Posted on April 2, 2008 @ 12:32 am - Written by BawldGuy
Please forgive the title, but sometimes I grow weary of all the nay sayers out there, rooting for a complete collapse. Surely this correction, both for the national economy as a whole, and real estate housing specifically, have demonstrated unique qualities. Subprime is now part of the culture’s lexicon. The banking system has been tested mightily, as has the leadership of the Federal Reserve and its Chairman, Ben Bernanke.
I’ve never been one of those real estate cheerleader types. You know the ones, there’s never a bad time to buy real estate, yadda yadda. When the market’s sucky that’s what I call it. You can’t go through as many bad markets as I have and do otherwise.
Those who’ve been buying real estate investment property lately are gonna feel pretty good about themselves a few years down the road. Even back in the post recession years of ‘74-75, or after the S & L Crisis resolved itself, the perfect storm we see today never materialized. The missing link? The permanent loss of historically reliable investment regions like say, the entire west coast for instance. Or how ’bout the emergence of new ‘destination’ regions in Texas, (Dallas/Fort Worth) Idaho, (Boise) and Kansas City to name a few? But the real difference is the long term fixed interest rates available for investors.
Just to be consistent and on point for my San Diego readers — Get Outa Dodge — and get out now.
Thanks — I needed that. Now back to our regularly scheduled post.
First Sam Zell says what I’ve been saying for months. The housing market isn’t nearly in as bad a shape as mainstream media wants us all to believe. In fact he said a recovery would begin this spring. I think he’s pretty aggressively optimistic to say that, but he’s the billionaire, so I’ll let time tell us if my 3rd to 4th quarter scenario is correct or not.
This was followed shortly thereafter by the markets in Texas I like so much experiencing incredible real estate growth, even more impressive population growth, and a precipitous drop in vacancy rates. Oh, and did I mention the simultaneous increase in apartment construction there? Oh yeah — good times.
This week two giants also decided it’s time to buy. As David Stejkowski duly noted, both Shorenstein and Blackstone have raised prodigious amounts of capital for the acquisition of billions in commercial real estate.
And here’s a gift for San Diego readers who are owners of local income property. Allow a short preface. Your properties are worth significantly less today than they were three years ago. Yet, if you had the choice, you wouldn’t buy your own property for even today’s value. I’ve asked that question of a couple dozen local real estate investors, and with two exceptions, they all admitted they wouldn’t think of buying their own properties again — even at today’s discounted values.
Read this quote from Mr. Shorenstein and think of what you should be doing with your San Diego income property. (Hint: Get Outa Dodge)
Shorenstein, son of company founder Walter Shorenstein, told the New York Times in 1995: “If somebody is willing to pay a lot more than I would pay, then we’re a seller.”
That quote was taken out of an article published two days ago in the San Francisco Chronicle, entitled — Waiting for real estate bounce. Read the article to learn how Shorenstein is thinking about this market.
So, there you have it. Sam Zell — Shorenstein Co. — Blackstone Group — all saying the window of opportunity is upon us.
Put that together with what Wall Street has been saying, especially today, and one could conclude the Bulls are about to make their final move against the staggering Bears. The jury is still, of course, out. But I’ve been saying in these pages for the last 90 days or so, that this is the final skirmish between the two. It appears to me the Bulls have the Bears in the corner hoping for a last minute miracle.
Finally, without wavering, I’ve been backing Fed Chairman Bernanke since Day 1. He’s made the correct moves, all the while listening to critics who wanted him to do their bidding on their schedule. He’s done it his way. We won’t know for awhile, but it’s my contention we may look back at the first 92 days of 2008 as the period the good guys triumphed, led by Bernanke.
I’d give you a much clearer picture, but since the crystal ball hasn’t come back from the shop, this’ll have to do. But, just before I put it in the shop, I looked to see what might be next for the general lending outlook.
BawldGuy Prediction: On or before July 4th, real estate loan underwriters and their bosses will have rolled the clock back to basic sanity. Meaning? Loan programs now unavailable will reappear. Virtually impossible underwriting requirements will quietly be retired. Lenders will wake up, realize it says L-E-N-D-E-R on their foreheads. The next thought will be how little they’ve been acting like a lender. Then they will find ways to lend.
