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Social Security and Your Retirement

Wednesday, February 3rd, 2010

This is a post I began writing in June 2009. I thought it still had merit and should be shared.

Social Security’s Inadequacy

According to the 2009 Social Security Trustees’ report if you plan to live for the next 19 years, your Social Security benefits will be dependent on the income tax deduction from those in the workforce. Projected demand for Social Security benefits between now and 2016 will surpass any excess and begin to deplete the “trust” account held on the Treasury Department’s books.

The trust fund will be totally depleted by the year 2037 according to projections. This will require a decrease in Social Security Benefits or an increase in taxes to cover this shortfall.

Bruce Bartlett, a former Treasury Department economist, writes in The 81% Tax Increase:

Most Americans believe that the Social Security trust fund contains a pot of money that is sitting somewhere earning interest to pay their benefits when they retire. On paper this is true; somewhere in a Treasury Department ledger there are $2.4 trillion worth of assets labeled “Social Security trust fund.”

The problem is that by law 100% of these “assets” are invested in Treasury securities. Therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It’s as if you wrote an IOU to yourself; no matter how large the IOU is it doesn’t increase your net worth.

This fact is documented in the budget, which says on page 345: “The existence of large trust fund balances … does not, by itself, increase the government’s ability to pay benefits. Put differently, these trust fund balances are assets of the program agencies and corresponding liabilities of the Treasury, netting to zero for the government as a whole.”

Prudently including Social Security benefits should be a part of a plan to achieve Retirement Freedom. However, to rely solely upon Social Security will most likely produce a pauper’s retirement.

Real Estate Investments for Retirement Income

There is hope to counteract the pauper’s fate provided by Social Security. Purchasing real estate in growth regions, using prudent leverage can produce solid retirement income.

The Benefit of Control

Social Security’s weakness for an investor is the lack of control. The average U.S. citizen does not have control over how the funds are invested or whether they are invested at all.

Investment property offers an investor much more control. An investor can choose where to invest, what type of property to buy, whether to use debt or not, how a property is managed, and when to pull money out of the investment.

The Benefit of Capital Growth

Social Security benefits are similar to the returns of annuity. When an investor buys an annuity they plunk down a pile of cash and expect to earn a specified payment over time. The amount of return is solely dependent on how much cash is invested up front.

Social Security pays retirees the same way. Retiree benefits are dependent upon their contributions during their working years.

Real estate investing offers the ability for investment growth. An investor may start with $50,000 initially invested. Over time with prudent choices based on prudent advice, $50,000 may grow to $200,000. Invested wisely $200,000 can generate a lot more income than $50,000.

The Benefit of Tax Shelter

Social Security benefits may be taxable depending on retirement income.

Real estate investors use favorable tax laws to provide greater after tax cash flow from their investments and other sources of income. More cash flow allows greater freedom to pursue their dream retirement.

I would love to hear your thoughts on social security and real estate. Which do you think is better?

If your ready to free yourself from dependency on the government’s handout for your retirement goals, contact us for your free consultation.

Posted in Real Estate Investing, Retirement Freedom | No Responses »
Tags: Real Estate Investing, Retirement Freedom, Retirement Strategy, Social Security Benefits

Using Warren Buffett’s Principles to Invest in Real Estate

Tuesday, January 12th, 2010

Did you ever notice that Warren Buffett seems to make very few bad investments?

On September 23, 2008 Mr. Buffett’s company, Berkshire Hathaway, invested $5 billion in Goldman Sachs preferred stock. Goldman offered a 10% annual return on the investment in preferred shares, $500 million per year. In addition, Berkshire Hathaway was given the option to buy $5 billion in common stock at a price of $115 per share. One year later the investment would have returned almost $3.1 billion to Berkshire Hathaway not including the annual, perpetual return on the preferred shares. (As of January 8, 2010 the investment would be worth $2.58 billion at $174.31 per share.) This is a return of 40%-60% in one year!

