Saturday, December 29, 2007

Looming Mortgage/Credit/Debt/ARM Crisis Was Plainly Visible To Those Who Took Time To Look

I just read a most troubling story on CNN Money. The report stated that top economists were predicting this time last year that the worst of the housing issues were behind us, the market had bottomed out, and that real estate (residential real estate, that is) was going to rebound in 2007.

Now, first off, I do NOT remember seeing reports like that. Perhaps I missed them. What I do know is that anyone who understands the fundamentals of the economy, and knew the house of cards our loan system was built on, could see the housing market ready to come crashing down. Government had been pushing lenders for years to make loans easier to get, to make housing more affordable. So they lenders did just that.

- But at the same time, some really lousy lenders got into the game and made fortunes lending to people who were high risk borrowers and who probably never stood a chance of paying back what they borrowed. Those lenders made out like bandits and collected incredible fees.

- At the same time, some borrowers -- not necessarily high risk -- bought far more home than they could afford, or needed, out of greed, or "keeping up with the Jones," or because they were talked into it by a lender or real estate agent.

- At the same time, some investors bought houses to flip without understanding the market. They took out no documentation, no money down loans because they were convinced the market would continue to boom. But they never looked at the market. All the signs were there to show it was going to crash very soon.

- At the same time, virtually EVERY one of these borrowers across all categories signed on for adjustable rate mortgages, ARMs. The problem is, the lower than market interest rate ARMs all were good for three to four years, after which the rates would be adjusted upward. "But that's no problem, Mr. and Mrs. Smith, you'll be doing even better by then, right?" the lender would say just before closing. During that time, Mr. and Mrs Smith frequently (not always) put new furniture and new cars on credit. Now, the Smith's are facing mortgages that are going to jump, as their scheduled interest rates spike.

Folks, this has been coming for several years now. I have talked about this issue hitting us all in the face with other agents and lenders for nearly three years now. For people to say "no one saw it coming" is a flat-out falsehood.

Another reason why I prefer investment real estate -- TO HOLD FOR INCOME, TAX BREAKS, AND INDEFINITELY DEFERRED CAPITAL GAINS, and NOT TO FLIP.

End of rant.

Thursday, December 27, 2007

President Bush Authorizes Extention of Terrorism Risk Insurance Program

Good news out of Washington DC for a change. The commercial real estate market and the health of the nation’s economy as a whole will benefit from the reauthorization of the federal government’s terrorism risk insurance program, which President George W. Bush signed into law.

In a story in National Realty News, The National Association of Realtors took credit for long advocating passage of the Terrorism Risk Insurance Revision Extension Act to maintain a strong commercial market. And you know what? This extention is a very good thing for investors.

"As the leading advocate for real estate issues, NAR commends President Bush and Congress for enacting the federal terrorism insurance backstop," said NAR President Richard Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif. "We especially thank Rep. Barney Frank (D-Mass.) and Sen. Christopher Dodd (D-Conn.), the chairmen of the House and Senate banking committees, for their leadership in guiding H.R. 2761 to passage. The potential unavailability of terrorism risk insurance would have had a devastating impact on many commercial financing agreements and could have negatively affected the commercial real estate market."

Simply put, the terrorism insurance program, initiated after the September 11, 2001, terrorist attacks, has helped stabilize the commercial real estate industry. The new law, NRN reports, will extend the program for seven years, covers both foreign and domestic acts of terrorism, retains the "trigger level" at $100 million of damages at which point federal assistance kicks in, and establishes a blue ribbon commission tasked with recommending a long-term private market solution.

"TRIA reauthorization will strengthen the economic security of the commercial real estate market by reducing the uncertainty of terrorism coverage availability and by covering many forms of terrorist activity," Gaylord said.

In the long term, many in our industry feel the best solution should focus on what private markets have been unwilling or unable to do. Gaylord, commenting on this very issue, has strongly urged a process be created whereby businesses (investors) may purchase insurance for the most catastrophic conventional terrorism risks; provide adequate insurance capacity in all major commercial real estate markets, particularly in high-risk urban areas; and provide meaningful insurance against all types of terrorism risks. Gaylord says this extention does just that.

I'm not so sure, but I'm not in favor of government intervention to a large degree. The markets should arrive with tools that address these needs. In time, they will.

Monday, December 10, 2007

Sobering Times For Mortgage Industry; Good Times Ahead For Investors

Inman News posted some sobering news this week. Announced job cuts at mortgage lenders and in the financial sector continued to decline in November from August peaks, but the ultimate impact of the housing slump on workforce levels may be delayed for months. That's according to Chicago-based outplacement consulting firm Challenger, Gray & Christmas, Inc., which tallied 5,528 announced layoffs at mortgage lending institutions in November. That's down from a peak of 30,892 announced layoffs in August. The total number of announced job cuts in mortgage lending for the year-to-date, 81,681, is more than six times the total for all of last year, 12,874.

The Inman story added that there have been 147,395 announced layoffs in the financial sector through November, compared to roughly 50,000 in each of the two previous years. "We probably have not seen the last of financial job cuts tied to the housing slump and subsequent collapse in the credit markets," said the firm's chief executive officer, John Challenger, in a statement. "In fact, many analysts are waiting for a major announcement from Citigroup in the coming weeks that some say could impact as many as 45,000 jobs.” Challenger Gray tracks only publicly announced layoffs, so actual job losses may be greater. But the numbers compiled by the firm provide an indication of industry trends, which may take longer to show up in government statistics.

In real estate -- where many layoffs are not publicly disclosed -- 3,275 layoffs have been announced for the year to date, Challenger reported. The firm put the number of announced layoffs in housing -- including the construction, real estate and financial sectors -- at 119,972 through November. That's a more than five-fold increase from the 22,814 tallied in 2006. Announced layoffs in the combined category totaled 10,537 in November, down from 31,746 in August, the peak for the year.

Large commercial real estate has been largely untouched by the credit or debt crisis, depending on how you want to describe it. Smaller investment properties, however -- doubles, 4-families, etc. -- are feeling some of the pain as buyers find it harder to get loans. Loans are not impossible to achieve, there are just a few more hoops and the ridiculous no-money down schemes (I never liked those) are practically a thing of the past.

With that said, the coming two years are going to be the time for investors to jump in as prices continue to dip. I know some readers will think this is piling on or negative during a rough patch, but my focus is investment real estate. The values will be there. I think I wrote this a few weeks ago, but some older agents are telling me they haven't seen investment opportunities like this for 30 years -- essentially the last time we had skyrocketing fuel prices and declining property values.

AND I DON'T MEAN FLIPPING INVESTORS! That is not investing. That's gambling! And that is part of what has created the credit/debt crisis. The reasons are complex, but we will come out of it. Nevertheless, if you are in a strong cash position, the next few months will be a good time to start picking up properties held by distressed owners. Whether you assume mortgages, or pick up your own to relieve the current owner of their burden, I believe the smaller, cash-producing properties to hold will be had at good values over the next 24 months.

Thursday, December 6, 2007

Taking The Helm Of CREE For 2008

Well, it's official. This morning I was sworn in as president for the 2008 business year of Columbus Real Estate Exchangors (CREE). This is an incredible organization and the best ongoing place for keeping tabs on the best investment real estate being made available in Ohio. For many, it is ongoing training and far exceeds CE that is required of real estate agents by the State of Ohio.

One of our honorees today, Randall Jackson (award for best deal over $1 million) stated that CREE's weekly meetings have benefited him greatly since, as an independent broker, he does not have the luxury of holding a weekly company sales meeting in the manner that giant brokerages do each week. Randall is an incredibly successful developer and that he views CREE as a sounding board and learning tool for his projects speaks volumes. Others speaking today echoed the same sentiment.

CREE is a group of about 130+ brokers and agents throughout Central Ohio, all of whom are Realtors. All specialize in the brokerage of investment properties, with particular emphasis on counseling our clients to build wealth utilizing the numerous tax benefits of IRS 1031 exchanges. Meeting weekly, we conduct regular marketing sessions, present properties we have listed for sale or exchange, and generally brainstorm and problem solve to help each other help our respective clients, whether they be buyers or sellers.

I have learned much in my tenure as a member of CREE these past several years. Being asked to run for president of the organization is an honor. Being elected by my peers, more so. But as outgoing president Ted Oatts, in a presentation of CREE's first-ever "lifetime achievement award" to veteran Realtor and educator, Furman Tinon, its better to pay forward. Legendary football coach Woody Hayes used to say that a lot.

The coming year will be fun. It will be difficult. And this new role will be time-consuming. But in a small way, it is a means for me to pay forward and share continuing and ever-evolving investment knowledge with my clients, prospects, friends and family. My executive committee for 2008 is: Tony Yacoub, Ohio Commercial Real Estate, vice president; Amber Balo, Furman Tinon Real Estate, secretary; and Wendy Baldwin, Baldwin Realty Corp., treasurer.

I talk about the life-long learning that members of our unique organization gain each week, and paying forward. Being recommended at the top of the officers slate for 2008 by our nominations committee was a surprise. But it fits who I am in this way. Taking the reins for the next year is a way for me to finally pay back to this organization, to do something in return for the wealth of knowledge and education I have received. Education that has helped me help my investor clients -- no matter whether they own a twin single, or numerous shopping centers or multifamily complexes.

This may sound arrogant, but I am honored to have been asked to lead an organization that I believe is comprised of -- without question -- the most creative minds in commercial/investment real estate.

To my colleagues, thank you for your confidence. Cheers!

NOTE: I am headed to Cincinnati tomorrow for a meeting at our Pru CRES offices there on the RIISNet project. Over the weekend, I will post a brief writeup of the CREE Christmas Breakfast meeting from today, and give some insight into the award winners and why they were recognized by the organization this year for outstanding contributions to their clients

What To Buy When You're Wealthy

Not really specific to investments, but I thought it was fun for the holidays. I frequently have people ask me the best way to build wealth. I truly believe investment real estate is the way to go. Then people will joke and wonder, what would you do with the money if you became wealthy? Well, you could invest in more income-producing properties (not flips, but hold for true income, growth, etc.).

