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.
Posted on February 25, 2008 @ 7:16 pm - Written by BawldGuy
Ever wondered what really determines mortgage rates. The common misconception is the 10 year treasury note. Actually, they’re good for mortgage rate trends. Anyway, it’s a good read and packed with rich detail with which you’ll be able to impress your friends.
Baseball is back!! Take a look at the Arizona game schedules. You can thank me later.
Betcha you don’t know nearly everything about your own neighborhood. Now you can find out about that little cafe you keep passing by on the way to work. Or if that vacant lot down the street has a building permit attached to it yet. Most of these so called neighborhood info sites are lame, but this one seems different.
Brian Brady explains in (post title goes here, but it’s longer than this parenthesis) about what really determines mortgage rates. Don’t just read the post. Wander down to the comments, as some real heavyweight guys show up. It’ll be well worth your effort.
Jay Thompson does all thinking folks with taste an incredible favor this week. He’s known as The Phoenix Real Estate Guy and wrote Spring Training Is Here!… which links to every team training for the upcoming season in Arizona. A full schedule for all the teams and at the end of a simple mouse click.
I sense a road business trip to Arizona in my future.
Joe Ferrara over at Sellsius wrote Learn What’s Going on in Your Neighborhood: Everyblock He talks about a new site which aggregates with incredible detail info on your particular neighborhood. I’m guessing most folks will spend far more time finding cool stuff about their neighborhood than they intended.
“…and remember. The daily Bawldys have approximately 1/365th the value of our annual awards.”
Posted on February 22, 2008 @ 12:05 am - Written by BawldGuy
This market, for the most part, is terrible. Plain and simple, it’s a long way from just being down a tad. Though not nearly the worst I’ve seen, it’s bad enough. Is it bad enough for you too?
What would motivate you to trigger a tax deferred (1031) exchange into another region in another state? I promise to give you more than one reason.
We’ll get back to that.
There are a couple reasons, generically speaking, motivating folks to invest or execute a tax deferred exchange. One is to end up with more money than they have now. The other is to create more cash flow (income) than they have now. Sophisticated stuff, eh?
The people reasons are infinite, and for the most part absolutely appropriate. Obviously whether for growth or income, retirement is the #1 reason people invest in real estate. The end game is always the same — the highest retirement income possible. They also want to easily pay for their kids’ education. Or be able to take care of their parents if necessary.
Let’s take a mini-detour here for a BawldGuy Axiom: More is better than less. Sooner is better than later. More, sooner, is much mo’ better.
Paradox: Sometimes selling for less, means ending up with more.
Focus on what’s happening now. Loan underwriting has been tightened. (New candidate for understatement of the year.) Selling real estate has become more difficult, or as we’ve discovered in some markets, more than difficult. Prices have gone down — more or less in different markets. The plain truth is, your property isn’t worth what it used to be. Usually though, it’s just not that big of a deal.
Let me show you why.
Investors who wish to sell in this market think denial is a valuable trait. They don’t respond well to the naked facts of today’s market reality. Sometimes they’re even unkind. That’s because maybe they haven’t thought this market all the way through.
Now it’s time to ‘get back to that’.
I’ve been through this kinda market a few times before. You know, the whole been there, done that thing. The script doesn’t change. The scenery is different, but that’s about it. This correction is worse than ‘74-’75 — but not as ugly as the early ’90’s. Many, including Warren Buffet most recently, have made the observation that the early ’80’s were worse. It’s not close, at least so far.
There are some real perks to a down market for those in the right position, and armed with a well thought out Purposeful Plan.
Let’s talk about what the right position is.
The rightest position is having a boatload of cash burning a hole in your Levi’s. Next best? An investment property(s) with sufficient equity to do some serious damage. The next in line is your home with lots of accessible and affordable equity. Affordable meaning, of course, you can make the potentially increased monthly payments that could result when taking money out.
For now, we’ll bypass 1 & 3. Both involve showing up as the Buyer With Cash, which in this market, doesn’t exactly make you a pariah. Instead, let’s talk about the investors holding income property with a good bit of equity.
Let’s not get caught in the trap in which amateurs sometimes find themselves. They’ll use a formula found in some real estate investment book, telling them to make their move once their equity reaches a particular percentage of the property’s value. For instance, 40%. That figure might work well in one region, while it’s seriously way late in another.
There are too many factors involved to handcuff yourself to impotent one size fits all templates. Numbers may or may not work the same in different regions. Kingman, Arizona ain’t Mansfield, Texas. Southern California isn’t Boise, and Kansas City is just not comparable to Phoenix.
This is where the pro comes in. I’m in San Diego. Let’s say you’re in, ah, Kansas City. A duplex in San Diego goes these days for $450-700,000 give or take. In Kansas City you could probably go to Duplexes R Us and get 2-3 duplexes for that much. So if you have a SD duplex worth $600,000 with only $200,000 gross equity, the average owner would probably role their eyes at the thought of exchanging their equity elsewhere — especially in this market.
Looking more closely, we see the net equity of the SD duplex is a little over $150,000. If that were a brand new KC duplex, with a value of $235,000 and the same percentage equity to value — the net would be far less, around $60,000.
