Real Estate Investing

What do you think? I’m considering partnering up and purchasing some residential real estate properties for passive income in the midwest. I think now might be an ideal time to buy and rent for the long haul - some properties can be obtained at 50% what they were last sold for.

hopefully the street rats don’t strip off the aluminum siding and make it worth 20% what it was last sold for

Not convinced. Everyone I am hearing going down that road ends up being surprised by the amount of work and involvment this entails. Can become very time consuming.

according to our readings, real estate should perform well when inflation is high. Obviously we are in a period of deflation, however, with monetary/fiscal policy so loose, I would think inflation picks up again in the next year or two. I’ll take some missing aluminum for 20% of market value. As long as they leave a place to make microwavable popcorn and take a deuce.

I would be coming in as a limited partner - general partner and property manager would be involved to do majority of the work - my investment would be totally a passive one. I agree the amount of work would be too much to do it alone to make worthwile

demographic trends in the midwest are abismal. Losing jobs and population to the southern coasts. What’s the vacancy track record of the property? Is it close to an employment center or maybe a college? How stable is the local economy? Is there debt on it? How much vacancy can you live with and still cover debt service? Are there any major renovations that need to be done in the near term (you should have someone qualified do a property condition assessment)? The biggest question is what cap rate are you buying in at and how does that compare to the market you’re in? Being a RE investment professional I can tell you that 50% discount may not be enough, depending on the property. Vacancies and cap rates are both rising, cap rates very quickly. What’s the exit strategy? Lots of questioins to answer and it’s only worth it to dig if it’s a substantial investment.

jbaldyga Wrote: ------------------------------------------------------- > demographic trends in the midwest are abismal. > Losing jobs and population to the southern coasts. > What’s the vacancy track record of the property? > Is it close to an employment center or maybe a > college? How stable is the local economy? Is > there debt on it? How much vacancy can you live > with and still cover debt service? Are there any > major renovations that need to be done in the near > term (you should have someone qualified do a > property condition assessment)? > > The biggest question is what cap rate are you > buying in at and how does that compare to the > market you’re in? Being a RE investment > professional I can tell you that 50% discount may > not be enough, depending on the property. > Vacancies and cap rates are both rising, cap rates > very quickly. > > What’s the exit strategy? > > Lots of questioins to answer and it’s only worth > it to dig if it’s a substantial investment. As another RE guy, to make what jbaldy said simpler, make sure you have reasonable rent vacancy and expense estimates going in and make sure you’re being very well compenated for the risk. Very easy for this trade to go south on you… Also, keep in mind that it’s highly likely your initial investment won’t be the only capital you’re required to provide. If your manager is sophisticated, he’ll have some pretty substantial penalties baked in if he comes asking for more cash for renovations, etc and you don’t pay up. Very easy to fall into a situation where you’re pumping tons of cash into a losing investment.

ahahah Wrote: ------------------------------------------------------- > jbaldyga Wrote: > -------------------------------------------------- > ----- > > demographic trends in the midwest are abismal. > > Losing jobs and population to the southern > coasts. > > What’s the vacancy track record of the > property? > > Is it close to an employment center or maybe a > > college? How stable is the local economy? Is > > there debt on it? How much vacancy can you > live > > with and still cover debt service? Are there > any > > major renovations that need to be done in the > near > > term (you should have someone qualified do a > > property condition assessment)? > > > > The biggest question is what cap rate are you > > buying in at and how does that compare to the > > market you’re in? Being a RE investment > > professional I can tell you that 50% discount > may > > not be enough, depending on the property. > > Vacancies and cap rates are both rising, cap > rates > > very quickly. > > > > What’s the exit strategy? > > > > Lots of questioins to answer and it’s only > worth > > it to dig if it’s a substantial investment. > > > As another RE guy, to make what jbaldy said > simpler, make sure you have reasonable rent > vacancy and expense estimates going in and make > sure you’re being very well compenated for the > risk. Very easy for this trade to go south on > you… > > Also, keep in mind that it’s highly likely your > initial investment won’t be the only capital > you’re required to provide. If your manager is > sophisticated, he’ll have some pretty substantial > penalties baked in if he comes asking for more > cash for renovations, etc and you don’t pay up. > Very easy to fall into a situation where you’re > pumping tons of cash into a losing investment. thanks for the advice. I’m meeting this Thursday with the company and I’ll let you know a few pieces of info and now I have more questions to ask. Coneptually, it would seem that going forward many people won’t be able to purchase homes because of stricter rules for taking out a loan (20% down - better credit, etc…). As more enter the workforce from College and leaving home, etc…, people have to live somewhere. I was able to purchase a condo right out of college in 2000, however, I’m not sure that would be the case these days. Further, I think many are less likely to purchase homes simply because of fear of losing money. With all that said, people have to live somewhere - so they rent. This might not be the bottom for real estate, but how much further down can it go?? Cap rates could still increase on the commercial side, however, how much higher could they go on the residential side? REITS (equity) had a nice day today.

bad-- It’s true that people have to live somewhere and the buyer market situation is a positive for rental properties. However, when job losses mount, household formation tends to slow. Instead of renting your own place, you may move back to your parents’ or double up w/ other renters, both of which stifle demand. The key is what’s happening to vacancy rates, rents and cap rates in your market. I’d have your potential partners put together some market data and make them prove to you that it’s a good market. ahahah-- good to hear there are actually other RE people in the CFA program. What’s your focus?