Or, you could consult Time magazine. Apparently this is how the super-rich spend their money.

Creativity Helps Keep Deals Moving

I recently was asked for an opinion, specifically to poke holes in a proposal, on a transaction that involved personal residencies in affluent New Albany, Ohio, a potential investment property, and a means to satisfy contingencies during a market that has been more than tough on the residential real estate business.

I could find no holes after analysis, and in fact had read of this scenario being tried in one other market. I recommended the parties also talk to a CPA to talk about any tax implications. We could find none, and all agreed it was a strong approach that others might mimic if the right circumstances warrant.

Now, you should know that despite the news about tens of thousands of lower- and moderately priced homes being in danger of foreclosure, most people don't realize there are problems among the affluent as well. Locally, I heard a number that shocked me. The statement was that one out of every three or four homes in New Albany, an extremely well-heeled area in northeast Franklin County in Ohio, have some sort of "financial issue." There are half-million dollar homes that are being rented -- owned by investors. There are homeowners who have problems with their lenders and the ARM fiascos. There are homes for sale, but many more homes are being offered in "pocket listings," listings that are not publicly advertised for any number of reasons (one might be that people do not want their neighbors to know the house is for sale or that there is financial difficulty).

So the scenario follows. A Seller in northeast Franklin County has a $2 million-ish home that is for sale. He has lowered the asking price to $2 million from a higher number, and is reluctant to drop it any farther. On at least three occasions he has been in contract with Buyers who could not perform the transaction because they were unable to sell their northeast Franklin County homes, valued at $750,000 to $800,000 each. He has already purchased a $3 million apartment overlooking Central Park in New York City. He needs to get rid of his Ohio home. The plan is this. He will leave the price of his home at $2 million. To make the transaction happen this time, and to satisfy the home sale contingency of the Buyer who is purchasing his home, he will buy the Buyer's home at approximately $750,000. As I said, this will satisfy the sale contingency of both parties' contract. Once in possession of the $750,000 home, he will either hold it and use it as a luxury rental, or list it for sale at that price for about 30 days, then lower it by $100,000 if it is not yet in contract. He is willing to take a loss just to get rid of the $2 million.

Consulting with a CPA found no problems with the plan. From what I was told, in the original Buyer's mind -- so far -- it is worth the loss to be able to complete the sale of the $2 million property. Interesting, yes?

In this market, no matter whether you are talking about residential or commercial/investment, creativity is the key.

Sunday, November 25, 2007

Triple-Net Investment Opportunities Abound

I write a lot about my belief in the strength of multifamily real estate as an investment. But there there are a number of retail opportunities available for investors, as well. One reader wrote me over the weekend and asked about the kinds of companies that sign NNN, or Triple-Net, leases.

Here are a few examples of the kinds of companies that will sign long-term NNN leases:

-- Seattle-based coffee house giant Starbucks just announced full year 2007 results, which included a 21 percent increase in net revenue, 5 percent increase in comparable store sales, and earnings per share growth. The company plans to add 1,600 U.S. Stores in 2008.

-- TJX Sees Potential for 700 More U.S. Stores. The Framingham, Mass.-based The TJX Companies, Inc. , an off-price retailer of apparel and home accessories under banners TJ Maxx (851 stores), Marshalls (777 stores), Home Goods (287 stores), A.J. Wright (130 stores) and Bob's (34 stores) across the country, recently reported its third quarter fiscal 2008 results. Net sales increased 6%, comparable store sales increased 3% and net income increased 13% over the previous year. In the U.S., its TJ Maxx stores produced the best results. Some stores are stand-alone NNN opportunities, while others are in larger shopping malls.

-- Pet Supermarket has opened its largest store yet in Mirimar, Fla. The Miami-based Pet Supermarket, pet supply retailer with more than 100 stores nationwide, opened an 11,000 square feet superstore, significantly larger than the company's standard store format of 6,000 to 8,000 square feet. The store is a test concept for future openings. The company currently has stores in Tennessee, Alabama, California and Ohio, and intends continued growth.

I also receive many notices of investment opportunities for standalone buildings housing Advance Auto Parts and Walgreens pharmacies. Each of these companies typically signs long-term leases.

In my next post, I'll explain the concept of Triple Net leases, and their many hybrids.

Tuesday, November 13, 2007

'Mailbox Money' Approach Opens An Investors' Mind To Possibilities

Recently, our office represented out-of-state buyers who purchased a four-story office building in downtown Columbus. Downtown revitalization here is such that strong potential exists to take the 1st and 2nd floors to office space, and the top two floors to residential. Downtown living is hot in many cities. While the high-rise/loft residential market has softened here somewhat, the city still is providing 10-year property tax breaks if you buy a downtown condo or loft.

Would that be enough to get you to invest? Who knows? My point is that there are many different types of investments. Office, retail, industrial, multifamily, and combinations of all. There are office condos, multifamily over retail and/or office. The buyers of the building here, at the corner of Gay and High Streets, saw that the property was being offered for auction. They took a look in advance and bought it at the sale.

It's all about your comfort level. In the case of this building, being out of state, the new owners will hire a management company, and our group will be presenting a management proposal for them to consider. A lot of potential investors don't initially consider real estate a viable possibility at first, because they don't know about "Mailbox Money." Their concern is "how will I take care of the real estate?" Mailbox Money is the concept where an investor does not have to worry about the property -- a management company takes care of all leasing, management, maintenance, etc. An investor merely receives an income check each quarter and a status report.

The bottom line? Find an agent you trust, find an agent with the heart of a teacher -- not a salesperson -- and give them the opportunity to help you understand the many income and exponential tax advantages of different types of real estate. Then, exploit that agent's understanding of the marketplace to help you find a property that meets your budget, and helps meet your financial goals. And don't be stuck solely on income generation. Income is highly important, but the tax advantages on the back end of the transaction are enormous.

Thursday, November 8, 2007

Honored By Nomination

I was honored recently to have been recommended by the nominations committee of Columbus Real Estate Exchangors for election as president of this incredibly dynamic organization. I am not alone, however. The full slate of four nominated officers to direct the activities of CREE for the 2008 business year are: myself (president); Tony Yacoub, broker, Ohio Commercial Real Estate (vice president); Amber Balo, agent, Furman Tinon Real Estate (secretary); and Wendy Baldwin, broker, Baldwin Realty Group (treasurer). The slate of recommended officers for 2008 was presented to the 50 or so members who were present this morning for our weekly marketing session.

CREE is a member of the Ohio Commercial Realtor Exchange Association (OCREA) and meets weekly to discuss investment properties, problem solve on the brokerage of difficult to sell properties, and work together to assist our clients with their investment needs, particularly in the area of 1031 tax-deferred exchanges. Our client base, while Central Ohio focused, own investment real estate all over the U.S. I do not mean to sound boastful but CREE's membership, which numbers more than 100, has been described by some in our industry as "the most creative minds in real estate."

To my fellow Realtor members who comprise the CREE nominations and executive committees, I thank you for your confidence in me. I am proud to be a part of this incredible organization, and I look forward to the election at our December 6 holiday breakfast.

Friday, November 2, 2007

Credit Crunch Claims High-End Ohio Home Builder

This is not an investment story, but it illustrates how real estate is being impacted by the credit crunch. Long time high-end home builder C.V. Perry has shut its doors forever. Click here for the story.

Comical PSA Encourages Financial Planning

The comedy is a touch on the lame side, but the message is HIGHLY important. Don't wait to do your financial planning. A buddy of mine recently showed me a statistic that stated one in five people would rather go to the dentist than talk about long-range financial planning. I can't stress enough the importance of financial planning. Don't let your estate "be activated" without you having a say in your family's financial future.

Click on the URL below to see funnyman Frank Caliendo make this important point in a great public service announcement.

Emailer Asks About 'Boot'

Recent email from a Cash On Cash reader -- "What is Boot?

Section 1031 of the Internal Revenue Service code offers an excellent opportunity for real estate investors by means of deferred tax exchanges. But investors also need to be very careful about getting into a 1031 exchange boot. If they do, they might still end up with a tax bill that they were trying to defer. Here is why. Under current IRS 1031 exchange rules, only "like-kind" property held for business or investment purposes qualifies for a 1031 exchange. There are a number of things, however, that if included as a part of the exchange, can trigger a capital gain tax bill on the portion of the exchange that they represent. These examples are called a 1031 exchange boot. A 1031 exchange boot can include any item in the trade that is not of the "like kind" as defined under section 1031 of the IRS tax code. Quite often people mistakenly get these boots included in their 1031 exchange, and they unfortunately will end up with a capital gain tax bill.

The two most common types of boots that a real estate investor come across are a Mortgage boot and Cash boot. There are also many other types of boots like personal residence boot, and personal property boot, etc.

A mortgage boot on your 1031 exchange takes place when the investment property you buy has a mortgage debt of lesser value than the mortgage debt on the property you happen to sell. It is strongly advised that the real estate property you buy should have a mortgage debt equal to, or greater than the property you are selling. In the rare case that the real estate property you buy has a lesser mortgage debt amount than the property sold, the difference in the mortgage value will be taxable to the investor.

To avoid a 1031 mortgage boot, you have two choices -- 1) If the seller of the property refinanced the property and you happen to assume the new higher debt, you are allowed to finance it through a new loan or a "land sale" contract. 2) Simply add cash to the deal and the cash added into the deal offsets the debt relief on the property sold by you.

Let's switch to a cash boot discussion. By definition any cash or other cash equivalent value received ex. (promissory note) in a 1031 exchange is also not included in the "like-kind" property and is considered as a cash boot. On any such income from capital gain taxes are applicable or if the cash amount is a composite amount of principal and interest, the capital gain taxes are always charged on the principal amount. If this cash happens to be held for a longer period and you earn any interest payment from that, those interest payments will also be taxable as regular income. Keep in mind, if the seller is paying cash for any repair charges that are required by the buyer then the amount paid by the seller towards the repair charges are considered as a cash boot and then it would also be taxable.

Thanks to "Luke" for the great question!

