low and Hold: Sunday Morning Thoughts 03 October 2010

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If you were offered an apartment property with a few issues, such as high vacancy, deferred maintenance, and lousy management, would you buy or pass?

Many people would pass stating it would be too much trouble to fix the errors, and there is so much on the market with fewer issues.  Others would ask, “What is the lowest price you would accept for this property?”

Both answers are legitimate depending on your investment desires.  Maybe you would like something that has stable cash flow, and has been kept up.  This type of property will cost more to purchase and the rate of return would be lower than if you considered something else.

The something else property, the “problem” property could potentially yield higher rate of return than the property without flaws.

With the “problem” property you could negotiate a much lower price due to the high vacancy and deferred maintenance.  This lowering of purchase price could give the advantage of a higher rate of return when making the improvements and leasing to new tenants, netting more cash flow.

But remember when picking a “problem” property, the area is the key to success.  If you pick a “problem” property in an area which is also a problem, you may want to reconsider the purchase, only because it would take more time to straighten out an area versus straightening a “problem” property in a descent area.

Once the problems are corrected in your flawed property, the rate of return could potentially sky-rocket past the property without flaws.

Many people find that being a private lender erases most of all the risks, and yields high rate of return for minimal effort.  If you need more information please visit our website or call 323 988 7205 x 106