Posted on November 16, 2007 @ 9:54 am - Written by BawldGuy
How many times have we all said that? I’ll confess to probably more than my share.
Back in 2003 I’d begun telling clients, and whoever else who’d listen, to forgo the cartoonish San Diego appreciation and head to more stable ground. Once blue collar 40 year old duplexes are selling for over half a million? 
Seriously, did the Lord tap me on the shoulder and whisper into my ear? Did He give me the scoop?
“Thou shalt leave San Diego and wander yonder, until the promised investment lands are found.”
“Investment lands? Plural?”
“Verily I say unto you — get outa Dodge! Folks listen to you — at least sometimes. Many of them will make the correct decision — most will hang in San Diego, wandering for who knows how long. The last guy I tried to lead to some great real estate took 40 years and…never mind it’s a long story. Besides, I already wrote a book about it.”
There’s no Promised Land out there — at least I’ve not found it. Been lookin’ for it so long, flying so often, a Southwest flight attendant recently asked me how Mom was doing.
There are some places out there offering solid locations, very reasonable prices, old school financing, and pretty attractive rent/price ratios. Translation: relatively higher rents & lower prices. It’s one of those ‘best of both worlds’ kinda things.
It’s my contention the next 10 years could be the most boring decade in recent memory. However, like vanilla ice cream, possibly the most boring dessert ever created, it can be significantly improved upon.
For instance, a little chocolate sauce, even warmed up a tad, makes vanilla ice cream nearly edible. 
Now Jamocha Almond Fudge…
Back to the next 10 years.
The South and West are benefitting from consistent population shifts aimed at those two compass points. That trend will only continue, as folks will always follow jobs and a better lifestyle.
Places like Phoenix, Boise, Salt Lake City, Austin, Kansas City, Denver, Atlanta, parts of both Carolinas, and several more, are going to experience long term, steady, boring — growth. Some them, Boise and Austin to name two, will change dramatically in the next 10-15 years. Austin’s already well on its way, and Boise? That one will be fun to watch. The stars are aligned in favor of that city. Weather, recreation, very family friendly, median prices still comparable to San Diego — in 1995.
Nobody knows what the next decade will bring. Anyone who takes themselves seriously can only make a guess, based on incomplete data, and conclude what they will. Extrapolating 10 years from now will only make us blush later on.
Make a pact with yourself. Regardless of how the next 10 years turn out — don’t be in the position of lamenting — Shoulda Woulda Coulda.
Where you invest wisely, with a Purposeful Plan, and a vision — that’s your Promised Land.
Endless wandering will get you nowhere fast.
Posted on November 14, 2007 @ 11:40 pm - Written by BawldGuy
What’s the ROI? Give me a break. If I ate a cookie every time I’ve been asked that question, I’d weigh 400 pounds. For giggles, ask your buddy exactly how he arrives at the return on an investment. Ask a few people, and as our teachers used to do, get them to show their work.
It could prove interesting. 
If you’ve found a way to figure out a return on your potential investments, don’t let me talk you out of it. I wrestled with whether I should use, as illustration, a real life APOD (Annual Property Operating Data) with an attached five year after tax cash flow analysis — concluding with the number most folks love to see. You know, any number followed by a % sign. In this case, it would be called Internal Rate of Return, or IRR.
Even that high sounding approach is a lie. Cash flows by definition, are not internal, but external. Therefore, they aren’t part of IRR. Yet, they’re integral in the computation process — go figure. (Oops, I made a pun.) We don’t panic though, because there’s a very simple, and thankfully very vanilla extra step we can take to adjust perfectly for that flaw.
What’s not flawed about it? Chris in KC will be happy as a kid eatin’ pulled pork at his favorite BBQ to hear — principal pay down is automatically accounted for in this form of analysis.
Here’s what you want included in yer cypherin’ if you want a way to compare many potential investments — when you can’t buy them all.