View Your Investment as Ownership of a Business

Warren Buffett writes in his 2008 letter to Berkshire Hathaway owners:

We like buying underpriced securities, but we like buying fairly-priced operating businesses even more.

In his 2007 letter to investors Buffett writes:

Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stockmarket purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.

A real estate investor must realize that they are buying a business when they buy rental property. Businesses must market and sell a product to customers that are ready, willing, and able to buy in order to make a profit.

As a real estate investor your product is space and your customers are your tenants. For the apartment or multi-family owner their product is living space. The retail real estate owner offers storefronts to other businesses. The office building owner offers other businesses office space.

A successful real estate investor will market the space to their customers or tenants. An investor must offer it for a reasonable price or the tenants will not be interested. Investors must decide which tenant is most likely to rent the space and advertise where that tenant will see their advertisement. Maintaining a property that is appealing to potential tenants is part of the business of real estate.

A stock investor must analyze the competitive strength of the business they are buying. Will it be protected from outside competition? Does it have adequate cash flow? What is the demand for their products? What event may damage their business? How likely is that to occur?

Real estate investors should ask the same questions about their real estate investment. Is this property above or below the competition? Are new developments coming on line? If so, how will that affect my investment property? What economic factors contribute to the health of the local economy? Do people want to live near my investment? Who are the major employers?

Invest Based Upon Value Not Price

Warren Buffett learned much of his investment philosophy from Benjamin Graham, author of The Intelligent Investor. Benjamin Graham stressed value investing. In Mr. Buffett’s most recent letter to Berkshire Hathaway investors and this quote was on page 5:

Additionally, the market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie and me. Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.

Two things stand out from this quote. First, value is more important than price. If you invest in a piece of junk with no lasting value, it doesn’t matter what price you pay for it. Inversely, what price would you pay for the Hope Diamond or the Mona Lisa?

Mr. Buffett describes intrinsic value in the Berkshire Hathaway owner’s manual on page 5 as “the discounted value of the cash that can be taken out of a business during its remaining life.” Mr. Buffett goes on to say that intrinsic value may very from one investor to the next and even varies between himself and Charlie Munger, his business partner.

In real estate, investment properties provide cash flow through rent and offer the owner the ability to sell at a future date. Once the value of these cash flows has been determined (through discounted cash flow analysis), an investor can determine a price at which the value is worth an investment.

Second, price declines are advantageous to investors with cash to acquire new real estate. Price declines make valuable real estate more affordable.

Distressed markets do not function efficiently. Usually, this means that there is a shortage of willing and able buyers. Sellers are forced to compete on price for the few available buyers. Prices continue to drop until a willing and able buyer is interested to buy. This shortage of buyers leads to fear and further limits the entry into the market for new buyers.

Distressed markets also have a shortened time-frame. Sellers need to sell quickly or raise capital quickly. This provides unique buying opportunities for the savvy investor with cash available to scoop up discounted properties quickly.

If Possible, Use Other People’s Money

One of Berkshire Hathaway’s first purchases was National Indemnity, a property-casualty insurance company. Insurance continues to be one of Berkshire Hathaway’s major income sources. In Berkshire Hathaway’s 2004 investor letter Buffett writes this:

The source of our insurance funds is “float,” which is money that doesn’t belong to us but that we temporarily hold. Most of our float arises because (1) premiums are paid upfront though the service we provide – insurance protection – is delivered over a period that usually covers a year and; (2) loss events that occur today do not always result in our immediately paying claims, because it sometimes takes many years for losses to be reported (asbestos losses would be an example), negotiated and settled. The $20 million of float that came with our 1967 purchase has now increased – both by way of internal growth and acquisitions – to $46.1 billion. [emphasis added]

In real estate using other people’s money is typically accomplished through the use of a loan. A real estate investor invests a portion of the funds necessary to invest and a lender lends money to the investor for the balance of the purchase price.

