Friday, November 21, 2008

CNN/Money 401(k) Coverage Continues To Disappoint

Once more, CNN/Money magazine has another story about losses in American citizens' 401(k) programs.

And while one piece of the advice is good -- ask your financial adviser what the heck is happening to your account and why -- they continue to leave out a critical piece of information.

All the conversation about 401(k) investments is about stocks and bonds, and the latest story from this investment news partnership continues to disappoint.

Here is the latest. Note the lack of any mention of investment real estate and 401(k) portfolios. Perhaps the most powerful piece of a diversified portfolio, mainly because real estate identified as an IR. 1031 asset, is indefinitely shielded from capital gains taxes. Indefinitely deferred, to be precise. And yet they ignore it.

So very sad, and yet another reason why I continue to be disappointed in my former profession.

Thursday, November 20, 2008

What Investment Property Has Ever Dropped 30 Percent In Value In Three Days?

A question:

What investment property has ever dropped 30 percent in value in the first three days of the week?

I can only think of one. The World Trade Center towers -- but then that probably isn't fair since terrorists slammed two jet aircraft into them in 2001, murdering thousands of people.

Okay, I didn't really mean to shake you up that way, but my point is this. Barring some unforeseen, rare, virtually impossible event, real estate does not suffer precipitous drops in value. They don't even go down 30 percent in a week, let alone a month.

So the news today that the value of CitiGroup dropped 30 percent in three days-- after several weeks and months of decline begs the following query.

Why would anyone want to be investing in this questionable paper when there are perfectly good investment properties out there -- apartments, offices and the like -- that throw off cash every month?


(Note: Citigroup was trading at $25.42 at close on April 30 of this year. Today, it plunged to below five dollars a share. For more on the story, click here.)

Tuesday, November 18, 2008

One Of The Things That Drive Me Crazy

Coming out of a journalism background (a million or so years ago), one of the things that drives me nuts is when business writers don't know what they are talking about.

OR, better put, when some low-level intern or general assigment reporter is told to put together a quick, bullet-itemed list of things you can do with an investment vehicle. Like, say . . . a 401(k).

But unsuspecting readers, who are doing their due-diligence (we hope), and trusting in websites that purport to be accurate are led astray. For example, here is a site on CNN (well respected as a business news vehicle, particularly when it partners with Money magazine) talking about 401(k)'s, with a notation that investors need to make sure they have the right mix of stocks and bonds.

But nary a mention of investment real estate. Could it be that so many of these writers, bombarded daily with news about the slumping real estate market think that the only thing out there is houses? Or are they lazy?

Cash on Cash readers know that investment real estate is a perfectly legitimate vehicle to place in this investment tool. Hmmm . . . MSNBC seems to understand this.

Just one of those things that bugs me.


Some trends for you to chew on and some thoughts:

Pricing and activity regarding multifamily investments is stable and trending slightly up, according to Real Capital Analytics Inc. This is being driven by attractive financing still available through Fannie Mae and Freddie Mac. In addition, building starts for multifamily are down across the U.S.

My observation -- New construction being way down (a more than 50 percent decrease in new starts, according to Reed Construction Data), combined with home foreclosures that have residents looking for alternative housing is pushing occupancy up -- good news for owners.

Warehouse and industrial properties are having a tough time right now, due to declining employment and an insecure economy, according to PPR. A lot of new warehouse space has come online in the past several months, into vacancy rates that are some 20 percent higher than expected.

My observation -- Don't look for improvements until late into 2009 and more likely in 2010. Developers will curtail new development for 18 months or so, and vacancy rates will improve toward the end of that time frame.

Liquidity issues are also preventing some developers from getting started on new projects they had in the pipeline. PPR's outlook suggests that this lack of new supply across the board (office, multifamily, industrial/warehouse) is a good indicator. The flip side would be oversupply in a down cycle, and as a friend of mine in the business likes to say, "that would be a bad thing."

The bottom line? There are still opportunities out there but you have to search them out. Plus, get the funding issue settled early on rather than waiting until a contract is in place.

My two cents . . .

Thursday, November 6, 2008

Now More Than Ever Utilize An Expert To Go To War For YOU

I don't often toot my own horn and say "hire me," or "you MUST hire a real estate agent" in these pages. Though I will admit I have urged readers to get qualified counsel (your neighbor or favorite uncle who sells real estate part time really doesn't count).