Posted on March 27, 2008 @ 11:40 pm - Written by BawldGuy
Though we’ve been to Austin, Dallas/Fort Worth, Kansas City, Boise, Phoenix, Palo Alto, and the list goes on, we’ve pretty much ignored San Diego real estate investors for nearly five years. Our plan calls for reentry in April or May. And no, we’re not gonna be tellin’ folks to buy San Diego investment property. It hasn’t made sense for a few years now. In fact, we don’t think it will ever be wise to invest here again.
Why?
Here’s the short version.
Your half million dollar duplex has monthly rents these days of $1,800-2,500 or so. For easily less than half the value of your property, you can own a duplex (and brand new, not ancient like yours) with monthly income of $2,000-2,400. Does yours offer 3 bedrooms and 2 baths? And an attached 2-Car garage? In a neighborhood you’d allow your 70-something mom live in by herself?
I’d put my mom into these properties to live alone. In Phoenix they started calling it BawldGuy’s Mom Rule. If I wouldn’t put Mom there, don’t tell me about the property. That policy cut out a whole lot of useless conversations.
If your small 1-4 unit residential income property has a net equity of $60-500,000 you’ll be able to move that equity, tax deferred no doubt, to areas in the country allowing for leverage San Diegans can only experience through time travel, or Grandpa’s stories. Your capital growth rate will soar. Oh, you’d rather have a whole bunch of cash flow? How ’bout doubling to quintupling your current cash flow?
San Diego income properties simply cannot compete with other regions. It’s not possible. And if your Plan calls for you to sell your San Diego stuff in the next 3-10 years, here’s something to think about.
If they’d be ah, ill advised to buy your property today, at it’s lowest value in quite some time, how silly is it gonna be for them to buy it in another decade? It’s ancient now, right? If it’s value goes up in the next 10 years do you believe they’ll pay even more? Really? It’s my professional opinion they won’t — even if they were all the colors of the rainbow.
The bottom line is this: We can get you Outa Dodge — significantly increase your capital growth rate and/or cash flow — plus your tax shelter — while dramatically improving your chances for a magnificently abundant retirement.
Let’s continue with an example of what’s possible.
Let’s use your duplex mentioned above, with loans totaling $250,000 — here’s what you can do.
Your net proceeds from a sale will be more than you might expect because of our new business model. Instead of having sales/closing costs of around $40,000 or so, they’ll be far less. Brown and Brown no longer takes a listing commission of 3%. Tell me that isn’t cool. More on the details later. (Or, here’s an idea — you can contact us and we’ll give you the scoop way before everyone else finds out.)
Even with the normal brokerage fees your net proceeds from a sale will be about $210,000 +/-. With that capital we can tax defer you into $1-1.5 Million of very well located property — brand new too. And that’s not all, not by a long shot. The problem is, most folks don’t know what to do, where to do it, or who can help them get it done. In what direction should they go?
You’ll increase your annual depreciation by over $40,000 — not an insignificant improvement.
The difference is we’ll take your equity from here to there for a whole bunch less — and with way better marketing. We suspect our new model will end up costing our San Diego sellers about 75-90% less on the listing side of the commission. There’s nothing we can do with the buyer’s agent’s cut.
I mentioned marketing. We think those who have been selling small income props have been getting short changed on the quality of marketing. This has resulted in most of these props not selling, or taking forever. We’re gonna change all that — or at least that’s what it says right here.
Back to saving money.
This will result in a savings of well over $10,000 per property at the half million price range.
We’re serious about this.
Are you serious about your retirement plans? Are you seriously counting on San Diego to yield the retirement income you’ll need? If you could safely double, triple, quintuple your retirement income — never mind, silly question.
What are you waiting for? Contact me — we’ll sit down and let you know what’s possible. Most San Diego property owners can make surprisingly significant improvements in their capital growth rate, cash flow, tax shelter, and retirement income.
We’ll be standing by — there’s a pretty convenient Contact BawldGuy button on the upper right side of this page. Says ‘Contact BawldGuy’ and everything.
Posted on March 16, 2008 @ 3:14 pm - Written by BawldGuy
Taking a break from real estate today, I’ve been watchin’ the tube and wondering what my friends Lani and Chris are feeling as they watch from Austin and Kansas City. Watch what? Kansas vs Texas for the Big 12 men’s basketball championship, that’s all. Yawn. I’ve been watching between documentaries on foot fungus and the care and feeding of hairless Mongolian rats.
Kansas won — whoohoo! Sorry Lani.