Investors often call this leverage. Using a small amount of capital, the investor’s equity, to buy a larger asset. The “lever” is the loaned money. This concept allows an investor to earn a return not just on their capital, but also on the money they have borrowed.

The concept of leverage only works if the borrowed money is less expensive than the return generated by the asset. It is hard to make a profit borrowing money at 12% and investing it for a 10% return.

Pick Management Wisely

One of the the things Mr. Buffett has done extremely well is buy operating businesses. He selects businesses that have excellent management in place. Warren Buffett realizes the value of a quality management team and the benefits it offers to ownership.

In the 2004 Berkshire Hathaway letter to investors Buffett shares his instructions to his business managers:

“Run your business as if it were the only asset your family will own over the next hundred years. Almost invariably they do just that and, after taking care of the needs of their business, send excess cash to Omaha for me to deploy.”

Real estate investors should choose their property management companies wisely as well. A good manager will keep a property well-maintained and full of quality, paying tenants. A poor manager may cost an owner less, but may allow properties to become run down or allow unfit tenants to lease your property.

Feel Free to Say “No” to Opportunities You Don’t Understand

Mr. Buffett is not afraid to pass on investments that he doesn’t understand, even though he may “miss out” on some great investments. Mr. Buffet has repeatedly admitted that he doesn’t understand technology companies, and doesn’t regularly invest in them. This saved his company from incurring some huge losses during the Technology Bubble in the stock market.

Real estate investors should avoid investments that they don’t understand. If an opportunity sounds “too good to be true”, it probably is.

Apply a “Margin of Safety”

A margin of safety limits the risk of an investment. Benjamin Graham, Warren Buffett’s mentor, dedicated an entire chapter in his book, The Intelligent Investor, to the concept of a “Margin of Safety”. Graham writes:

In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, “This too will pass.” Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.

Simply put, a margin of safety is room for error. If you think a stock is worth $12, pay $10 instead of $11.50 to guard against a miscalculation of value. Unless you are God, eventually calculations on future events are going to be wrong. A margin of safety helps to preserve your investment when your calculations are incorrect.

As real estate investors, we make many of our determinations based on assumptions about income to be received in the future. Applying a margin of safety allows us to invest with room for error should our assumptions be wrong. Recessions, plant closures, and natural disasters all affect real estate, but cannot be predicted. A margin of safety provides a buffer against these unforeseendisasters.

Conclusion

Real estate investors can benefit from the principles of stock investors like Warren Buffett. Viewing investments as a business, investing based upon value, prudently using leverage, picking management wisely, avoiding confusing investments, and applying a margin of safety will help real estate investors to invest with confidence in any type of markets.

Posted in Benefits of Real Estate Investing, Real Estate Investing | 2 Responses »
Tags: Commercial Real Estate Investing, Investment Property, Property Investors, Real Estate Investing, Real Estate Investment, Real Estate Investors

Bay Area Real Estate Prices Going Up?

Friday, December 18th, 2009

The Contra Costa Times, Contra Costa County’s major newspaper, is reporting today that Higher Bay Area home sales, prices offer hope. It is important to notice the first paragraph of the article.

The Bay Area real estate market continued to show improvement in November due to fewer sales of bargain-priced foreclosed homes and more sales of higher-priced properties.

According to a report released Thursday by MDA DataQuick of San Diego, the median price paid for a home in November was $387,000, an 0.8 percent decrease from October, but up 10.6 percent from November 2008. Last month’s median price was the second consecutive month that saw home prices rise on a year-to-year basis since two years ago. The median is the point at which half of the homes sell for more and half sell for less. [emphasis mine]

The author, Eve Mitchell, astutely notices the reason the median home price, the price at which half of the sales were above and half of the sales were below, rose is due to more high-priced homes selling.

This doesn’t mean housing prices are actually rising, though they could be. It does mean a greater number of homes above the median price have sold in November than in November of 2008.

The article goes on to say,

In Contra Costa County, the median sales price for a home was $290,000 in November, a 9.4 percent gain from a year ago.