Today I am going to deviate from that general policy. I want to discuss the importance of partnering with a real estate agent who understands commercial/investment opportunities. It has been said that there are no problem properties, just problem ownerships. This is a fairly true statement. When a property isn't working out for the owner, chances are they bought it wrong (at the wrong price, for the wrong terms, etc.) or are managing it poorly. Those two bugaboos probably add up to more reasons than not why an investment does not work for its owner.

Some 15, 20 and 30 years ago, there were people who bailed out of the stock market and invested everything they had into real estate. Those who bought right, did well. Those who thought they knew it all, and did it on their own, did not, on average fare as well. And therein lies the rub -- with today's technology providing exponential increases in access to data, a lot of potential investors want to do it on their own. "I don't need a real estate agent," they say, believing that they can somehow save the money they would be paying an agent to represent them on the buy side.

Well here's a little secret . . . nine times out of 10, on the buy side, you pay no real estate commission. It comes out of the seller's side, funds that already have been allocated to pay commissions to get a property sold.

We are in that same climate today. People, smartly, are working to move money from other investment vehicles into commercial real estate.

But let's put that aside for a moment. Adversity most often creates opportunity. People and companies sell for any number of reasons -- death in the family, retirement, just cashing out, moving up to better properties, have used up depreciation and want a new property where cash recovery will start over, planned 1031 exchange, etc.

Buying "right" is the key. Moving out of stocks or moving under performing IRA or 401(k) money into real estate is likely a smart move at this time. But thinking that because Bill Gates or Google put lots of electronic gizmos at your fingertips and that you can go it alone . . . well, you can. But remember what I said about the folks from 20 and 30 years ago? Same potential for disaster. Only it might be worse because of a false sense of security that all the software tools available make it idiot proof to buy an investment property. There are far more pitfalls than you can imagine.

Here's one way to look at this discussion. I have told many people that I think Quicken is an incredible tool for accounting. But does using Quicken make me an accountant? No. So why would I try to do accounting on my own? Too many risks, for one.

So why do so many people feel they are at risk in the stock market, but then take the risk of buying "wrong" by pretending they have all the skills of a seasoned real estate agent? Not all, but many real estate agents will represent themselves in transactions, and that is because they understand the nuance, the negotiation, and the marketplace. Smart residential agents use experienced commercial agents to handle the former's investment purchases and sales.

But for regular folks, the potential for harm is astronomical. There are horror stories by the thousands of many who invested in far-off exotic locales, like Florida, because a neighbor did it. Did it themselves, they add. And now they are hurting. They are among the many who bought in because they didn't know what was happening with the market, bought in too high, and now are waiting for their bailout (don't get me started on that) if they happened to buy a house to use as a rental. Not all will be bailed out.

Bottom line. Find an agent who understands investment properties. Not sure how to start? Contact me and I will refer you to someone. My expertise is in Ohio. Not elsewhere, and I would not pretend to try to represent clients in other parts of the nation, but I am hooked into a network of smart, reliable people who can get the job done.

There are investment opportunities everywhere. Your comfort level is a key factor, but then there is always professional management who can take on a project and send you mailbox money once a quarter so you never have to worry about your investment. If you are looking at the millions of single family homes available as potential investment opportunities, the INCREDIBLE period of opportunity for investment at a rock-bottom price may only last another year.

Regardless of whether you are looking at an office building, a multifamily complex, or even a duplex or a couple of houses for rentals, I urge you not to blow it by trying to take on the task of buying an investment property on your own.

Please, please PLEASE do yourself a favor . . . Get someone who knows what they are doing to go to war on your behalf.

Saturday, November 1, 2008

Note Brokerage Expanding

An outgrowth of the commercial/investment real estate industry is the boom in note brokers, specifically those who find willing buyers and sellers of real estate notes.

I can't tell you how many times in putting together a deal that the seller has been asked whether they would, if the property buyer is financially strong enough, consider providing a second mortgage to help make the deal happen. The initial response is, "no." But they don't realize that note has value, and can be sold down the line to another investor who wants income.

The most fundamental job of the real estate note broker is to introduce the seller and buyer to each other. But not always. Often, a commercial real estate agent knows of investors who want to sell a note. In most cases, note brokers charge an introduction fee. One of the greatest advantages of real estate note brokers is that they provide and process all the paperwork required for a smooth transaction. In addition, real estate note brokers charge a small fee for doing the paperwork for you.

So for both investors and property sellers who have been waffling about whether to carry a second mortgage to make a deal happen, consider that there is a vibrant and healthy industry putting together buyers and sellers of notes.