Meanwhile, back at the ranch, The Boss left for work, her 121st (or thereabouts) consecutive day without a day off. She’s living a good news/bad news joke. Her new bridal store in Mission Valley is growing in leaps and bounds, having begun paying for itself at the beginning of her third month, something nearly unheard of in retail circles for a small startup.
NOTE: For those who do not understand who The Boss is, I don’t have time to explain marriage to you.
When we first met it wasn’t long before I knew a move had to be made. Good on the Bawld One — she felt likewise. Fortunately she loves baseball, which would have been a deal killer otherwise. She thinks like a man which makes things way more better — a lot easier too.
Anywho, today I thought it’d be nice to put one of ‘our’ songs here just ‘cuz I can. I could tell you why such a song is special to us, but then I’d hafta kill ya. Some of my friends can ask, (those who were there will not forget) but they’ll have to ply me with at least a lunch at Casa de Pico to loosen these lips. The saga actually unfolded at one of our all time favorite places to let it all hang out, McP’s in Coronado.
The Offbeats, our favorite local rock ‘n roll cover band plays there often. Their version of this song is, in my opinion, better than the original by far. It was on one of those Friday or Saturday nights at McP’s, The Boss had the real estate gals in our long running traveling road show wide eyed. Louie Louie had been officially replaced.
So here’s to The Boss, working on Sunday while feeling like Death on a Cracker. Women are ssoooo much tougher than men.
Posted on March 13, 2008 @ 9:54 pm - Written by BawldGuy
As written recently on these pages the internet isn’t the end all be all for data collection — especially income property stats. One of the most egregious errors a real estate investor can make is the purchase of a property based upon erroneous rent assumptions. Since it’s called ‘income’ property one would assume it’s potential to garner that income would be important. One might even take it a step further and insist on empirical evidence.
Way back in the days of pen and paper, the only acceptable way to acquire concretely reliable rent info was to hit the pavement — literally. Grab yer clipboard and yer basic comfortable shoes and start walkin’ and knockin’. I’ve been doing exactly that since the late ’70’s. It’s not sexy work, trust me. Though most people are more than happy to help, some folks can get downright rude.
BawldGuy Axiom: Nothing beats first hand research done at street level, in person — nothing. The gold standard for research is always first hand — their lips to your ears — in person. Hearsay just doesn’t cut it.
Still, when a client asks us what makes us so confident in our rental figures as stated on our after tax cash flow analysis, we grin and pull out ours, or sometimes our team’s rental survey. (Note: The minute I find out a team member hasn’t done a required rent survey, they’re fired.) This isn’t done by phone, fax, email, or channeling the local apartment tenants in an area. You do what needs to be done — you knock on doors yourself.
Management firms will tell you, “You’ll easily command $XXXX a month in rent for that unit — no problem.” When it ain’t their butts on the line, it’s never ‘a problem’. Most management firms make their rental decisions based upon their own relative convenience. I ran my own management division for a decade and know what it takes — and it ain’t hangin’ ’round the office when you’re not sure of what the rents should be.
Agents/brokers will be smother. “Our experience in the area says you should get this amount.” Whereupon they give up a number. Rely on that number the same Mom relied on me having all my homework done before bedtime.
Builders are the comedians of potential rents. It’s long been my theory they size you up and decide in the middle of their answer what rent figure to give you. If they discern I’m from California, it goes up at least 10%. Exceptions: I’ve met two builders in the last 18 months who gave me rents backed up with empirical evidence — one in the Kansas City area, and one in the Dallas/Fort Worth Metroplex area.
Short diversion.
The first thing a California real estate investment broker/advisor learns when leaving the state is the strange thing that happens to their forehead — In bold lettering a message appears. CALIFORNIA FRUIT LOOP — I’LL BELIEVE ANYTHING.
Tomorrow I’ll give specifics on how I’ve conducted rent surveys over the last 30 years. I’ve learned a ton, and it’s all come in handy. Meanwhile, keep this in mind: Buying investment property without slam dunk, sun-settin’-in-the-west reliability is foolhardy at best and a quick way to lose a bunch of your hard earned money at worst.
Remember: It’s called income property for a reason.
Posted on March 8, 2008 @ 6:46 pm - Written by BawldGuy
Now that most of the country’s real estate is, uh, taking a breather, as is the stock market, I thought it was perfect timing to reissue a post I published about nine months ago. The post has been modified as little as possible to reflect the current times. None of the pertinent numbers have been touched.