“We are really starting to see the high-end loosen up. Obviously, the borrowers have to be well qualified, but we are starting to see more financing.” said Robin Dickson, executive vice president of J. Rockcliff Realtors, an East Bay brokerage.

Another reason that median prices are up from a year ago is that there are fewer short sales and bank-owned foreclosure in the marketplace now, she said.

Still, she would not be surprised to see more foreclosures come into the market next year.

“We know they are out there but the banks are hanging on to them for now,” Dickson said

Foreclosure Crisis Not Over

Mish in Tip of the Iceberg With Luxury Short Sales; Fannie, Citi Suspend Foreclosures for Holiday Season, links to a Bloomberg article that states,

House

Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers.

If this trend of luxury home defaults continues, expect to see more luxury real estate return to the market as bank-owned REOs. This could continue to lower the median home price.

Bloomberg also reports ‘Shadow Inventory’ of U.S. Homes Climbs, Report Says. (HT: Calculated Risk)

The number of homes that may be in the pipeline for a sale because of foreclosure and delinquency climbed about 55 percent to 1.7 million at the end of September, according to estimates by First American CoreLogic.

Rising Interest Rates Leads to Lower Prices

According to the Chicago Sun-Times, Freddie Mac is reporting the 30-year mortgage rate is up to 4.94% from 4.81% last month. Lower interest rates allow buyers to afford more house, because their monthly payment is lower. If the interest rate continues to rise, home values may stay flat or fall as borrowers will find it difficult to qualify for higher priced homes.

Conclusion: Prices Not Likely to Rise

While news of a greater number of higher-priced homes selling is positive, it does not indicate that the value of homes is actually rising. As well, with a looming “shadow inventory” and the specter of higher interest rates in the future home prices are not likely to rise in the near future.

(Photo Credit: Modern Northwest House by pnwra)

Posted in Bay Area Real Estate News, Contra Costa Real Estate | No Responses »
Tags: Bay Area, Contra Costa County, East Bay, Real Estate Investing

First-Time Home Buyer or Real Estate Investor

Friday, December 11th, 2009

Real estate investment has been very rewarding to many intelligent and strategic investors. Investors that have the patience to take the long view have been well rewarded for their patience and diligence.

Many people view the purchase of their personal residence as a “real estate investment”. Rich Dad, Poor Dad author Robert Kiyosaki has challenged this idea through the definition of the word asset. He defines an asset as something that pays you money during your ownership and a liability as something that costs you money while you own it. By this definition, a personal residence does not qualify as an asset as you are not paid for ownership.

As well, best selling author of I Will teach You To Be Rich, Ramit Sethi, has shared reasons for his personal views that buying a house is not always the best advice for a young working professional. Not the least of which is the “phantom costs” of insurance, taxes, and repairs associated with owning a home.

The analysis of both these men is sound. In general, a personal residence should not be purchased for investment purposes. There are certain circumstances where buying a personal residence can in fact work as a means of investment.

Buying a Residence with Investment as a Secondary Goal

For a young, working professional, buying a home and having other people help pay your mortgage can
be a way of investing. What do I mean? You buy a house with three bedrooms and rent the other two bedrooms out to two of your friends. Or buy a duplex live in one side and rent the other side out.

With most fixed-rate 15-year and 30-year mortgages, a portion of each payment is applied to the debt owed, the principal or principal balance. This increases your home equity. Equity is the value of your residence minus the total debts against your residence.

Home equity is a form of “forced savings”. Home equity is not easily spendable. Thus making a monthly payment towards the principal balance forces you to save a portion of each loan payment.

Having additional people to make your mortgage payment can provide you with extra cash for investment, spending, or to pay down your mortgage.

Using FHA 203(b) for First-Time Home Buyers

For the working professional using an FHA insured loan makes sense. The FHA 203(b) program allows eligible borrowers to qualify for up to 96.5% of the purchase price to be financed. These loans often have a slightly higher rate than a traditional mortgage, but offer the flexibility of a smaller down payment.