You wanna know you’re comparing apples and well, apples
You’ll love it if you can look at before and after tax cash flow
Make it almost easy to decide between a Dallas duplex, an Austin condo, or a Boise fourplex
Amaze your friends with meaningless double-talk and confusing concepts
The last one is just mean, but I threw it in there anyway.
What in the &^*%@# is Internal Rate of Return? The definition is simple.
It’s that return, which, when discounted back to Day 1, equals your initial investment.
Back in the day, when I was an expert witness in a couple civil suits a year, I was asked to define IRR almost every time my butt first hit the stand. When my answer was finished in one breath, they got very antsy.
Caveat: Ask 10 guys like me to give IRR’s definition, and you’ll get 11 answers. The cool thing though? They’ll probably all say the same thing in that many ways.
Again, don’t forget the flaw in IRR. It implied any cash flows are internal, which we know they are not. We know that because the cash flow went from the investment to our Levi’s, straight to Starbucks.
Let’s say your after tax IRR is 12%. If you have an annual cash flow of $5,000 — is it earning 12% a year? After tax? Of course it isn’t. 
Hence, the flaw. It’s like a desert mirage — only it’s the return that’s not there.
It’s easily corrected though. Just assign the cash flows with what we call a ’safe rate’. (after tax) If you can take your cash flow and obtain 4% at your bank, you now can eliminate IRR’s ‘lie’ about cash flows. If we know your marginal income tax rate fed/state combined, is 35%, we can now apply an after tax rate of return to your cash flows of 2.6%.
We now initiate what’s called MIRR, M = Modified. If the analysis calls for a five year hold, we take each year’s cash flow and bring it forward at the 2.6% rate for the appropriate number of years. The last year becomes a huge cash flow, because we ’sold’ it that year — therefore all the sales proceeds land in the last year. Duh
An MIRR looks as easy as pie on a chart. It might read $XXX in year ‘0′ — then 0’s for every year until the sale year, the end of year five in this example. Year five is now $XXXX, which allows us to do a simple ’solving’ type analysis.
Initial investment = Present Value After tax sales proceeds = Future Value Time = Five Years
Just solve for ‘X’ — ‘Interest’ or ‘Return’ or Whatever the heck it pleases you to call it.
What the Modified Internal Rate of Return offers us as investors, is the ability to compare just about any investment to any other investment. Even stocks to real estate to bonds.
Apples and apples.
Any tool allowing us to compare vastly different properties as if they’re clones, (figuratively speaking) is pretty dang valuable. IRR & MIRR aren’t by any stretch of the imagination the be all end all of investment analysis — but I like ‘em.
Posted on September 27, 2007 @ 8:18 pm - Written by BawldGuy
Finally — and with a hat tip to my good friend and fellow old school guy, Phil Hoover, a nationally read newspaper puts into print what we have been telling our clients, and anyone else who would listen for almost two years now:
Idaho — Boise especially — is the bomb. (For you folks over 40, that means Boise is the Cat’s Meow. For those over 60, it means Boise is the Bee’s Knees.)
An in depth article on the state, including Boise, pointed out why the smart real estate investors are putting that region on their A-List of places to invest — or live.
Go to the archives on this blog, or the categories, and click on anything I’ve written about Boise.
The word’s getting out folks. When USA TODAY figures it out… The time window for buying well located properties for sensible prices — while staying under the radar — is slipping away.
The current loan/credit problem is giving us extra cover for sure. Time, however, isn’t on your side if you’re looking to be one of those real estate investors who will be looking back in a few years, reminiscing about the good ol’ days. You know, when everyone including your Aunt Fannie didn’t know Boise’s humungous potential way back in ‘06-’07 — but they were able to sneak in under the radar and score Big-Time.
Let this stand as my umpteenth declaration of how fundamentally sound Boise investments are now — and will be in the very long run.
My crystal ball remains as cracked as yours — nothing’s changed there. If there’s a real estate investment no-brainer — Boise’s it.
Enough said.