Wednesday, October 31, 2007

Central Bank Drops Interest Rate 1/4 Point

The Federal Reserve today announced it was dropping a key short term interest rate to 4.5 percent. The one-quarter percent cut is designed to stimulate the sluggish housing market. And of course, lower interest rates are always good news for real estate investors. This is the second time the Fed has cut rates this year.

Tuesday, October 30, 2007

Fed May Cut Interest Rate Again Tomorrow.

This isn't real estate information, but it is information that affects real estate.

The Federal Reserve is widely expected to further slice interest rates on Wednesday, but a second reduction in two months has economists split on the potential result. It might help boost lagging real estate sales (the commercial/investment market is strong, the residential market is weak). Others, however, are looking for a rate cut to help boost other sectors of the economy, particularly holiday sales.

Monday, October 29, 2007

NAR Report Backs Up This Author's Predictions

I'm no Uri Gellar, but basic fundamentals are basic fundamentals. Early last spring I predicted multifamily would continue to strengthen due to the looming credit crisis. Specifically, my belief was, and continues to be, that as credit for risky borrowers became more difficult to obtain, people who were planning to buy houses would continue to stay in apartments. I also stated that many people losing their homes would turn to apartments for living space.

I caught a lot of flak from people within this industry for being "negative." I wasn't being negative, I was looking ahead on behalf of my clients. Well here we are. The market stayed strong. The National Association of Realtors' latest Commercial Real Estate Outlook says the following: ". . . Potential first-time home buyers are hesitant and staying in the rental market, supporting multifamily fundamentals until the lure of home ownership returns, the housing cycle changes and more buyers enter the housing market." Interestingly, the report also notes that there has been a slight impact on multifamily from an unforseen growth of single family homes offered for rent due to their owners being unable to get them sold.

Thursday, October 25, 2007

Co-Star Q3 Report Shows Drop in Office Absorption

The national office market posted net absorption of 18.9 million square feet in the third quarter, the second-lowest quarterly net absorption in the last 3 1/2 years, according to CoStar Group's Third Quarter 2007 Office and Industrial Report. Only the first quarter of this year posted a lower net absorption figure. Good reading. Check it out!

Wednesday, October 24, 2007

Merrill News Latest Example of 'Paper' Investments

Let me say this as plainly as I can . . . when you purchase stocks, you are purchasing paper. You own nothing tangible. Stocks may provide a dividend -- or they may not. You gamble that they will go up in value.

When you acquire investment real estate, you have relatively steady income, you have incredible tax writeoffs, and you can defer any capital gains by trading your property for other investment real estate. See below. How a company like this didn't see it coming, I still don't understand.

From Bloomberg News Service -- Oct. 24, 2007 -- Merrill Lynch & Co. reported the biggest quarterly loss in its 93-year history after $8.4 billion of writedowns, the most by any securities firm. The third-quarter loss of $2.24 billion, or $2.82 a share, was about six times higher than the New York-based firm estimated on Oct. 5. Merrill wrote down the value of subprime mortgages, asset-backed bonds and loans to finance leveraged buyouts, and Chief Executive Officer Stanley O'Neal said in a statement today that he is "working to resolve the remaining impact from our positions.''

"Merrill fell as much as 3.1 percent in New York trading and is now performing worse than any of its four largest rivals, after O'Neal misjudged the severity of the decline in the credit markets since July. Investors who lauded the 56-year-old CEO for chasing higher returns now question whether he policed the risks as he pushed the firm to become the biggest underwriter of debt securities backed by subprime loans.

"We're very disappointed,'' said Rose Grant, who helps manage about $2 billion at Eastern Investment Advisors in Boston, including Merrill shares. "I don't think Stan O'Neal will step down, but you do have to look at top management and wonder why they didn't know the extent of this loss.'' Click here for the full text of this story from Bloomberg News Service.

Saturday, October 20, 2007

Some Great Books To Consider

I thought I would pass along some ideas for books to consider. These are all very good resources for better understanding investment real estate, and how it can impact an individual's financial planning. There are many books out there on getting rich quick; these publications are about building wealth. There is a difference.

Pick up a copy and see what you think!

"Exchanging Up," by Gary Gorman

"The Millionaire Real Estate Investor" by Gary Keller

"Real Estate Riches: Using Your Bankers Money" by Dolf de Roos

"Commercial Real Estate Investing: 12 Easy Steps To Getting Started" by Jack Cummings

Monday, October 15, 2007

Self-Directed IRAs Good Vehicle For Investing In Real Estate

Did You Know???

The great majority of investors believe that the money held in their Individual Retirement Accounts (IRAs) can only be invested into stocks, bonds, cash mutual funds or other "traditional" type investments. Not so!

The fact is you can invest in real estate, tax liens, mortgages and other high-yielding investments through your IRA. How? You have to understand that you and your IRA are not one and the same. IRAS are established to benefit you, but they are, in truth, a separate "trust." An independent custodian holds the assets in the IRA for you.

If you have a piece of investment real estate you want to hold for income, your IRA can purchase the property. The title is held in the IRA, and is titled to the IRA. For example, if it were in my name, the title might read, "XYZ Trust Company Custodian For the Benefit of (FBO) Brent Greer IRA." Get it?

Here are the major benefits: 1)Tax advantages -- When you sell you do not pay tax at that time because all the proceeds are kept inside the IRA. Any gain you have from the sale of real estate within your IRA will be tax-deferred (tax-free for a Roth IRA). 2)Access to capital - A frequent barrier to purchasing investment real estate is initial capital. But many people have money in their IRA that can be used to buy property for income (multi-family, commercial), raw land, even mobile homes. In addition, you do not have to own the entire property yourself. You can go into partnership with another investor.

There are some prohibited transactions, primarily those where you or your relatives have prior ownership. Specifically, your IRA cannot purchase a property that you or a relative are selling. These are called "self-dealing" transactions.

Your self-directed IRA might be a handy vehicle for helping you get into investment real estate without using out-of-pocket funds.

Sunday, October 14, 2007

Major Banks May Set Up Bailout Fund To Ease Global Sell-Offs of Securities

Reuters News Service is reporting that major banks, including Citigroup Inc/, are looking at setting up a roughly $80 billion fund to buy ailing mortgage securities and other assets, in a bid to prevent the credit crunch from further hurting the global economy, sources familiar with the matter said. News sources told Reuters that representatives from the U.S. Treasury have organized conversations among top global banks, sources said, as financial institutions grow increasingly concerned that a certain type of investment fund linked to banks may have to dump billions of dollars of repackaged loans onto financial markets.

The concern? A fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. Such sales could trigger huge losses for banks, and in the worst-case scenario tip the U.S. or Europe into recession. The fund would be the latest response to a global credit hangover after at least three years of easy credit that fueled massive mortgage lending in the United States and spurred record levels of leveraged buyouts.

Wednesday, October 10, 2007

How Does A Reverse 1031 Exchange Work?

I had a client in the office yesterday with whom I have assisted in the disposition of rental properties, and the acquisition of a 30+ unit apartment complex. The question he and his wife had was on "reverse" 1031 exchanges.

The concept is relatively simple. It is, essentially, the opposite of a traditional 1031 tax-deferred exchange. The difference is that the investor is purchasing the replacement property "prior" to sale of the disposition property. But all the other rules remain. Here is how it works: The investor purchase the 1031 replacement property. A notation is made in the sales contract that the property is part of a 1031 tax-deferred exchange. The investor then has 45 days to identify the properties that are to be sold as part of the exchange, and 180 days (from the day the replacement property was purchased) to finalize the transaction(s).

As I stated at the top of the post, it is the opposite of a traditional 1031 exchange, but with the same rules.

Google Adds 6 New 'Streetview' Cities

From Inman News: Google Maps' controversial Street View feature (for more, see Google Maps Hits the Streets) expands to six more cities today with the addition of Chicago, Pittsburgh, Philadelphia, Phoenix, Portland and Tucson to its database. As a bonus, the images in Phoenix, Tucson and parts of Chicago are all in high resolution and the service has added the ability to pan up in any of the views, which is especially useful when looking at tall buildings.
Here's a quick marketing tip. Google Maps allows you to email a link to any location, so if you have clients currently looking at properties (especially if they are relocating from another city) email them the link to the Street View so they can take a virtual walk through the neighborhood.

Monday, October 8, 2007

BoA, JPMorgan Chase May Announce Record Losses

WOOF! The Financial Times is reporting that Bank of America and JPMorgan Chase are thought to be on the verge of announcing combined losses of $3 billion from mortgage-backed securities and leveraged loans when they report third-quarter earnings this month. The announcements would bring total losses at the world's leading banks from subprime-related assets to $20 billion, said the newspaper.

JPMorgan Chase's losses will come on leveraged loans of $1.4 billion, Sanford Bernstein analyst Howard Mason said in the report. He also anticipates it will suffer an additional $700 million in writedowns on mortgages and mortgage-backed securities, said Financial Times. Bank of America is expected to see around $700 million in leveraged loan losses and mortgage writedowns of $300 million. The newspaper added that the two entities lend significantly to private equity firms, so most of their writedowns will come from leveraged loan commitments they'd have to take a loss on if they sold now.

Yikes. More of the "things getting worse before they get better" phase we are now in. Hold on, it's going to continue to be a bumpy ride!

Friday, October 5, 2007

New PricewaterhouseCoopers Investor Survey Shows Credit Crunch Not Affecting Interest In Commercial Properties

New stats out from a PricewaterhouseCoopers Korpacz Real Estate Investor Survey show that investors remain strongly interested in commercial property despite credit market volatility and concerns about an economic slowdown. The survey adds that the major limitation to investment activity is a lack of properties coming to market. The interest is strongest in office, retail and industrial properties, but there are growing concerns about oversupply in the multifamily and hotel sectors.

In Ohio, particularly Central Ohio, there are definitely more investors than there are properties coming to market. We do not, though, have an oversupply of multifamily and hotels in the region. In fact, pressure on multifamily is driving up rents and values -- good for current investors but making for a more expensive proposition for investors looking for product.