Most traditional lenders will look for at least 20% of the purchase price to be paid by the borrower. In high priced areas, like the San Francisco Bay Area, this can be a big hurdle to overcome.

FHA has stricter guidelines for what types of homes qualify. Homes have to be in livable condition and have been owned by the previous owner for at least 90 days.

A Charted Course

To apply this strategy a charted course is needed to avoid trouble.

Make sure your credit is in order. Pay your bills on time. Don’t run up to much credit card debt. Spend less than you earn.
Collect adequate savings for a “rainy day”. This should be 6-8 months of reserves. One month of reserves would cover your proposed monthly mortgage, monthly utilities, any other debt payments, food, insurance, etc. Lenders like to see that you have funds available should you be unable to work or are laid off to continue to pay your monthly obligations. It will also help you avoid anxiety and worry.

Paycheck Calculator

Determine how much house you can afford based on your current income. A single professional earning $60,000 per year would bring home about $3,600 after taxes each month. When calculating the amount you can afford to pay you should exclude any payments from your proposed roommates. You want to be sure you can make the payments without the roommates, should they leave for any reason.Lenders usually require that housing costs should be no more than 28% of your gross monthly income. (It may be wiser to limit yourself to 25% of your take home pay.) Using the lender ratio would provide for a monthly housing costs of about $1,400 including taxes and insurance.Assuming property taxes of approximately $275 per month and insurance of $85 per month leaves $1,040 per month for loan payments. Using an interest rate of 6.50% per year our young professional could afford a house worth $164,539 on a 30-year mortgage and $119,388 on a 15-year mortgage.
Save for a down payment and closing costs. Notice this is separate from reserves. Once you make the down payment, you won’t have it for reserves. Plan to save between 5% -10% of the purchase price of the home. Each housing transaction has additional costs relating to transfer tax, title insurance, and escrow. Our young professional should save between$8,227 and $16,454.
Find and purchase your home

The whole strategy will take a number of months to accomplish and building equity in your home will take years. This is not a get rich quick strategy. This is taking the long view, charting a course, and diligently following it till you get the desired results.

Alternative Strategy

The FHA 203(b) mortgage can be used to purchased up to a 4-unit property. Using the same principal you could attempt to purchase a building that will generate income from the other units.

A Note About Investing

The key to any investment strategy is not to risk more than you can afford to lose. If losing your down payment is more than you can afford to lose mentally, emotionally, or financially do not risk it by investing. Each investor has their own risk tolerance. For some investors, they can only tolerate the risk that a CD at the bank offers. Others are willing to take bigger risks. Find the level of risk that is suitable for you and invest accordingly.

(House Photo: james.thompson)

Posted in CA Real Estate, Real Estate Investing | No Responses »
Tags: Accumulation Phase, Investment Opportunities, Real Estate Investing, Real Estate Investors

Investing in Real Estate Notes

Tuesday, November 24th, 2009

A note is a signed document between two parties acknowledging a debt and promising repayment. Simply put it is a promise to pay.

Bob borrows $10,000 from Paul to buy a house and signs a note for $10,000 agreeing to repay the debt in one year with 6% interest.

A note can be secured by real estate. This allows the lender to sell the property if the borrower does not faithfully repay the debt as agreed in the note.

In many states a mortgage is used to secure a note with real estate. In California the most popular means of securing a note with real estate is a trust deed or deed of trust.

Many notes are originated when a piece of real estate is sold. If the buyer is unable to procure financing to buy the property outright, the seller may “carry back” a note secured by a deed of trust.

For instance, Bob is buying a house from Paul for $100,000. Bob has $15,000 cash and is able to get a bank loan for $75,000. This leaves him short of the purchase price by $10,000. Paul can take a note from Bob promising to pay $10,000 if Bob is willing to pay interest on the $10,000 and repay the balance in 5 years. Both parties win. Paul is able to sell the house and Bob is able to buy the house.