Posted on August 8, 2007 @ 8:22 pm - Written by BawldGuy
Builders, at least some of them, are demonstrating that Denial isn’t just a river in Egypt.
But why should they be any different than investors in markets like Southern California? If I’ve heard it once, I’ve heard it twice — “I simply am not gonna sell my property for less than it’s worth.” I don’t think you will either. As a matter of fact, I think you’ll sell it for exactly what it’s worth.
I heard that very statement from a very nice, and amazingly asute lady yesterday morning. She wasn’t being emotional at all. Her success in the last few years, has of course been fueled by the cartoonish appreciation we all witnessed. The problem?
The property she won’t sell for a penny less than $XXX hasn’t sold since May. I told her either she is over priced, or if that isn’t the case, her broker ain’t gettin’ it done. She said her agent is pretty good. I’ll accept that — but you can’t have both. 98% of the time, if indeed your agent is solid, almost four months on the market might just mean the property is priced too high.
“But we reduced it twice!” Really? What’s your point? The buyers are apparently unimpressed — in droves.
Before I continue — did I tell you she was willing to eat a grand a month in negative cash flow to keep the property for another three years? In the investment game we call that an alligator. She figured, (maybe correctly) that in three years the market would be better, and she’d get a better price. The $1,000 a month out of her purse? She didn’t even blink an eye.
The lesson here: 25-70% equity in investment properties located in moribund areas are like canoeing with a concrete block as cargo. Prudently increasing your leverage (different levels for different investors and areas.) while simultaneously doubling, or sometimes even tripling your total property values will act as a turbo charger to your capital growth rate. The higher the equity from which you’re trading, (leaving) the bigger the hit for your capital growth. Those who choose to wait their high priced market out hoping for appreciation to return will find the demand is less than they’d hoped. Make your move now — 5-10 years from now you’ll be at the backyard BBQ braggin’ about how you made this move under the radar when prices were pretty low.
Here’s what I told her. You’re enormously successful as a business lady and real estate investor. Your net worth requires two commas. Listen to the following numbers — I’ll be brief
If you take $50,000 less, your equity can still get you into a million bucks in growth-region properties via the execution of a tax deferred (1031) exchange. 
If those units don’t go up an inch the first year, you’re at least not out the $12,000 negative cash flow. If they go up just 5% you’ve made — wait — here it comes — $50,000 in capital growth. Either way you’re better off because you know So Cal is gonna be one of the last places to come back. (Not to mention an extended hold of three more years has a price tag of $36,000. So even if the property appreciated that much, she’d only be even.)
Can you say Purposeful Planning? Her businesses produce so much income, she could very possibly be the rare exception to the Sominex (Ambien) Account rule.
However, areas like Kansas City, Denver, Boise, parts of Texas, parts of North Carolina, (and others) will begin to visibly appreciate before most of the country.
This lady is in her early sixties with the mind of a 40 year old, and has energy to burn. She’s been buying and selling properties, 
(fixing some) and selling them — so she could pay taxes. (?) We’ve had two short conversations so far, and already I’m already in the starting blocks eager with anticipation at what she can accomplish in the next several years. She said she’s like my mom, who’s 76 and still working. (By the way, it was lunch at Mom’s today!) She said she’ll never stop working. She’s scary good at making her businesses pay, and really enjoys her work.
In the five to six years we had silly price run-ups I’d guess she’s made a few hundred grand net, buying and selling real estate.
Even with relatively far lower annual appreciation rates over the next decade, I wager she’ll at least triple what she did the last five. I think she senses that too.
She’s a very smart lady with a nearly vertical learning curve. Lord I love this part of the business.
I hope we get to work together. I know one thing, my wife already loves her — and as most of you know, wives are very rarely wrong.