Wednesday, September 12, 2007

Flippers Fueled Foreclosure Crisis

If you've read many of my posts, you know I hold a certain disdain for flipping. Not flippers per se . . . Its just that the flipping phenomenon is rife with risk for marginal gain. Holding real estate for investment and the plethora of tax advantages is far smarter, and far more lucrative. So some news that came out a couple weeks ago had my blood boiling again . . .

The Mortgage Bankers Association's chief economist, Doug Duncan, said in a speech that flippers and other speculators in single-family homes helped drive up price in many hot housing markets during the boom. As a result, they contributed heavily to mortgage delinquencies in several of those markets. reported on this speech recently.

Said Duncan, "Defaults are on the rise in most parts of the country, but . . . it is not always the case of a homeowner losing his or her home." Often it is "the case of an investor gambling on a continued increase in home values and losing that gamble." For example, the MBA reported that as of June 30, in Nevada, 32 percent of all prime mortgages in default and 24 percent of subprime defaults were on non-owner occupied properties.

"Calfornia, Nevada, Arizona and Florida were among the states with the fastest home price appreciation over the last five years. This . . . attracted both speculators and home builders, a volatile combination that led to an over-supply of homes that was beyond the capacity of the local populations to support. When this oversupply became apparent and prices began to fall, many of these investors simply walked away from their mortgages."

Incredible, isn't it?

One thing that we are noticing, as I predicted many months ago, is that the multi-family market is strengthening throughout Central Ohio. Largely because of the credit crunch tied to residential real estate, people who were planning to move into a home from an apartment cannot. And those who have been in their homes and have lost them, or are about to lose them, are moving to apartments. The next time you drive down the road, take a look at what has disappeared -- signs advertising free 1st month rent, free appliances, free 3 months of heat, etc. Owners no longer need the incentives to get people into their apartments.

Thursday, August 16, 2007

Understanding Cap Rates

Every now and then I receive an email from a subscriber asking me to explain "cap rates."

When you are considering real estate for an investment, you take the emotion out of the equation and look at your acquisition from a business perspective. The return on the investment is more important than how the property looks or its location. An important point to consider is the Capitalization Rate, often referred to as the cap rate.

The cap is calculated by dividing the property's annual net operating income (NOI) by its fair-market value. The NOI is determined by taking the effective gross income, and subtracting operating expenses. For example, you purchase a property for $250,000 that rents for a total of $2,000 a month with $20 additional monthly income and $667 in monthly expenses (that's $8,004 annually). Your cap rate is 6.0 percent (which actually would be a marginal return here in the Midwest, but this is just an example).

All things being equal, the higher the capitalization rate, the better the investment!

Tuesday, July 31, 2007

I Shouldn't Discuss Industry News When I'm on Holiday!

Am in New England on some business and some personal downtime this week, and heard the most horrid "subprime mortgage" story. A friend in southern Maine tells me that an acquaintance of his, with mediocre credit, was denied an $80,000 mortgage for a home on 2 acres in the woods "because a single woman with two kids shouldn't be living alone in the woods." Now, that is not grounds to deny a mortgage. But what makes it worse is that she supposedly was approved for a $130,000 mortgage for a house in town that she was concerned was more than she could support.

Guess what? Now she's in a bind financially and may lose the house. And the mortgage broker who found her the great deal and had a colleague find her the bigger home in town she really didn't want, has his fee and will feel none of the problems she is experiencing.

I deal a lot with incredibly honest, caring and smart mortgage people in the commercial/investment world. From big projects to small ones. It irks me to no end what has happened to people and their homes today. Some of it is "keeping up with the Jones" and overextending on credit, or taking that "interest-only" loan now because they figure they'll be doing even better financially in three years. But more and more it is being shown that a few uncrupulous mortgage brokers put people into homes the broker knew they would never be able to keep. At outrageous fees, at outrageous terms. And our economy is paying the price . . .

Okay, time to take a walk. Headed up a logging road for a long hike today. Maybe that will help me cool off!

Sunday, July 29, 2007

Mailing Gets Under My Skin . . .

I can't believe what I got in the mail yesterday!!! A solicitation, via the National Association of Realtors, to buy life insurance annuities. This drives me nuts, especially since I can do better with real estate investments than I can with most stocks, bonds, annuities, etc.

Its funny, I bump heads occasionally with my "colleagues" at Prudential Financial, who sell insurance products for wealthbuilding. And we compare notes, and they tell me they don't want me anywhere near their clients. Because mine is a better argument.

Anyway, I have GOT to find out who to call at the NAR about this solicitation! Why in the HECK are they pushing insurance vehicles instead of the product in which we all specialize???? Sheesh!!

Thursday, July 19, 2007

Fed's Bernanke Finally Chimes In On Subprime Mess

Rising delinquencies and foreclosures, said Federal Reserve Chairman Ben Bernanke in remarks yesterday, "are creating personal, economic, and social distress for many homeowners and communities -- problems that likely will get worse before they get better."

Thank you Mr. Bernanke for echoing what I have been telling clients for more than three months now. I'm glad for the validation.

Wednesday, July 18, 2007

Ownership vs. Securities Investments

Reason Number 89,652 (okay I'm exaggerating a little, but I wanted to get your attention) to own your OWN investment real estate, and avoid unregulated risk in the market . . .

THIS AFTERNOON Bear Stearns told investors in a letter that two hedge funds that invested in securities backed by subprime mortgages have very little or no value. The news, coupled with last week's decisions by ratings agencies to downgrade their ratings on billions of securities backed by subprime loans, could force other securities firms to write down the value of such investments.

Look At The Green Grow!

A new McGraw-Hill Construction report states that 2009 will be a tipping point for green building. The report predicts that within two years sustainable buildings will comprise 16 percent of large corporations' real estate portfolios. Why? Because energy costs are the largest controllable expense in office buildings.

McGraw-Hill cites the following payback on green commercial real estate: 8-9 percent decrease in operating costs; 7.5 percent increase in building value; 6.6 percent ROI improvement; 3.5 percent occupancy increase; and 3 percent rent increase.

Monday, July 9, 2007

Fridays Keep The Business Interesting

You never know what will happen when you're in the office on a Friday afternoon.

I recently completed a lease project with a major Atlanta exhibition company that was looking for retail space in Central Ohio. High profile exhibition that the entire community is talking about. I'm now looking for space for this same company in another Midwest market. I would not have had the opportunity had I not been in the office on a Friday afternoon. Ironically, they needed an architect. I called a few I knew and who were referred, and the gentlemen who did a fantastic job for this client answered his phone . . . when? . . . on a Friday afternoon.

Along the same lines, I've got a West Coast company coming into Central Ohio and we have found a couple possible spaces for them to lease. I'm also on a task force of Prudential CRES agents representing a California-based IT client that is developing the nation's most secure online data center -- inside a mountain in eastern Kentucky. We are the leasing agents for the Tier 4+ facility that will ultimately be 10 times the size of the NORAD complex in Colorado's Cheyenne Mountain.

Its why I love this business. I get to work with so many different people and companies. And once more I'm sitting here rambling while waiting for a case in the jury pool at Franklin County Municipal Court.

Thursday, July 5, 2007

Blackstone Buys Hilton Hotel Chain

Wow! Being on jury duty gives you a lot more time to catch up on your reading. As you might have guessed, as of this writing I still have not been called to a case.

It has been announced that Blackstone Group -- the formerly private investment fund that purchased Equity Office several months ago -- has purchased the Hilton Hotel Chain. Big money for everyone! As of this transaction, the total dollar value of hotel transactions in 2007 has surpassed that of all of 2006.

Little Paris Hilton will surely have extra $$$ in her portfolio now to dig her out of trouble the next time!! But seriously, the acquisition is different for Blackstone this time, in that they plan to hold most if not all of these properties for the foreseeable future. In the Equity transaction, Blackstone spun off many of Equity's holdings, creating a bigger cash reserve for the acquisition minded firm, which took itself public last week

NBC News Misleads Public On Power of Hedge Funds

Did anyone notice the big lead story NBC's Today show had late last week about the booming "success" of hedge funds, and how the wealthiest of the wealthy are getting wealthier using them?

Now, what NBC News missed is that hedge funds have been around for decades. What they got right was that some creative investment gurus are using them for even more spectacular gains (though there is incredibly high risk) using vehicles that are not regulated to ensure people don't lose their shirts.

What NBC DID NOT MENTION is that hedge funds have been imploding for more than a month. Why? Because a lot of these funds were invested heavily in companies making home buying loans to high risk borrowers. And anyone who hasn't been in Europe -- or ill -- knows that the residential real estate market has been on the skids largely due to millions of dollars in bad loans. And yet, they still aired a story that was riddled with misinformation.

So people walked away from the story thinking that 1) hedge funds are the place to make oodles of money (not right now or for the foreseeable future), and 2) that real estate funds of one sort or another are the only place to make money.

Once again, the media ignores the power of purchasing investment real estate to "hold."

Tuesday, July 3, 2007

Jury Duty Has Given Me More Time To Read, Pontificate

I'm in jury duty in Franklin County (Ohio) Municipal Court this week and next, which has provided me a lot of time to read the paper and some magazines (at least more than I usually do). I found story after story online and in hard copy of people losing their pensions, people not sure of the future of their 401(k)s, etc.

It got me thinking on how many people in real estate I know, and people I know who sell stocks, own real estate as an investment. An office building, an apartment building or two, or even a warehouse. Having other people pay your bills for you makes sense when you boil it down. Yet so many people consider it mysterious and even dangerous. Flipping houses is dangerous. Owning real estate to hold, and knowing what you're doing or having a real estate professional help you, is smart. It is astute.

So I'll probably be commenting more in the coming days on stories in the news. I'll either debunk myths or point out a great success someone had. In the meantime, Happy Independence Day!!! And to veterans and service men and women, as well as my three nephews in the service in harm's way in the Middle East, thank you for your service!!!

Friday, June 22, 2007

Blackstone Group Goes 'Public' Today

Remember all the hub-bub and gnashing of teeth several months ago when Blackstone Group made a big to take over Equity Office? As you might recall, especially those of my readers who followed this news in these pages, there was quite a bit of activity when other suitors stepped up and made their own unsolicited bids to buy Equity, the world's largest owner of office properties. Equity was a public company and some felt the Blackstone bid was low. Turns out they were right on with their numbers, and, ultimately succeeded in purchasing Equity.