Notes as Investments

A note is similar in concept to annuity. The investor makes an initial investment, the loan. If all goes according to plan, the investor receives steady payments from the borrower until the debt is repaid.

Notes are generally good investments for those that have reached their retirement years. Notes offer income to the investor that can be used to fund monthly expenses.

Real Estate Note Variety

Real estate notes come in all sizes and shapes. Notes can be secured by homes, office buildings, shopping centers, apartments, vacant land, or warehouses. Notes can range in value from a few thousand dollars to millions of dollars.

Buying Notes

Notes are often sold when the original lender needs a lump sum, rather than income.

For instance, Paul needs to pay his daughter’s college tuition of $7,500. The $50 of monthly interest is not sufficient to pay the tuition and he requires a lump sum.

Paul could sell his note to an investor. If the investor pays the face value on the note, $10,000, the investor will receive a 6% return on their money until the note is repaid.

Discounting Notes

If an note holder is willing to accept less than the face value of the note, this note is said to be discounted. The note buyer will be able to realize a return greater than the stated rate.

For instance, Paul loans Bob $10,000 for one year at 6% interest due at the end of the year. That same day Paul sells the note to Jim for $9,500. Jim will earn a return of 11.58% on his investment of $9,500.

For the savvy investor, buying notes at a discount can be a great means of earning above average returns.

Posted in Benefits of Real Estate Investing, Real Estate Investing | No Responses »
Tags: Cash Flow, Real Estate Investing, Real Estate Notes

The Mrs.’ Question #3: How often will I get money or interest from my real estate investment?

Thursday, August 27th, 2009

This post is one in a series of posts featuring my wife, The Mrs. I asked her to pretend that she was a wealthy woman with $2,000,000 (million) to invest. This money was needed to provide her for the rest of her life. She is to ask questions that might come up in the course of investigating a new investment advisor. Please check back for more questions.

Question # 3: How often do I get money from my real estate investment?

Their are many different types of real estate investments. They range from bare land and developed lots, to office buildings and houses.

Most of the investments that we assist our clients with are income-producing investments. This means that the properties have a tenant (renter), of some kind, that pays rent.

Typically, an agreement is made between a landlord and tenant through a written lease. The lease will spell out the details of how much the rent is and how often it will be paid.

The majority of leases are written to receive monthly rent. Some leases are over longer periods of time. For instance, agricultural land is generally leased on an annual basis. But the majority of leases are written with monthly rent.

Generally, Monthly Income

Most investors when they start out will invest in multi-family investments. Rent is usually collected on a monthly basis. Therefore, you can expect to get monthly income.

The amount of income can vary from month to month. Buildings need repairs, tenants move out, and taxes need to be paid all affecting net income.

Posted in Mrs.' Questions, Real Estate Investing | No Responses »
Tags: Investment Property, Real Estate Investing

Is It Time to Get Back Into Real Estate?

Thursday, August 27th, 2009

Are we there yet? Have we reached the bottom of the market?

Dave Kansas for the WSJ.com writes: Is It Time to Get Back Into Real Estate?

What I find especially interesting is where most of my risk-taking friends are headed. It isn’t the stock market; in fact, the only folks I know who have waded back into the stock market are the gunslinger types who never really left it.

Instead, they seem to be heading for real estate. At first I found this puzzling, given the brutal battering real estate has taken. But that’s the point: An increasing number of my friends see this as the perfect opportunity to find something at a bargain-basement price.

…

The people doing this are employed, feel confident that they’re not going to lose their jobs, and believe that while housing prices may fall a bit more the bottom is not too far away. Moreover, financing remains relatively cheap and, according to one lawyer I know in house-hunting mode, banks aren’t as tight with mortgage lending as headlines indicate.

