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.
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.
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.
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.
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!!!
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.
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.
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!
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!
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