More interestingly, today Blackstone is taking its privately held company public in a huge IPO that has had people on Wall Street talking for weeks now. As many people ask me, can that much money be made in investment properties?

My answer is virtually unchanged . . . if the big boys are doing it, there is room for everyone.

Saturday, June 16, 2007

Formula For Determining Cash Flow After Taxes

Just a quick formula to share . . .

Here is how you determine cash flow AFTER taxes:


(subtract) - the ANNUAL DEBT SERVICE

this equals = your CASH FLOW BEFORE TAXES

now, (subtract) - the TAX LIABILITY (savings)

this equals = your CASH FLOW AFTER TAXES!!!!!

With this information, you can perform an investment analysis on a property you are considering acquiring on either a before-tax basis, or an after-tax basis.

Friday, June 15, 2007

What Motivates You? Part 2

Yesterday I posted some hot button issues that motivate people to invest, particularly in real estate. Today I want to wrap up the discussion. Here are a few more distinct advantages of commercial/investment real estate:

1) Diversification -- Commercial real estate offers diversification from other investments such as securities (stocks and bonds) and commodities, which have different risks.

2) Psychological Benefits -- The fact that real estate is a physical asset (i.e. - bricks and mortar) provides a certain amount of psychological security over more nonphysical assets such as securities.

3) Positive Leverage/Principal Reduction -- In many cases, an investor may obtain financing with a lower interest rate than the overall unleveraged yield of the property. This will increase the yield to equity, including reduction of the mortgage balance.

New VISA Commercial Puts Down Consumers Who Use Cash

Boy, am I going to vent!!

Television commercials are often some of the most clever pieces of advertising out there. They can be memorable. And they can flat out send the wrong message.

Currently, there is a new commercial for VISA that implies that businesses of all kind run smoothly because everyone is using a credit card or debit card. Now, the commercial may be aimed at getting people to use VISA debit cards, but it is never stated. So the implication -- especially for younger viewers -- is that EVERYONE is using credit cards. What makes it frustrating for me and many others is that the commercial blatantly goes on to paint people who pay for something with cash or a check as somehow being "out of step" with the rest of society. To be succinct, the commercial blames us folks (yes, me included) for somehow "interrupting" the smooth flow of commerce.

So why does this commercial get me so worked up? Because consumer debt, or the credit crunch, or whatever you want to call it, is what has so much of our society in financial trouble. And regular readers of this blog know I vent A LOT about consumer debt screwing up families and their ability to invest in real estate, or even buy a home. The whole sub-prime loan problem is another issue I have dealt with in earlier posts. But these commercials flat out send the wrong message. There are two or three versions of the same commercial too.

Let's take it a step farther. I talk to people nearly every week who say they wish they could start investing in real estate. But they can't get a decent loan, or even put together a respectable down payment, because of the mountain of consumer debt they have piled up -- mostly in credit cards. And the credit card companies urge consumers to spend, spend, spend. And when people spend, spend, spend, they don't learn to save and invest, because they are satisfying their need for instant gratification, which the credit card companies enable.

I prefer to pay cash for just about everything. Why? Its my choice. And I'm not into the instant gratification thing. But I also know that when I'm short on cash, I don't buy stuff. Now retailers may not like that. But VISA is saying with its commercial, "oh don't worry, with our card you can have anything you want, anytime you want . . . AND you won't be a distraction or interrupt the smooooooooth goings on at your favorite retailers.

Bottom line? For me, I'll keep doing what I do. And so will millions of other Americans. We'll pay cash . . . and if that holds up a line, so be it! With commercials like these we'll soon be raising yet another generation that can't invest in their future because they believe its okay to buy a $4 pack of cigarettes, or better yet, a couple of cans of Red Bull -- with a credit card. SHEESH!!!

Thursday, June 14, 2007

What Motivates YOU?

Do you know what motivates investors? See if any of these items are what pushes your hot buttons . . .

1) Positive Cash Flow -- Investment in income-producing properties often generates an income strean that can be used to fund different needs, such as retirement.
2) Tax Advantages -- As a result of deferred taxation, the after-tax return on commercial real estate typically is greater than an alternative investment with a comparable before-tax yield. The cost-recovery deduction (depreciation) normally defers -- and saves -- taxes, an effect that is magnified by debt financing.
3) Appreciation -- In addition to the periodic cash flows, the sale (or reversion) cash flow of a property can represent an increase in value.
4) Inflation Hedge -- Real estate investment typically has been an excellent hedge against inflation. And today's headlines show inflation is all around us, from gasoline price spikes to the sharp increase in the cost of groceries.

More "hot button" items for investors coming tomorrow!

Wednesday, June 6, 2007

Ohio Lawmakers Already Looking To Fine Tune New Residential Property Registration Law

For owners of residential investment property in Ohio (one unit or more), get ready -- state lawmakers are getting ready to noodle around with the newly enacted "property owner/contact" registration process.

Originally a statewide answer to widely varying registration schemes in cities large and small around the Buckeye State, the registration "standard" now is apparently causing problems. And state lawmakers are going to see what they can do to make everyone happier. The issue is that smaller counties, which had no registration process at all, or had small towns with their own registration programs, are now responsible for the process and view the mandatory registration of contact information for residential property owners as an unfunded mandate. Which, technically, it is.

County auditors offices in the state's poorer counties are concerned about the extra requirements being assigned to them. The registration idea was born in Ohio's urban markets, where city and county officials were having trouble tracking down absentee landlords who skipped on taxes or neglected their properties. The thinking is that some counties might have the option to enforce the state law. That will be an interesting fight!

Stay tuned...

Tuesday, May 15, 2007

The Difference Between Good Debt and Bad Debt

More on debt. There is good debt and there is bad debt. Several readers emailed me again recently to ask for more on this. I will try to put it even more simply . . .

Good debt is debt that you do NOT have to pay back. Others pay it for you (mortgage on investment property).

Bad debt is is debt that you rack up and have to pay back yourself. Consumer debt such as credit cards and car payments.

There is a book I highly recommend. Entitled (ironically) Good Debt, Bad Debt: Knowing the Difference Can Save Your Financial Life, this book by real estate agent Jon Hanson is a great read. He does not do much brokerage these days, but travel quite a bit teaching people the benefits of money management, understanding good and bad debt, and most importantly, teaching young people about money in an environment where they are wooed by TV ads, text messages on their cell phones, and massive piles of junk mail telling them how easy it is to get a credit card.

Thursday, May 3, 2007

Pay Cash Or Leverage?

Overnight, I received a handful of emails from readers asking about debt. The consensus was that utilizing debt to purchase property (borrowing from a lender) isn't a hard-fast rule, its more a choice.

I would agree. The words I use with my clients are "comfort level." It all depends on your comfort level. There is nothing wrong with purchasing investment property TO HOLD by paying all cash -- if you can swing it. You will still have the benefits of income, appreciation, depreciation and expense deduction. You just won't be able to also leverage a lender's money, and you are tying up a large amount of personal capital.

One thing that amazes me in this ongoing discussion about debt taking place in our nation and around the water-cooler each day is how people will shudder at the thought of utilizing debt to purchase investment property. Yet they don't blink an eye at their consumer debt to buy pretty things that provide no income. And it is these impulse purchases on debt that is getting people into trouble, as they pile more and more charges onto their credit cards.

Still, while leveraging the bank's money to purchase investment property is a smart approach, it is a personal choice. It all comes down to each and every buyer's comfort level.

Wednesday, May 2, 2007

7x More Savings Than Cash

I heard an interesting statistic at a meeting recently. Someone examining the nation's savings rates looked at savings and debt statistics, and the Federal Reserve's estimates of how much cash is in circulation. The results are staggering.

It is now estimated that there is some seven times more money in savings than there is actual cash floating around. As everyone pretty much knows, there is no possible way the nation's banks can come up with cash to cover all savings withdrawls if they were made simultaneously. We operate on bookkeeping entries and debt. And with debt come a number of benefits.

In earlier posts I have talked about good debt and bad debt. In fact, there is a book by that name by an Ohio Author, Jon Hanson. His book, "Good Debt, Bad Debt" talks about the difference between destructive consumer debt, and debt that works for you.

Back to the original statement about savings and currency. So where is all that money in savings that is not covered by currency? It has in the form of debt . . . monies loaned for real estate purchases, most often. One of the best statements I ever read was from Robert Kiyosaki, who notes that real estate is the only investment for which the bank will give you eight dollars for every two dollars you put up first. Of course, its in the form of a loan. Still, THAT is where the money in savings has gone.

Anyone involved in business knows about the difference between savings and currency in the marketplace. But seven times? That high number surprised even me.

Tuesday, April 24, 2007

Manageable/Productive Debt Can Work For You

I gave a presentation yesterday to some professionals from a number of industries. The topic was what I do as a commercial/investment real estate agent. Moreover, I took some time discussing the ins and outs of investment real estate. Inevitably, the subject turned to debt.

The bankruptcies and foreclosures we are seeing are at record levels. But this is the tip of the iceburg and it is going to get far worse before it gets better. Still, the question came up about using debt (leveraging bank funds) to purchase property. Now, readers to this blog know that I rant and rave about your home "not" being an investment (unless you are charging rent and it throws off income). There is one school of thought about only buying investment property for cash -- no borrowing from a lender. Another school says you should borrow, because you are leveraging the power of the bank and you are not out of pocket so much in the beginning.

The bottom line on debt is that it should work for you, and not against you. Credit card debt -- commonly known as consumer debt -- works against you. Unless you are printing money, if you pile up enough debt it is hard to get out from under it. Debt tied to income-producing properties is different. Your residents (in apartments), or office or warehouse tenants actually pay the debt for you. Properly structured, their rent payments are supposed to cover the expenses to operate the property, service the debt, and hopefully, put some extra cash in the bank.

Consumer debt is destroying families. Manageable/productive debt tied to an investment property is debt paid back by others. And it can work in your favor.

