Posted on May 5, 2008 @ 11:39 pm - Written by BawldGuy
Living in Paradise, uh, San Diego, brings with it certain obligations. Today brought one of them — Cinco de Mayo. You will have lunch or dinner, sometimes both, at a local Mexican eatery. It’s the law. Fortunately, you can’t swing a dead cat in San Diego without hitting a Mexican restaurant, and most of them are decent to pretty dang good. The Boss called saying we were having Mexican food tonight, so guess where I just came from?
Eat yer heart out, Chris.
She asked me, as is her special talent, what was the most obvious change we may be seeing in the future of real estate investing. Come on Honey, I’m havin’ chips ‘n dip with a forklift sized plate of enchiladas suiza on the way. (Sad pathetic face.) Pan to The Boss throwing her rolling eyes, ‘what’s yer point?’ look. I immediately went into my response.
Upon hearing me out, she suggested a title including the phrase, ‘an inconvenient truth’ which I immediately liked.
It’s been said here before, but bears repeating, as it’s that important. Read the rest of this entry »
Posted on April 17, 2008 @ 10:11 pm - Written by BawldGuy
As promised, the subject will be subprime in general and scheduled loan resets i particular.
Yesterday I was able to view a chart (alas, unavailable) showing a very interesting chronology of these resets. It showed an clearly obvious peak. This peak was hit in Dec. ‘07/Jan ‘08 — then they dropped of into the black abyss — a 75-80% drop. Seriously. This level more or less remained until the 3rd to 4th quarter of next year. In other words, the tsunami of resets has already happened. The market now has well over a year, and possibly 18 months before the next wave (much smaller) hits.
There are folks for whom even these historically low interest rates don’t matter. In fact, if 0% was available they still couldn’t refinance. No equity is no equity no matter how you slice it. Then there are the borrowers who can use the next 12-18 months to refinance before their loan resets. Or they can sell. Some, because of the way their loans work will be able to just keep on keepin’ on, ‘cuz the reset won’t put them in the poor house.
The system is working. Property will change hands, and lessons will be learned. As more and more buyers cast themselves off the fence, this process will inevitably gain speed. Before we know it, the cycle will have begun anew. Is the system about to serve us all up a big juicy burger? Hhmmm.
Let’s cut through this whole Bull/Bear stuff, OK? Read the rest of this entry »
Posted on March 2, 2008 @ 10:54 pm - Written by BawldGuy
I’ll begin this post by pleading guilty to what follows. It takes one to know one. 
Learn from my experience — regardless of our will to control — things change. We can either go with the flow and benefit from the new paradigm — or suffer the consequences.
People are funny. We wanna do something. We don’t know for sure whether it’s the right something — but we know for sure we wanna do it. It’s kinda sorta reverse science. Instead of offering an hypothesis followed by attempts to test the hypothesis, they instead look for evidence — however thin or out of context — to support their position. I know this to be true, because sadly, I defended San Diego investment property a year or two beyond what the empirical evidence supported. I was simply blinded by decades of experience and blind to the changes happening before my very own baby blues.
Some real estate investors are so ensconced in their incredibly underperforming investments — they refuse to see the evidence demonstrating the error of their ways. I used to be one of them. Here’s what we did at our meetings.
In markets like we see in California, i.e. very expensive, real estate investors now find themselves owners of income property offering everything but — competitive capital growth and no negative cash flow. Yet they’ll talk ‘tlll they’re blue in the face defending their decision to remain. The status quo is just too comfortable, and the option to change just too much of unknown for them.
I’m not judging here, as I did the same thing myself. I probably should’ve left San Diego two years before I did. It finally came to the point where I could no longer defend San Diego numbers. I did what people are still doing today. It boggles the mind — but since I did it too, I’ll not cast stones. Here are some of the pieces of ‘evidence’ the ’stay local’ crowd proffers.
I can drive to the property
Property in San Diego, Orange County, L.A. Palo Alto, etc. is always in demand
Rents just never stop goin’ up here
40-50% down to a break-even makes sense with superior appreciation
There are still investors out there impervious to significant negative cash flow
Absolutely no ‘outa state’ location is nearly as cool as mine
I got out in late ‘03 — advising all my clients to sell San Diego and Get Outa Dodge.
San Diego property values have been dropping since late ‘05. Same for Orange and L.A. Counties. Palo Alto? It’s a paradise on earth. If you haven’t been there, it’s difficult to describe. They don’t live in our world, not even close. Everyone is a six figure wage earner, an MBA or Ph.D, and have kids literally playing in competitive organized chess tournaments — at four years old. Simply put, Palo Alto lives up to its press clippings. We loved it there. What a gorgeous place to live.
But…
Many investors find themselves with rentals costing them $2,000 a month to own. That’s almost $25,000 a year in negative cash flow — and it’s not the exception to the rule. Also, it makes no sense to endure negative cash flows just because you can. The idea is to end up with the most capital gain possible, right? Right.
Several investors this weekend told me first hand — buying Palo Alto income property requires 40-50% down just to avoid negative cash flow. Wow.
Do the numbers, they’re easy. If you can buy 4-5 times the dollar amount of property with the same exact capital, the more leveraged property only has to experience 20-35% of your ’superior’ area’s rate to keep up. Ask yourself…
But before you ask yourself the next question, ponder the following.
Pause — See a recurring trend here? When is a banana not a banana? Uh, what? What’d'ya mean it’s not an apple — it says ‘apple’ right on it — are you blind, oh Bawld One?
OK, back to the next question.
What if you executed a tax deferred exchange into 4 times the property and experienced 1/3 the appreciation? Confused? Don’t be — let’s look at the dollars, cuz that’s what we deposit in our bank account, right?
For this example we’ll use $400,000 (40% down payment) as the original capital invested into the ’superior’ area’s $1 Million property. Compare that to using the same capital amount as 10% down somewhere outa state.
We’ll use 15% appreciation for ‘Premium area’ and 5% for ‘Outa State area’.
15% X $1 Million = $150,000
5% X $4 Million = $200,000
The so called ‘inferior’ region produced a capital growth rate of 50%. The gold encrusted ’super region’ just 37.5% — and the difference will only become larger with each passing year. In terms of dollars, the outa state investor is already ahead a cool $50,000 the first 12 months.
Now, compound that over the next 15-30 years, and you’ll begin to get the big picture.
Here’s another pragmatic thought to ponder.
Your income property, located in paradise already requires 40-50% down just to avoid negative cash flow. Even if your stuff does appreciate 15% annually for the next 3 years, what Einstein is gonna pay you $1.5 Million for a property which by then will surely require 50-60% down?
Or…
Say you find a buyer — you gonna take your net proceeds and buy a $2 Million single family or duplex 
rental in the same area? Really? At least while you’re alone, be honest with yourself and come to at least one supportable conclusion. And what is that?
In 3 short years the outa state investor has already taken a 6-figure lead on capital growth in terms of dollars. What’d'ya think it’ll be in 10 years? 20? 30?
Please — wave the white flag — yer killin’ me.
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.
Try it, you’ll like it. Be dumb like a fox.