Posted on July 28, 2007 @ 11:22 pm - Written by BawldGuy
Living in San Diego is far more expensive than say, Kansas City, Boise, or Fargo. People have their preferences of ocean, mountains, warm weather, real seasons, art, and dozens more. It still surprises me when say, a Phoenix native rhapsodizes about how they wouldn’t live anywhere else. Having lived in SD since 1967 I just can’t relate to the notion of living in Phoenix sans coercion or naked force. Folks from cities subject to four seasons say they couldn’t live in San Diego because of the blandness of the year-round climate.
But what about cost of living? We’re now shopping for a new place and seeing what we get for our budget. For the same money in Boise we’d be buying more house than we’d ever be able to use. Lord only knows what we’d be able to find in Kansas City, or Fargo. But what would we find in NYC?
Turns out not much — way not much.
How’d you like to be a renter and pay over $3,000 for considerably less than 1,000 square feet? Wow. 
Or if you’re buying, would you be interested in a 700 square foot condo for half a million clams?
I’ve been emailing and talking on the phone with an interesting couple from Brooklyn the last several days. It’s been an eye opener to say the least. I’ve always known, of course, about how expensive NYC is, but to hear the every day ins and outs has been almost scary. ‘Mary’ and ‘Rick’ live in a Brooklyn apartment. Fortunately for them, the rent is kept very low.
Between them they make $120-150,000 a year. He’s in the creative department of a Fortune 500 company, and she’s a freelance producer. They’ve managed to save over $50,000. As Mary says, “We don’t eat out as frequently, or take in as much of NY culture as we used to.” They’re pretty dang disciplined, and should be proud of what they’ve accomplished so far.
If they moved to Boise they could easily afford to buy one of the townhomes we 
recently acquired from a local builder there. Their living space would literally quadruple! They’d be in a very cool neighborhood, though I’m sure not even in the same galaxy as what they’re used to in NYC. Financially, everything would be far better for them in Boise.
The problem? They love living in New York. There’s little objectivity involved for most people when it comes to deciding where to live. They love NY, I can’t imagine living anywhere but San Diego, and the folks in Boise look at me like the RCA Dog when I even suggest they might like San Diego too.
So what’s the point?
If you love living in New York where a chocolate doughnut is $2.95, you also live with the reality that you just don’t have the same choices on your menu as a person living in another city. Mary and Rick contacted me because they had a gut feeling they shouldn’t spend their savings on a place to live. They wondered what I thought.
I wholeheartedly agreed. In fact I told them I thought investing now would probably allow them to have their cake and eat it too — later though.
They can afford to invest in at least (or maybe only — we’ll see) one property. It’ll be far from NY of course, which means they have to wrap their heads around their very first investment being in another state. That’s a lot to digest, isn’t it? You bet.
Rick returns from a business trip soon so we’re gonna be talking again. Each time we talk, they have more questions — all of them well thought out, and on point. They’re very bright people. They’re first time investors, which make up maybe a third of our clientel at any one time.
I personally like to work with first time buyers because it’s a natural high for me to experience the process with them. As time goes by and they begin to reap the benefits, I keep getting better fixes. Heck, I’m Jonesing now just thinking about my next conversation with them.
Their retirement is going to be sooner and far more abundant than the vast majority of New Yorkers. Living there has its price — they pay dearly for the New York lifestyle. Because they’re able to earn significantly above the median income, they at least have the choice to invest or buy a home. Most, according to Mary, live in nearly constant fear of losing their apartment for one reason or another.
Yet they’ll stay there because they can’t imagine living anywhere else. 
Rick and Mary have worked very hard to add an option to their menu. Yet, most regular folk in NYC don’t have a lot of choice in the matter. Think for a moment what it must be like to live where you want, but knowing you’ll never own a home, or be able to invest for your own retirement. And they realize the whole time, all they have to do to secure a far better retirement is to move to a city with a significantly lower cost of living.
But if you’ve lived in the same place for decades, imagine having to decide whether you want to leave 20+ years of friends, possibly family, and the lifestyle you love, the life you’ve created OR stay there without the real chance for a magnificent retirement.
It’s not a choice I’d want to make. Rick and Mary are a rare breed. My money’s on them.