Manageable/Productive Debt Can Work For You

I gave a presentation yesterday to some professionals from a number of industries. The topic was what I do as a commercial/investment real estate agent. Moreover, I took some time discussing the ins and outs of investment real estate. Inevitably, the subject turned to debt.

The bankruptcies and foreclosures we are seeing are at record levels. But this is the tip of the iceburg and it is going to get far worse before it gets better. Still, the question came up about using debt (leveraging bank funds) to purchase property. Now, readers to this blog know that I rant and rave about your home "not" being an investment (unless you are charging rent and it throws off income). There is one school of thought about only buying investment property for cash -- no borrowing from a lender. Another school says you should borrow, because you are leveraging the power of the bank and you are not out of pocket so much in the beginning.

The bottom line on debt is that it should work for you, and not against you. Credit card debt -- commonly known as consumer debt -- works against you. Unless you are printing money, if you pile up enough debt it is hard to get out from under it. Debt tied to income-producing properties is different. Your residents (in apartments), or office or warehouse tenants actually pay the debt for you. Properly structured, their rent payments are supposed to cover the expenses to operate the property, service the debt, and hopefully, put some extra cash in the bank.

Consumer debt is destroying families. Manageable/productive debt tied to an investment property is debt paid back by others. And it can work in your favor.

Saturday, April 14, 2007

$23M Franklinton Development Project Announced

Columbus' near west side -- the "first" Columbus as it is called by some -- is getting a major new development that would have been unthinkable just a few years ago.

Franklinton, which is now an "area" of Columbus, is slated for a $23 million development that will turn two former industrial sites and a vacant lot into condos, apartments and artists' studios. Announced yesterday by a bevvy of city officials, it would not have been possible without the building of the Franklinton Flood Wall. The wall was conceived more than 20 years ago, but was not completed until around 2004. The Franklinton area has not seen any new development, nor redevelopment, pretty much ever. Insurers would not write policies for the area because it lay in the Scioto River flood plain. But the wall changed that. This project is the first of what is expected to be many development projects in Franklinton, an area occasionally known as "The Bottoms."

Helping kick off the privately funded development is a requst from City Council to approve $175,000 worth of state environmental-cleanup grants for an assessment of pollution at the former home of B&T Metals Co., which once employed 500 people at 435 W. Town Street. In addition, the project is in a neighborhood where condominium buyers will be eligible for 10- to 15-year property-tax abatements. The project will include artists' studios, gallery space, a small theater and retail and office space. A nearby vacant lot will become a small park where sculptors' work will be displayed.

Franklinton was the Ohio village on the Scioto River where early Ohio leaders stood and envisioned a state capitol on the opposite shore. That city, Columbus, was built. Keep your eye on this project. While some of the players are sketchy, it could prove to be a winner for investors, developers and the city, alike.

Wednesday, April 11, 2007

CREE Colleague Nita Dougan Passes

Nita Dougan, long-time member of Columbus Real Estate Exchangors and the Central Ohio real estate community, and the right-hand and partner of husband Ben Dougan, passed away suddenly early this week. Together they built Hamilton Commerce Realty in Ohio and specialized in commercial and investment property brokerage and management. You would have never guessed she was 82.

Nita, you will be missed. And to Ben, and the Dougan family, as well as the extended HCR family, I send my heartfelt condolences for your unexpected loss. Truly, CREE meetings on Thursday mornings will not be the same without this very nice lady.

Wednesday, April 4, 2007

Your Home is THE BANK'S Investment . . . . Not Yours!

Repeat after me. "I will never again utter the words, 'my home is my best (or biggest) investment.' "

It drive me crazy when I hear people say that. And it isn't because they are stupid. That is what people are taught . . . by inexperienced real estate agents, by many lenders, and it is repeated in the newspapers, magazines and on television. First off, your home is not an investment. Unless you are renting rooms to your kids, it just isn't! the only other way it might possibly turn out to be an investment -- by accident -- is if your home is suddenly "in the path of progress." Meaning, the highest and best use for your property may no longer be a residence, but might be a retail development. A development that, per acre, is worth far more than if you stayed in the home. True, most homes do appreciate in value. But it is not an investment.

Investments provide income. A home -- whether it be a single family residence or a condominium -- is just that . . . YOUR HOME! Frankly, it is a liability -- a debt that you pay on. But it is a debt that most people want to pay on. It isn't meant to provide income. A home is your shelter, your domicile, your escape, your (relatively) peaceful island away from the madness of the daily rat race.

Why am I getting all worked up over this misuse of the language? Because it goes deeper. People talk about their homes as if they were investments. But when you ask them what kind of return they are getting, they'll say, "oh, you know what I mean." They themselves are confused, and worse, they confuse their kids. We have a generation today that doesn't know a lot about money nor investments. Things are handed to them, or they are taught the government will help them. They need a good lesson on the subject, which they don't get in today's educational system.

So the next time you hear someone say "my home is my biggest investment" or "wow, we invested in our home at the right time," please, please, PLEEEAAASEE set them straight!!!

Origins of the Subprime 'Tsunami'

As hard as it might be to believe, you haven't seen anything yet. What is happening with the whole subprime mess is just the tip of the iceburg.

Still, there will be some winners in all this. There are still sleazy lenders making questionable loans to risky borrowers. But here is a recap of how we got to the situation that has the new media in an uproar (i.e. -- the latest catastrophe). I also have some thoughts on why this is an advantage for multifamily investors.

The subprime issue was the 9,000 pound elephant in the room that no one wanted to talk about. I always knew it was going to come back and bite the industry and the economy in the collective rumps. Subprime loans, and these interest only vehicles, unveiled with great fanfare three to four years ago, are all coming crashing down. I took some heat a few months ago when I first stated this, but I'll say it again. One person's downfall is another's gain. As more subprime lenders fail, and subprime borrowers either lose their homes or cannot get a loan, there will be increased pressure on multifamily properties. Which means multifamily investors will benefit.

But the revealing side of the subprime mess, which few people want to talk about, was discussed in January at a seminar for investors. The event, which was also webcast, featured Jack McCleary, head of asset-backed security training for UBS Investment Bank. Here is the number one most important snippet from his insider's view, as reported by Inman News:

-- At first, subprime mortgage lenders "basically (took) a page out of the credit card model, which was, 'We're going to risk-base price the consumer debt. You show us the consumer, we can put a high enough coupon on there that we'll be able to provide credit where it didn't exist.' In other words, subprime lenders calculated that if they just charged high enough rates, it didn't matter if some people weren't able to repay their debt."

-- By 2002 to 2004, with interest rates hitting historic lows, subprime lenders began targeting homeowners with credit card and other debts for refinance and home equity loans. "It became a debt consolidation model," McCleary said. "There was some HPA (home-price appreciation), so people had equity in their homes. Ameriquest was very good at this -- most of their production for this period of time was cash-out refis." The thinking at the time? "Take the equity out of the borrower's home, use that to pay down consumer debt, and transfer it into mortgage debt that's tax deductible. We're providing a service, we're helping borrowers make efficient and good financial choices."

-- The mortgage refinance business proved lucrative -- if you could generate loans at a high volume. With the emergence of a market for private-label mortgage-backed securities, the money was there to loan. It was just a matter of convincing people to borrow. Subprime lenders expanded their operations and advertising so they could make more loans.

-- When the refinancing boom petered out in 2004 -- in part because interest rates were headed back up, but also because many who wanted to refinance had already done so -- lenders were left wondering how to keep squeezing profits from their large operations. The parties that be could have sought out how to solve the problems of borrowers. But in 2005, the industry decided it had originator problems to solve. "How do we generate more volume? Loan prices aren't high enough, because the spread between the WAC (weighted average coupon, or interest rates paid by borrowers on the mortgages in a pool) and LIBOR (the London Interbank Offered Rate, or the basis of the lenders' cost of credit), isn't large enough."

-- Intense competition brought profit margins down. There also was an affordability problem with the borrower because prices had increased so much in some markets that fewer families could afford to buy homes.

-- "The answer that solves everybody's problems was 80-20s," or piggyback loans, McCleary said. "The borrower obviously can afford to buy the home now, if he doesn't have to put any money down, and by adding seconds into the portfolio, the WACs increased. Generally the WAC on seconds is, for subprime, call it 10.5 to 11 percent. Adding 5 to 10 percent of that to any pool has a significant impact on the WAC."

The industry did it to itself. Everyone saw it coming and no one said a word. But multifamily, my favorite real estate investment vehicle, will benefit.

Word(s) Of The Day -- 'Seller Financing'

Seller Financing is a debt instrument taken back by the seller as part of the purchase price for a commercial property. Such financing is used as an inducement to a sale when normal 3rd party financing is expensive or unavailable, and in situations where the existing, first lien loan may be assumed by the buyer but the difference between the existing debt and sales price exceeds the cash resources of the buyer. This financing may be in the form of a Senior Mortgage, or a Junior Mortgage.

An example. The buyers offer a twin-single for sale with an asking price of 200,000. The existing mortgage may be assumed by the buyer (though few mortgages are assumable these days) and has a principal of $80,000. One buyer offers to meet the sellers' price on the condition that they provide seller financing in the form of a second mortgage of $80,000 subordinated o the existing loan. Another buyer may put up a $50,000 down payment (25 percent), apply for lender financing for an additional large amount, and ask the sellers to provide seller financing on the balance to help. Seller Financing, when appropriately thought-through, can do much to "sweeten a deal" for both buyer and seller, alike.

Tuesday, April 3, 2007

OUCH! Buckeyes Drop Another National Championship

Well, that game last night smarted. Watching my Ohio State Buckeyes lose for a second time in three months to the University of Florida for the national championship -- this time in basketball . . . well, it just makes you shake your head. Once again, the better team won! the Bucks could not get the three-pointers to drop.

Monday, April 2, 2007

Ohio State-Florida Rematch Has the Attention of This Author

It is hard to believe that it has been only a few months since my beloved Ohio State Buckeyes were horribly defeated by an incredibly powerful and talented University of Florida football team for the national championship in the 2007 Fiesta Bowl. What is even more incredible is that these two schools are meeting again for the national championship. But this time, it is March Madness and these two schools will tip-off in about 12 minutes to decide who is the best team in the nation in college basketball. This IS madness!!!

