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)

 

What’s Your Investing Strategy: Sunday Morning Thoughts 19 August 2012

strategy (Photo credit: Sean MacEntee)

What strategy do you use to put your money to work for you?

Some people may say they invest in a mutual fund, have a 401k with a fund manager they have never spoken to directly.  Or some people having a distrust of banks and the banking system may actually put their money in a mattress.

Putting money to use to make money is a strategy as old as time.  Some people believe that working for money is the best way to make more money, but near the end of the week, they always seem to be waiting for the next paycheck.  In essence living from pay check to pay check, but never seeming to save enough money.

Then there are those that invest in the stock market.  They buy stocks based on a tip someone gave them, or they invest based on someone else’s opinion of how a stock will perform.  From day trading, expiration trading, buying stock, dabbling in options, etc.  But if you are a novice then you may not know the land mines which await you when you enter the battle field of the stock market.

Isn’t that what the banks were doing with the money you placed in the bank before the system took a down turn, they even charged you fees for the privilege of leaving your money with the bank.  Well, they do keep it safe, don’t they?

Why is real estate investing a great investment option even for a novice?

Most people can look at an area and decide if the area is good or otherwise.

There are many strategies in real estate investing but one of the best strategies, is do you feel the investment is sound?

The other questions you can ask yourself:

• What can you do with the property to improve it?

• If you need to sell it how much and how fast do you want to sell it?

•  Can the investment sustain itself and give you cash flow?

With real estate investing one golden rule, never attach yourself to a property.   You will come across many good deals in real estate investing but never hold on to an alligator just because you love it.

Related articles

• Residential and Comercial Real Estate Investing: Sunday Morning Thoughts 5 August 2012 (backedbyrealestate.com)
• The A, B, C’s of Real Estate Investing: Sunday Morning Thoughts 22July 2012 (backedbyrealestate.com)
• Some of These Real Estate Stocks Pay More Than 12% (fool.com)
• Ryan scrutiny ‘par for the course’ – NBCNews.com (video.msnbc.msn.com)
• Investment Site Announces Investing Solution After Latest Stock Market Rise Still Shows a Down Market (prweb.com)

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.

Related articles

• The A, B, C’s of Real Estate Investing: Sunday Morning Thoughts 22July 2012 (backedbyrealestate.com)
• Invest in Cash Flow Properties (foxnews.com)
• How to avoid a Ponzi Scheme: Sunday Morning Thoughts 15 July 2012 (backedbyrealestate.com)

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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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.

Minimizing Risk in Real Estate Investing

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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.

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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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?

Re-Emerging Investment Opportunities: Sunday Morning Thoughts 20 March 2011

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Recently Hewlett-Packard signed an industrial lease on a distribution center in the San Bernardino County California more specifically Cajon.  The property is 1.4 million square feet which makes it one of the largest industrial leases in southern California.  The lease period is seven years.

 

It is anticipated that the region will become highly sot after by other Fortune 500 Companies for mega box space.  There have been other deals in the area in the past few months, Living Spaces, Harbor Freight Tools, and American Building Supply Inc., have recently inked deals in the Cajon area.

 

What does this mean to a commercial real estate Investor?

 

The area maybe experiencing growth, again; buying homes and other rental property would be a possible start, in addition to office and large industrial space.  No one can work there if they do not live near there.

 

Once there is a migration of people to an area, house values will increase, as will the need for retail such as, fast food, grocery stores, and general shopping in the immediate as well as in the outlying areas.

 

On another note transaction in cash are on the increase.  Earlier in 2010 the percentage of real property purchased in cash was at about 23% that has now risen to 32% and is anticipated to increase throughout the coming years.

 

Does this surge in cash buyers mean people have huge stacks of cash lying around?

 

Not necessarily, it could mean private lenders, and lending groups have been funding deals and realizing a profit.

 

To contact us Investor@ImmaculateEnterprisesllc.biz

 

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.