I work for a group that buys debt. You?

i do acquisitions/underwriting on a closed end value add fund – mainly southern Cal industrial development. Crazy market these days. I think our fund may turn from value add to opportunistic. If you can buy an empty existing building at a 9 cap on market rents, why go through the risk of developing to a 9.5 return on cost. We’ll see where pricing is when the industrial REITs and Lehman go through their deleveraging. Do you work a particular region/property type?

The closer to the equity/development side we are, the more New England focused we are. The closer to the debt side we are, we start to go a little further out nationally. I worked on a decent amount of SoCal industrial while I worked in the CMBS industry, but sinced I’ve moved into my current job, we’ve looked at that stuff but never found deals we could really move forward on. We’ve seen a lot of high-leveraged loans on California industrial properties recently, so if you guys have the buying power, their could be a lot of pretty sweet deals coming up for you guys when people can’t refinance…

Yea I think the banks were a little too bullish on So. Cal when port growth was near double digits, but many are now getting burned (easy to say in hindsight). Luckily we hadn’t spent any money on our latest fund when the sh*t hit the fan, so we’re looking for opportunities – like you said forced sales b/c of loan maturities and also sale/leasebacks from manufacturers who have liquidity problems, with potential to redevelop down the line. I think whoever can execute large-scale purchases of the REIT portfolios will do very well. You’re in the secondary market for loans, no originations? Lots of opportunities for Mezz lenders I think when these owners have to recapitalize…

jbaldyga Wrote: ------------------------------------------------------- > Yea I think the banks were a little too bullish on > So. Cal when port growth was near double digits, > but many are now getting burned (easy to say in > hindsight). Luckily we hadn’t spent any money on > our latest fund when the sh*t hit the fan, so > we’re looking for opportunities – like you said > forced sales b/c of loan maturities and also > sale/leasebacks from manufacturers who have > liquidity problems, with potential to redevelop > down the line. > > I think whoever can execute large-scale purchases > of the REIT portfolios will do very well. > > You’re in the secondary market for loans, no > originations? Lots of opportunities for Mezz > lenders I think when these owners have to > recapitalize… Yep, no originations. We don’t like Mezz because it means we’re paying cash to take an unsecured position at the back of a probably over-leveraged capital stack, which gives a relatively high basis in the asset, when we could be paying .60 on the dollar and getting some leverage to buy the senior loan at basis your comfortable with. It just doesn’t seem like you get paid enough to be a mezz lender because you’re f-ed if the Borrower defaults. If the Borrower defaults on a senior loan on the other hand, then you may be in even better shape than if he pays his loan off…

yea you might be right. our investors want to move up the capital stack as much as possible. but even first mortgages can be tough to rationalize when you can get roughly the same exposure through corporates at huge yields. I’ve seen some reports that call for equity to be completely wiped out on a lot of deals that were done in the the last 2-3 years.

jbaldyga Wrote: ------------------------------------------------------- > yea you might be right. our investors want to > move up the capital stack as much as possible. > but even first mortgages can be tough to > rationalize when you can get roughly the same > exposure through corporates at huge yields. > > I’ve seen some reports that call for equity to be > completely wiped out on a lot of deals that were > done in the the last 2-3 years. on about 90% of the deals we do, unless you’re CalPERS or someone else with boatloads of cash, we expect that we’re going to wind up with the keys…

There is a pretty good article in the WSJ today "Apartment Landlords Find What Goes Up, Does come Down. Actually points out a few things the two of you mentioned above. Rents/revenues are expected to come down in the near future. Furthermore, more concessions are being tossed in to attract renters because vacanices are up/supply is up, etc… Certainly much homework to do before leaping into a deal. On the flip side, the residential may benefit because of limited construction over the recent past, financing is fairly favorable because of Fannie and Freddie provided liquidity, etc…

what do you do w/ the properties you end up owning?

Well the plan is for either us of one of our equity partners to own and operate them; but honestly, I haven’t been in this side of the business long enough to see any foreclosure. Our theory is that we factor enough of a downside scenario so that our basis with capital costs is ok if it hits the fan, but I’m sure we’ll see how things play out. We have a large property management group in my firm so we certainly have the capacity to step in…

cool. If you’re buying loans at a 40% discount then values can drop, what, 50%+ and you’re still into it at a market basis. Take a couple years to stablize the property and hope cap rates come back in at some point and you’ve got a good return. Of course there’s always the question of how far rents will fall and how high cap rates will go. I’ve been told I’ll learn more in the next two years than I possibly could have in the last 10. Let’s hope we’re still around on the other side…