The Number One team in the nation, the Buckeyes, vs. the defending national champions and tournament Number One seed, the Gators . . .

Go Bucks! Beat the Gators!

Wednesday, March 28, 2007

Abandoned California Business Campus To Become Mixed Residential/Commercial Community

While a lot of money is coming to the Midwest from California because real estate return on investment is higher here, that doesn't mean development has come to a halt in the Golden State. Codding Enterprises, a real estate company with a history in the shopping center industry, plans to transform the former Agilent Technologies campus -- a 200-acre office park -- into Sonoma Mountain Village, a high-density community with 1,900 housing units and 750,000 square feet of commercial space including a significant retail core surrounding a town square. The estimated $1 billion project would utilize the latest principles of sustainability, green technology and new urbanism and take approximately 10 to 15 years to build out.

In preparation for the redevelopment of the vacant property, Codding already has spent $7.5 million to create what is being called the largest privately-funded solar power installation in Northern California. The 90,000 sf of solar panels are capable of generating 1.14 megawatts of power, enough to run 1,000 homes. Central heating and cooling would be provided by a converted power plant left behind by Agilent.

A Codding spokesperson told Globe Street news service that housing will be oriented to take advantage of passive cooling created by prevailing northwest winds, and a network of cisterns will collect rainwater to flush toilets. To promote walking and riding bicycles over driving, the residential units--ranging from 500-square-foot condominiums to 3,500-square-foot single-family homes--will be located within a five-minute walk of the town center and within 10 minutes of a proposed train station. The four large office buildings existing on the property will be refaced and converted into a mix of commercial, retail and residential space. The massive asphalt parking lots on the property would be ground up and used to pave the streets.

Saturday, March 24, 2007

Word(s) Of The Day -- 'Valuation Process'

Valuation Process is the systematic method used by an appraiser to derive a value estimate of a property. Steps in the valuation process are:

- definition of the problem
- preliminary analysis
- data collection
- highest and best use analysis
- estimate of land value
- application of the three appraisal approaches (cost, market, income)
- reconciliation of value estimates
- report of value

Monday, March 19, 2007

Another Take On Adding Value

I've been writing lately about adding value with investment properties. This means finding a way to add income beyond rents from residents or office tenants. So it was with some chuckling on my part when I found the following site, The idea is that if you have a spare room -- or a parking space -- that you don't use, use the web system to find a "renter" for your extra space. Essentially you become a private storage unit for people who are willing to pay for space to store their junk, precious possessions, whatever!

It could work with a spare room at an office, or extra area in an apartment building. Still, you could utilize that space and turn it into a rentable storage unit for your tenants or residents. Whether you consider the acquisition of existing storage unit businesses (like in my preceding post), or this new concept of using the 'Net to seek or advertise space, the phenomenon of people paying someone else to store "stuff" is not going away any time soon.

So if you're a real estate investor, you should always be thinking "value-added." I do!

Friday, March 16, 2007

Ever Think About Self-Storage Units?

Increasingly, one of the better real estate investments is in self-storage units. Sound crazy? Many, many people need more space to store their junk, and never have enough around the house. Or hubby can't let go of his past. Or someone inherits Aunt Glady's belongings and doesn't know what to do with them, so they rent a storage unit.

Frequently, when working with clients, we look for "value-added" characteristics of an investment property. It might be as simple as adding coin-op washers and dryers. Shopping mall and strip center operators regularly take advantage of additional revenue opportunities seasonally, such as renting ground for Christmas tree lots. I have been involved with two different properties where there was additional ground that would be perfect for construction and operation of storage lockers, in Franklin and Hocking Counties in Ohio. Don't think the possibilities are there? Read on.

Charlotte, N.C.-based Morningstar Properties LLC and Chicago-based Harrison Street Real Estate Capital have formed a $200-million joint venture to acquire, develop and redevelop self-storage facilities. The joint venture will focus on properties in the Carolinas. It is expected that the joint venture will acquire $200 million in property over the next three years. The joint venture was launched with the acquisition of three assets totaling 1,589 units in the Charlotte, Fayetteville and Carrboro/Chapel Hill, markets with a value of $13 million. The Charlotte facility is located in the CBD where recent condominium development has added or will add 5,000 units. The Fayetteville property is located near Fort Bragg Military Base and the Carrboro asset is near Chapel Hill, where 50,000 students and facility live each year.

“The self-storage asset class remains highly fragmented. With over 45,000 self-storage facilities in the US still largely held by local operators, we have targeted the self-storage market given the excellent risk-adjusted returns one can achieve as the sector consolidates,” said Harrison Street Real Estate Capital principal Robert Mathias in an interview with

So there you have it. The big boys see the possibilities. Even on a smaller scale, self-storage presents significant opportunities for owners who have a few acres of unused ground adjacent to their retail, multifamily or commercial investment.

Thursday, March 15, 2007

European Real Estate Site Gathers, Organizes Property Ads

As a gadget lover and early adopter of new technologies, I just had to share this interesting bit of news. A European property search engine, called, launched in beta in November. It includes for-sale and rental listings from many countries that are somewhat integrated with Google Maps (clicking on the map will provide a list of properties in the general area, but properties are not individually mapped).

The name apparently derives from paparazzi -- those are the annoying, invasive, parasitic photographers who chase celebrities. The site's listings are collected "from thousands of Web sites," according to a site description. Free to use, it requires no registration. The company, based in Barcelona, Spain, says it is not an agency, a broker or a publisher. According to, it is "a Web site that gathers and organizes property ads, and then helps people find the Web sites that publish those ads." Property types include houses, plots, bungalows, farms, castles, developments, apartments, town houses, penthouses, mews, ranches, studios, villas and flats. Tom Dibaja of told Inman News in an interview this week that there are about 1.3 million properties currently listed at the site. An enhanced version of the Web site is due out next week.

Tuesday, March 13, 2007

New 'Business Advisory' Blog Is Up And Running!

As the kids would say, I want to give a "shout out" to my colleagues at Business Network Associates in Central Ohio. This is an organization of entrepreneurs who meet weekly to share ideas on building businesses, trade opportunities, and problem solve. As a member of the group, they asked me to help them set up a weblog where BNA members could publish information of interest to their clients.

So I set up the Business Network Advisory. I hope you'll check it out and let us know what you think. The address is:

Back On The Air

Man, the flu can get you down like you can't believe!

I've been down for the count on and off for several weeks, and unfortunately I've not been able to post as I would have wished. Either didn't have time, or just didn't feel like it!\

But I'm back on the air and will be posting regularly. Also am getting caught up with clients who have been patiently waiting on me to mend. Thanks for your support and your patience!

Monday, February 19, 2007

'Value-Added' Possibilities Frequently Overlooked

"Value added's" . . . not the best grammar, but something that every property investor should consider when they are evaluating real estate for purchase. It's not just the bricks and mortar; it's not just the cash flow; it's not just the appreciation. Prospective purchasers need to look for ways to add value to a property.

It could be as simple as adding washing machines and dryers -- either coin-op in a common area or machines for each individual unit; it could be knocking down a dilapidated structure at the rear of a property, and paving it for parking -- particularly in areas where little off-street parking is available. Value-added possibilities can be found on vacant ground that is part of the property being purchased. Is the vacant area large enough to build storage units for rent? Could the ground be rented to a Christmas tree vendor in the winter months for extra income? Adding value can also come in the form of newly installed insulated windows. This saves your residents money on their utility bills, giving you another selling point for prospective renters -- and a justification for bumping rents up.

There are many, MANY more ways to add value to an investment property. But you have to think outside the box!

Wednesday, February 14, 2007

Referral Group BNA To Jump Into Blogosphere

A referral group to which I belong, Business Network Associates, has decided to jump into blogging to share information and educate the public about various types of businesses and solutions to everyday challenges. It is now under development and should be up in about a week. It will be called the "Business Network Advisory."

More than a dozen entrepreneurs and business professionals, whom I trust implicitly, will be talking about and answering questions from readers on a wide range of topics: financial planning and financial literacy, health and wellness, home mortages, commercial lending, business/personal travel and special events planning, information technology, human resources, personal business coaching, title insurance, and much, much more. Plus, I will weigh in occasionally on commercial and investment real estate issues. When it is up and running, I'll pass along the address!

Property Investment Management Arm of Prudential plc investing in 'Australasia'

A sister organization of ours has paired with another property fund manager to invest in properties in "Australasia." The open-ended pan-Asia Pacific fund is sponsored by Prupim, the property investment management arm of Prudential plc (Prudential UK), and LaSalle Investment Management. Their new Asia Property Fund has been stocked with five assets in Australia, Singapore, Hong Kong and Korea that are valued at US $600 million. Prupim says the fund will invest in real estate throughout the region in multiple property types and structures.

Yes this isn't Ohio investment property, but yet another look at how entities large and small exploit the power of real estate.

Sunday, February 11, 2007

Dash To Open New Hotels Near Columbus, Ohio Airport Adds Embassy Suites To The Mix

A central Ohio development company plans to build an Embassy Suites hotel near Port Columbus, adding to the steady inventory of rooms in the busy airport market. Local development company Core Properties has secured a 6-acre piece of ground amid a slew of hotels off Airport Drive for the 185-room property. Core Properties owner Jeff Coopersmith said Hilton Corp., which owns the Embassy Suites brand, has approved the site.
Pending a change in zoning, Core Properties hopes to break ground on the hotel in late summer and have it open near the end of 2008.

So what is special about hotels as an investment? Because it is an investment model in real estate that can make money when it is only 60 percent occupied!

Friday, February 9, 2007

New IRS Rules on "Kiddie Tax" Could Affect Many

As you are working on your taxes for 2006, make sure you are aware of some changes to the tax code regarding the so-called "kiddie tax." This applies to certain investors large and small-- not just those who are building wealth with real estate.