As I wrote a couple of months ago, it’s always dangerous to hypothesize a global trend based on the all-too-limited view from your own backyard. But it’s also sometimes an insightful way to get a jump on what’s coming. And for me, what’s most intriguing is that, for now, most of this risk talk is prospective. There’s no sense of rushing, no desire to “stretch” too far in making a purchase. It’s like these people are permitting themselves to dream a little bit and get closer to pulling the trigger. But they want to be doubly sure before making a move.

What’s more, all of these people have a similar, cautious, mind-set. They don’t believe real estate will rebound or make a great investment. But they also don’t think real estate will lose a lot of value. Instead, they are focused on real estate as something they can use: a solid place to live or play that should also be, at worst, an OK investment.

Start Thinking About Investing

I can’t say that I agree with certainty that now is the best time to invest in real estate. However, I would definitely start to think about it.

Why start thinking about investing in real estate?

In some areas prices have fallen 30% or more from peak market values. This is a huge drop and brings prices more in line with historical averages and growth rates. We are closer to the bottom.
The foreclosure epidemic has not quelled. In fact by many standards there is still a wave of foreclosures coming. We are probably not at the bottom yet.
If unemployment continues to rise, more foreclosures could occur. Unemployment is likely to cause higher vacancies in multi-family properties. The bottom could be a ways away.
Credit markets are still stuck. Financing for buyers is difficult to obtain without a significant down-payment. Probably not the bottom.
Banks continue to be closed by the FDIC. Meredith Whitney warned that 300 banks may fail before the end of the financial crisis.

Invest Now If…

Invest now if, you do not need appreciation to achieve an acceptable return on your investment.
Invest now if, you have enough liquidity (cash) to cover potential vacancies or repairs after acquiring your property.
Invest now if, you have included 10% rent decreases and at least 10% vacancy factor in the near term.

What do you think? Are we at the bottom?

Posted in Real Estate Investing | No Responses »
Tags: Commercial Real Estate Investing, Real Estate Investing

Real Estate Investors of Tomorrow

Wednesday, August 26th, 2009

Enoch Lawrence, Senior Vice President at CBRE Capital Markets, has written an article Deconstructing the Downturn in the Commercial Real Estate Capital Markets. While the title led me to believe it would be an analysis of how we got here, I was surprised to find a commentary on where commercial real estate investing is headed.

The new world order in commercial real estate will be governed by patient, well-capitalized investors. Many new names and faces will appear and many old ones will re-surface again to cherry pick the market for quality assets ―the players are changing daily. The acquisition decision process is driven by equity, not debt, in this alternate universe. Investors must match their equity profile with the appropriate mode of lending, while at the same time monitoring the state of flux of the commercial real estate capital markets where respective sources of capital become more or less available. Government supported programs will significantly impact the availability of capital in the short run, but investor confidence must return to the market to help stabilize the lending environment. For this to happen, all market participants must realize that capital is available. The world has changed, and to access this capital, a healthier balance between risk and return must be achieved.

The market will be characterized by investors that have capital and are willing to earn a reasonable return equal to their risk. Mr. Lawrence questions whether 20% Internal Rates of Return (IRR) are realistic in the model going forward:

One may inquire about the vast sums of money raised to deploy into opportunistic investment strategies. In an environment where valuation remains challenging, you may ask how a 20% Internal Rate of Return over a 3-5 year holding period is being modeled and presented as a sustainable investment model en masse. This may be possible with small pools of capital deployed in niche markets, but the large scale deployment of this capital in search of distressed opportunistic returns has not materialized and is further exacerbated by more conservative underwriting from available debt sources.

Prior to the Lehman Brothers collapse in September of 2008 real estate markets were awash with inexpensive leverage. The market for debt that existed allowed real estate investors to leverage deals over 90%, in some cases, at historically low rates. The leverage boosted returns and allowed investors to have Internal Rates of Return of 20% or greater on paper.

Going forward investors must adjust their expectations to a lesser return. The important factors are going to cash on cash return and a stable long-term investment.

