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)

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.

 

 

 

 

 

 

 

Related articles

 

• Real Estate Investing Advice – MilitaryVALoan.com (militaryvaloan.com)
• How to avoid a Ponzi Scheme: Sunday Morning Thoughts 15 July 2012 (backedbyrealestate.com)
• Spotlight on REITs: Equity Residential Properties (moneymanager.com)
• BTB Real Estate Investment Trust Announces Its Distribution for the Month of July 2012 (prnewswire.com)

 

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.

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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