Let’s also agree the prices for both properties are easily less than they’d have received a couple years ago. Hence, the anxiety. “Why should I exchange, losing money in the process?” Of course, that’s a false statement based upon a false premise. (Again, more on that one later.) Because your value has fallen from its high point, doesn’t mean you’ve lost money. It simply means your crystal ball failed you — again — not telling you the exact day the damn thing was worth the most.
What’s the most relevant question at this point?
Easy.
Will a tax deferred (1031) exchange result in your position being significantly improved? Yes? or No? If it’s not a no-brainer — don’t do it.
In many of today’s growth regions an exchanger can better their position — sometimes more than significantly. The SD investor? (Or, just for giggles, how ’bout the Palo Alto investor? Their prices make San Diego look like the Dollar Store.) He could easily go from selling a single, 40 year old duplex to owning nearly $1.5 Million in new or nearly new properties. The KC guy? His net wasn’t nearly as much, but given the same opportunity, they could just as easily acquire triple (or almost) the value of what they left — really. No kiddin’.
Still, I hear the whispering.
That is pretty cool, but don’t you understand, we’re taking a ‘loss’ here. Why do that?
I’ll let the ‘loss’ propaganda pass. You don’t think anyone’s actually feeling sorry for you, do you?
In today’s markets, we’re negotiating deals for our clients, some as buyers, some as exchangers, saving them literally thousands of dollars. In some cases, this is not only in property value discounts, but upfront money too. Money in various costs and immediately require capital expenditures. Even when the deal is fine without a discount, our clients are miles ahead of where they started.
Huh? What’d he just say?
Either no closing costs, or 60-80% reduced closing costs.
Other credits based upon the property and lender.
In the most recent transactions — most recent meaning they haven’t even closed escrow yet — the average upfront savings (credits/upgrades) per client turns out to be over $15,000! Add to that the properties were bought as duplexes but will be sold as two separate units, and what have you discovered?
Again — easy.
All that money you ‘lost’? You made it all back and more simply by closing escrow on your exchange.
We won’t even talk about the next 10 years, except to make one observation. The difference in capital growth and additional cash flow over that period of time, will be easily measured in hundreds of thousands, if not in excess of a million dollars. It’s my intention you take that statement literally. Your choices could be crying in your beer about ‘what could have been’, or breakin’ out the champagne to celebrate your great judgment.
In the case of the SD investor, who thought they’d lost over $50,000? They gained $60,000 by their ability to buy with almost no closing costs, loan points, or paying for various upgrades. I’ll grant you it sounds pretty mundane, so I’ll make you a deal. If you don’t want the savings, pass ‘em on to me.
So far, I’ve already had a client who was able to purchase an extra ‘bonus’ property as a direct result of all the savings on his earlier purchases. That extra property will result in at least an additional half a million bucks over the next 15-20 years. Again — please take that statement literally.
Seriously, most of the properties available today, can be acquired with prudent leverage — as were the properties mentioned above. In fact, each of those properties, very conservatively speaking, were put into escrow for our clients with low downs, and fixed rate loans. They all break even or better.
Now, I double-dog dare you to tell me again about how much you’ll lose by selling your properties?
If you come here regularly, you know I like to have fun while passing on my experience and expertise.
Today was no different, but there’s a serious lesson to learn here.
Even without gaining any of the advantages shown so far, you can still sell for far less than you think your property’s worth and come out way ahead.
Think about what happens when you triple the value of what your equity controls. In SD you’re going up what, 0% a year lately? It’s far more likely decreased in value, and you’re acutely aware of that fact. Imagine our guy with the SD duplex, selling for $600,000 — ending up with nearly $1.5 Million in property. At only 3.5% appreciation the first year of ownership, he’ll have made more than $52,000 in increased value. Surveys show that beats 0% on $600,000 11 times outa 10.
Furthermore, they’re now in a much more flexible position, as instead of one property, they now have six. They’re all new. Their tax shelter has nearly quadrupled. Their capital growth rate has almost shot off the chart. And please folks, remember that capital growth, NOT appreciation is the name of the game.
Oh, and by the way — their yearly after tax cash flow has gone from about $5,000 to $15,000.
Not exchanging out of areas like California (Which includes you, Palo Alto.), Arizona, the northwest, and almost the entire midwest, makes no sense.
This is the kinda market where selling for a so called loss is actually the most profitable thing you could do. Really. Moving your equity, when it’s (And therefore, you too.) essentially mired in quicksand, puts your Purposeful Plan back into the game. Until you, as a real estate investor, realize this, your Plan will remain on hold. (stuck?) Meanwhile, your life isn’t on hold, and more importantly, well — tick tock. Another year, another birthday.
Time stops for nobody.
Don’t be captive to the whims of the market. Instead, turn this market into your personal capital growth machine. Learn how to win by selling for what everyone else thinks is a loss.
In this market you can truly lose your way into a far superior position.
Sorry Lani.
— 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.
but upfront money too. Money in various costs and immediately require capital expenditures. Even when the deal is fine without a discount, our clients are miles ahead of where they started. 
The difference in capital growth and additional cash flow over that period of time, will be easily measured in hundreds of thousands, if not in excess of a million dollars. It’s my intention you take that statement literally. Your choices could be crying in your beer about ‘what could have been’, or breakin’ out the champagne to celebrate your great judgment. 
Moving your equity, when it’s (And therefore, you too.) essentially mired in quicksand, puts your