I’ll make one comment before beginning: Remember the #1 factor in long term investing — Keeping your eye on the long term, the big picture. Know what I mean, Verne?
OK, let’s get going.
A long while back I published a post discussing the so-called debate, Real Estate VS Stocks as investment vehicles. It’s time to remind folks, as stock tips are flying everywhere again, that the stock market just doesn’t compare, especially for regular folk just looking to ensure the retirement they’ve been planning for years. Of course, this dovetails with what I was talking about the other day — 401(k)’s. They thrive or fail based upon the stock market. If in the last 10 years of your work life, the stock market takes a snooze, so does your retirement. Name the last time real estate took a decade off. Right, not even. Since the end of World War II, the next time real estate stays down, or flat for a decade — will be the first time.
Now that the stock market has done a solid imitation of the real estate market, I’m hearing more and more from folks who honestly think there’s a real comparison between their stock portfolio’s potential and their real estate investment plans. The whole, ‘We’ve reached the bottom, and now’s a great time to get into the stock market.’ Before I begin, there’s something I wanna make perfectly clear. You can get very wealthy in the stock market. Over the long haul, you can drag a bunch out of the vault for yourself. That said, you have to know which stocks to pick, when to buy, and who in management might undermine your long term plans. And much of the information on which you will want to base that info is zealously kept from you.
Your real estate portfolio is also subject to outside factors, but not nearly to the extent as the stock market. You can pick where, when, why, how, and in the end, do it all with reasonable confidence that the big picture will show you with an even bigger smile. One area is down, the next isn’t. San Diego is down now, while much of Texas is the real deal. Phoenix is waiting to bounce back, while Kansas City just keeps cooking along.
As I write this the DOW is just at or a touch below 12,000 — a hefty decrease compared to a year ago. Now everyone is trying to figure out if real estate measures up. This is predictable every time the stock market goes bullish or bearish in a big way. The mainstream media chimes in with their take on what investors should do. Those without a dog in the fight (read: any real understanding) offer the most humorous reading. The media often takes ignorance to levels air breathing mammals can’t survive.
The journalist usually ends up concluding the investor has to choose what’s better for their particular situation. That’s media-speak for “I had to write a piece on this topic and don’t know what I’m talking about, but it sure sounds good, doesn’t it?” Let’s put this subject to bed once and for all. We’ll put them in the most transparent way possible, side by side so anyone can discern which way is north on the map. Of course I’ve always maintained the media hasn’t ever done their research diligently on this topic, but we’ll give it a shot anyway.
Stocks vs. Real Estate
Here’s how we’ll do it. I contacted my Financial Planner as a source for an historically reliable annual growth rate in the stock market. I decided to use the S&P 500. For the past 55 years or so it has performed at a growth rate of approximately 8% annually. (It’s actually somewhat higher, maybe 8.5%.) Sounds impressive, but of course that’s not every year, just like real estate doesn’t always go up 40% a year. In fact, let’s be honest and say right up front that both real estate and stocks experience downturns from time to time as part of the normal business cycle. Duh. Don’t the current circumstances faced by real estate investors today speak for themselves? Ask your neighbor, the stock investor what he’s thinking about his portfolio these days.
Pick any growth region you want. Go to any 10 year period at random. In San Diego that’s a fun game I play with my new clients. They usually pick the period ending with a real downturn. It doesn’t matter. The rises have, historically speaking, given more than the downturns have taken away — by orders of magnitude almost. Nothing in San Diego has gone up as little as 5% yearly, in any decade you’d choose. It just hasn’t happened. I’m beginning with the year I got in, which was 1969. Almost four decades is long enough to make a point, don’t ya think?
Let’s set the parameters first. I’m going to grant annual growth of 10% for 10 years for the S&P. That’s about 25% over what they done over the last half century. We’ll use $100,000 as our opening capital investment amount. For real estate we’ll use an average annual appreciation rate of only 4%, buying small income properties using 10% down payments. (Note: This isn’t theory, I’ve been executing this exact scenario successfully for decades now, and have done so recently (How’s 14 times in the last few weeks?).)
As stated above, we’ll use an annual appreciation rate of only 4%. I’ll assume the stock’s annual return will be able to maintain a 10% annual growth by selling and buying different stocks as the professionals see fit. I’m also assuming the real estate investor will do one tax deferred exchange at the end of the fifth year. Though I won’t impute any costs to the buying and selling of stocks, I will burden the real estate investor with a selling cost of 8% when he exchanges.