Posted in Real Estate Investing | No Responses »
Tags: Commercial Real Estate Investing, Real Estate Investing, Real Estate Investor

The Mrs.’ Question #2: Is there a chance I would lose my money?

Thursday, August 13th, 2009

Question #2: Is there a chance I would lose my money by investing in real estate?

The short answer is yes. Real estate is an investment and there is a chance that money can be lost.

However, nothing is a guaranteed investment. There is some risk, though it may be incredibly small, no matter where you put your money.

Did you hear the story about the Israeli woman that faithfully stuffed her life savings into her mattress? Over the years she accumulated well over $1,000,000 in cash in her mattress. This was all well and good until her daughter bought a replacement mattress and threw the old one out with the garbage. Who would have thought that a mattress wouldn’t be a safe place to keep your cash?

Strategy and Planning Can Reduce Risk

There are ways to lower the amount of risk you take on any investment.

Diversification

Just as keeping all of your money in one mattress is probably a bad idea, so is placing all of your money in one asset.

Give a portion to seven, or even to eight,
for you know not what disaster may happen on earth.

- King Solomon (Ecc. 11:2)

Spreading your investment capital into different assets protects you from the risk of losing all of your money in one fell swoop.

If you had invested all of your money in New Orleans prior to Katrina, there is a good chance you would have lost a good deal of your savings. Many investors and homeowners learned the hard way that insurance companies are very particular about the difference between rain damage and flood damage.

Leverage

Leverage is the ability to control a large asset with a smaller amount of investor funds. With real estate investing this comes by using a loan. The loan may take the form of a mortgage or a note and deed of trust in California.

With leverage an investor can buy multiple properties, reaping the benefits of diversification. For example, imagine an investor plans to buy his properties with 30% down and a mortgage of 70% of the purchase price.

With $100,000 this investor can purchase three (3) properties valued at $100,000 a piece and have $10,000 in hand for reserves. A purchase price of $100,000 x 30% down payment = $30,000.

Purchasing multiple properties spreads the risk of a loss of income over multiple locations. A tree falling on one property will not cause the investor to lose all of their money.

Caveat: Leverage can cut both ways. If a property were to go down in value, the first thing to decrease is the investor’s equity. This is a risk that each individual will have to determine they are comfortable with.

You Can Lose Money, but You Can Minimize the Risk

Yes you can lose money by investing in real estate. You can also lose money while stuffing into your mattress.

We have identified two ways to minimize risk, diversification and leverage. We didn’t even mention buying multiple unit properties, buying below market properties, and other strategies that can minimize the risk of owning real estate.

Posted in Mrs.' Questions, Real Estate Investing | No Responses »
Tags: 1 Million, Deed of Trust, Diversification, Real Estate Investing

The Mrs.’ Question #1: How much do I have to invest?

Saturday, August 8th, 2009

Question: How much do I have to invest with Maclennan Investment Group?

You can invest as little or as much as you want with Maclennan Investment Group. However, you will probably need at least $50,000 to invest in a single property.

We offer investment solutions tailored to the individual needs of each investor. We can provide solutions for people with $50,000 to over $10,000,000 to invest.

Why a $50,000 minimum?

Our investments are not like stocks where you can buy a few shares for $100.

With Maclennan Investment Group you will be investing in the ownership of real estate. You will be buying a house, a duplex, a triplex, or an apartment house with your money. These investments require more capital to begin.

In most regions the average minimum cost of investment quality real estate is around $200,000. A twenty percent (20%) down payment is equal to $40,000, leaving about $10,000 for closing costs. An investor would need $50,000 to invest in this type of real estate.

Are there exceptions to the minimum?

Yes. It is possible to invest in real estate with less than $50,000. However, this solution often requires that you have a partner or partners to make up the difference. Having a partner is not something that everyone is comfortable with.

If you have $50,000 to invest, we can start you on a Course to Retirement Freedom.

Posted in Mrs.' Questions, Real Estate Investing | 1 Response »
Tags: Investment Group, Real Estate Investing

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