Congress took something away from family pocketbooks last year, raising the age at which teens are subject to the "kiddie" tax. This is the tax on the child’s investment income that must be figured at the parent’s top rate instead of the child’s generally lower rate. Before, only those younger than 14 were subject to the higher tax; now, those under 18 are included. That change may ensnare earnings on certain college funds or savings vehicles started before taxpayer-friendly 529 college plans became widely available. Recommendation? Check with your accountant!

Wednesday, February 7, 2007

Our Pru CRES Operation Profiled in Magazine Cover Story

Well, it's out! The latest issue of Buy Lease Build magazine (Ohio Edition) has as its cover story a really nice piece on Prudential CRES Commercial, the business we are building in the Midwest, and details of some exciting programs that set PruCRES apart from other commercial real estate brokerages.
The story starts on Page 7. For those of you who need startled in order to get rid of hiccups or some other malady, there is a truly dreadful picture of this blog's author on the same page.

Link: Even GOD Did Evictions!

Even God did evictions!!! This is a link to a GREAT post by another author. It first showed up on the ActiveRain network. I do not know the author, but I had to pass it on. It essentially is a reminder to people who or own or manage property that is is alright to evict a tenant. You might not want to go through an eviction because its either a hassle, or you don't like change, or you feel the need to give your renter "just one more chance." No matter your religious convictions (or lack thereof), this is an entertaining read that reminds owners and property managers that its okay to do what you need to do . . . its business -- not personal.

Here is the link:

Vornado Out; Blackstone In In EOP Bidding War

It looks like the bidding war for giant office landlord Equity Office is over. Vornado Realty Trust has pulled its name from consideration, leaving Chicago-based trust right where it was in November--and right where the EOP board wanted it to be--in the hands of Blackstone. Click on the link below for the full story.

Vornado Drops EOP Bidding, Clearing Path for Blackstone

Tuesday, February 6, 2007

People Are Perfectly Willing to Help You Pay Your Bills -- If You Let Them

I use a particular quote frequently when I give presentations on tax-deferred exchanges and the benefits of investment real estate. A reader of these posts emailed me over the past weekend, asking me to explain something I posted in another online forum. Here is the statement they were curious about:

"People are perfectly willing to help you pay your bills . . . if you let them."

First let me say I did not originate this quote. But it helps people understand how real estate pays for itself, in a manner of speaking. I first heard the phrase when I met Furman Tinon of Newark, Ohio. Furman is a nationally known expert on investment real estate. Furman and I belong to Columbus Real Estate Exchangors (CREE), an organization of Realtors who specialize in helping clients increase their holdings while avoiding capital gains taxes utilizing IRS 1031 tax-deferred exchanges. We meet weekly to inform each other of properties we have for sale, or are looking for, on behalf of our clients. We also brain-storm to help each other find solutions for the challenges our clients face. CREE is part of a larger statewide organization called OCREA, Ohio Commercial Real Estate Exchange Association. OCREA just finished up a 3-day marketing session in Columbus that attracted more than 65 agents and brokers from a six-state region, all sharing details on investment properties they either have listed for sale, or are seeking for their clients.

Anyway, Furman shared this one-line philosophy with me. And it stuck. It has gone far to help me teach people the power of real estate. It's simple really when you think about it. You purchase a property, starting with a down payment from your personal funds -- though they may not need be from your checking account, but may be proceeds from a stock sale or other liquidation of an investment that is not performing well. After you're into the deal, your residents (I try not to call renters "tenants") pay your bills for you. THEY pay the mortgage each month. THEY pay the upkeep and maintenance. THEY pay the insurance on the property. Get it?

They'll do this . . . but you have to let them.

Saturday, February 3, 2007

EOP May Accept Lower Bid

According to news reports, the Equity Office Property Trust board of trustees, besieged by two suitors flush with billions of dollars in takeover money, has met again and says it prefers the lower Blackstone offer of $54 per share, or about $38.3 billion. Vornado Realty Trust has offered $56 per share for the company, but the EOP board agreed that Blackstone’s cash offer is better than Vornado’s $31 cash, $25 in stock per share offer.

Wouldn't it be something to have companies in bidding war for your properties? EOP has been a smart player over the years, growing to become the world's largest office landlord. As I mentioned in my last post, this story is instructive. And the final chapter isn't yet written.

Friday, February 2, 2007

Equity/Blackstone/Vornado Saga Is Instructive

The Equity/Blackstone/Vornado triangle gets more and more interesting. Blackstone says it will not make a further counteroffer to purchase Equity Office Property Trust, in response to Vornado Realty Trust submitting a binding $41-billion offer on Jan. 31 to buy EOP. The new offer by Vornado is for $56 per share, $2 per share higher than Blackston'e amended offer of $54 per share, which worked out to be about $38.3 billion. Blackstone responded this morning to Vornado’s announcement by saying it has submitted its final offer.

"We do not believe that the true value of Vornado's proposal is anywhere near $56 per share and Blackstone has no intention of increasing its all cash price,” a Blackstone spokesman told business reporters. “The true value of Vornado's offer should reflect a discount for stock, the three to four month time delay before receiving it and the risk of VNO's share price declining below $115 per share. When combined with the risk to EOP shareholders that VNO shareholders could vote the deal down for any reason, we strongly believe that our binding agreement with EOP is clearly superior.” Though the EOP board said it would consider Vornado’s Jan. 31 offer, the EOP board approved Blackstone’s amended submittal of $54 per share on Jan. 25, along with a $500 million break-up fee if the Chicago-based REIT does not agree to the Blackstone acquisition by Feb. 5. In Blackstone’s most recent offer in late January, it said it would pay about $38.3 billion for EOP, in a transaction that some investors have favored because it’s a cash offer, not including stock. In today’s statement, Vornado said its offer of $56 per share includes $31 in cash and Vornado shares equal to $25, as long as its stock price remains between $115 to $135 per share.

At this point you're asking yourself, "so what?" The reason this is interesting, and instructional, is because these companies recognize the value of holding real estate. They are in a bidding war. And though you may look at the numbers and say this is just the big boys showing off, it is instructive for this reason -- the advantages of investment real estate are often far more signficant at any level than other investment tools. Whether it is hundreds of office properties being argued over, or a half dozen 4-families, or even one twin-single or duplex, the value and the returns are there.

Friday, January 26, 2007

Converting 'Dead Equity' To Productivity

A lot of people are proud that they owe nothing on their home . . . or on a piece of investment property. And they should be proud of their hard work!

BUT (you knew it was coming, didn't you) . . . when a home or other property has high or full equity, it is what we call a "dead asset." Put another way, it is wealth that you possess that is not benefiting you. Think about it -- property usually doubles in value every 10 years or so. Say you bought a house for $50,000 and it is now worth $100,000. And when you bought it you put $10,000 down and financed the remaining $40,000. Over the 10 years your mortgage payments built up an additional $15,000 in equity. So you now owe only $25,000 on a home that has appreciated in value due to inflation to approximately $100,000. As a colleague of mine here in Central Ohio, real estate investment guru Furman Tinon, puts it, "inflation pruduces more multi-millionaires than anything else." But this new worth is not benefiting you.

After 10 years you now have $75,000 of net worth in your home ($100,000 current value minus the $25,000 note you still owe from your original note). To put this wealth to use, you go to a lender and refinance. Get a 75% loan against the value of the home, of $75,000. Pay off the $25,000 outstanding loan. You now have $50,000 cash at your disposal -- tax free. You take that amount and put $50,000 down on a $200,000 investment property. That's an instant 25 percent equity in the new property. And since it is an income property, it will be easy to finance. The monthly income (rent) your residents pay you should cover your monthly mortgage on the new property, and you get to exploit numerous tax advantages, such as: deductions for any property improvements you make; depreciation/cost recovery. Plus, if you sell this property in a 1031 tax-deferred exchange after five years, you will not pay any capital gains taxes on this new property's appreciation. You move the equity you have where it will work harder!

Wednesday, January 24, 2007

Equity Office, Largest Office Landlord, Gains New Suitors

Reuters news service is reporting that Equity Office Properties Trust, which agreed to be bought by Blackstone Group in November, said Monday its board agreed to meet with a Vornado Realty Trust investor group that submitted a rival bid last week and to share information. Equity Office has entered discussions with the Vornado group, which includes Starwood Capital Group Global and Walton Street Capital, and has asked them to submit a definitive proposal by January 31. Blackstone, a New York-based private equity firm, agreed to buy Equity Office for $48.50 per share in cash, or $20 billion excluding debt.

As I mentioned in a post back in November, many institutional owners of shares in Equity, a REIT, complained that Blackstone's offer price was too low. Vornado submitted an offer last week of stock and cash worth $52 per share, or $21.6 billion. Looks like Equity Office, the world's largest office landlord, is going to be the prize in a bidding war among an increasing number of suitors.

Tuesday, January 23, 2007

Another Indicator That 'Campus' Area Multi-Family Is Strong

Some folks who read my posts say I spend too much time talking about campus-area multi-family investments. Well, that's because I believe they are among the strongest assets available. But once more, don't take it from me . . . look at what someone else has to say.

In East Lansing and Mount Pleasant, both in Michigan, a joint venture is wrapping up the purchase of five off-campus student housing apartment complexes near Michigan State University and Central Michigan University. The Pierce Co., based in San Diego, Calif., and the Fidelity Real Estate Group, a division of Fidelity Investments, bought the 3,516-unit properties for $130 million.

Fred Pierce, chief executive officer of the acquiring partnership, told Globe Street, a real estate news service, that the recent purchase is part of a $500-million national student housing acquisition program the company will implement in the next three years, mostly properties in the Midwest and Texas.

More importantly, listen to what he follows up with. "We believe that the Midwest's university markets have solid fundamentals, but yet are not on the radar screen the way the growth markets are," said Pierce. "Even if the local economy isn't doing well, these university markets are stable," he says. He adds that there is a growing national interest by investors into student housing. "There's a greater amount of institutional capital and investors than there are student housing operating companies so there's a real opportunity to outperform multifamily," Pierce notes."

Now . . . where have you heard all this before? Oh that's RIGHT! Right HERE in the pages of "Cash On Cash!" LOL