Let’s see what happens.
After 10 years (rounding to the nearest $100) the stock investor has $259,400 — a profit of $159,400 over the 10 year period. A 10% annual growth rate on the originally invested capital.
Real estate has ended up with $458,000 - a profit of $358,000 for the same 10 year period. A 16.435% annual growth rate on the originally invested capital.
We gave stocks the benefit of 2.5 times the growth rate we gave real estate.
This still doesn’t take into account the benefits received from the real estate that don’t exist with stocks.
Any income derived over that period generated by the real estate would not be taxable because of depreciation.
All excess depreciation would then be allotted to the ordinary income (salary from job) of the investor, resulting in thousands of dollars in taxes not paid.
On the other hand any dividends derived from stocks are taxable. With rare exceptions the only way the stock market investor gains any tax shelter is when he loses his money, which is far more likely in stocks than in real estate, especially over the long haul.
Now imagine what this same $100,000 could have done for you, if you’d been pressing the right buttons for the last decade with your real estate investment portfolio. In my experience, even with some bumps along the way, 10 years of prudent and Purposeful Planning, (using the Flywheel Principle) almost always results in multiplying your original capital 5-20 times, depending upon the region, your timing, (sometimes lucky is good) and how vertical the rises were in that particular 10 year period. The immediate decade past would have resulted in your $100,000 turning into at least $1.5-2MIL — if you were paying attention and exchanging when it made sense.
Note: It’s my very strong belief the next decade or so will not bring us any huge run-ups in real estate. I think even the normally high appreciation regions probably won’t experience any significant upward spikes.
What’s really cool about real estate is the ability to buy based upon regional performance. For instance, if you bought investment property in Ohio in 1997 vs buying in San Diego, you’d have been very disappointed. Real estate is local, whereas stocks are, well, stocks. By understanding the fundamentals of different regions, an investor can more intelligently place his capital. A great example of this is when we took our clients out of San Diego five years ago, and exchanged them into other, lower priced growth regions. Many of them can now look back with 20/20 hindsight and see how their capital growth rate was significantly higher outside of San Diego. This doesn’t take into account the relatively lower prices, and the far superior price to rent ratios they enjoyed elsewhere. Their cash flow, if that’s what they wanted, was easily superior when the properties were not in San Diego, or areas like it (Palo Alto?).
Before anyone jumps in to defend stocks, don’t bother. You can make a lot of money with them. But the bottom line is, you can’t use leverage without going over the top with risk. Your weak dividends are taxable. You provide no tax shelter during the holding period. If you picked one industry leader over another, you might have made it big — unless of course, you picked wrong. Folks don’t need a crystal ball with real estate — plus they have prudent leverage.
Ah, leverage. Real estate without leverage, is like — buying stocks. It’s the difference maker.
This is why folks like Ben Stein, a man for whom I have almost unlimited respect, avoids any mention of leverage when he compares the two investments. (And he made himself wealthy almost exclusively through stocks.) He knows if he did, stocks would be embarrassingly left behind. Even conservative leverage puts the regular investor way ahead. Leverage is the unfair advantage we have. And we allow it to move Heaven and earth for us, until we arrive at our magnificently abundant retirement.
Then we bask in the glow of the life we’ve earned — through real estate.
Let all this percolate for awhile. Then ask yourself whether or not you should begin taking your retirement a lot more seriously. Contact me — I’m easy to talk to.
First Sam Zell says what I’ve been saying for months. The housing market isn’t nearly in as bad a shape as mainstream media wants us all to believe. In fact he said a recovery would begin this spring. I think he’s pretty aggressively optimistic to say that, but he’s the billionaire, so I’ll let time tell us if my 3rd to 4th quarter scenario is correct or not. 
you can own a duplex (and brand new, not ancient like yours) with monthly income of $2,000-2,400. Does yours offer 3 bedrooms and 2 baths? And an attached 2-Car garage? In a neighborhood you’d allow your 70-something mom live in by herself? 
— a hefty decrease compared to a year ago. Now everyone is trying to figure out if real estate measures up. This is predictable every time the stock market goes bullish or bearish in a big way. The mainstream media chimes in with their take on what investors should do. Those without a dog in the fight (read: any real understanding) offer the most humorous reading. The media often takes ignorance to levels air breathing mammals can’t survive. 
Let’s see what happens.
