Fork in the Road – Part 2 – It’s Coming Fast!

On Tuesday, I posted Part 1 of the Fork in the Road Series by Jeff Brown from Brown and Brown Inc.   Tonight, Jeff’s talking about the timing of it all.   Let’s just say the clock is ticking…..

Read it and then call Jeff at 619-889-7100 or call me at (616) 292-7559 and let’s talk about how the market is going to affect you and how we can help you navigate through it.

Tom Vanderwell

Real Estate Investors — Are You In ‘Wait ‘n See’ Mode? Breaking News: Time Ain’t Your Friend · BawldGuy Talking

Real Estate Investors — Are You In ‘Wait ‘n See’ Mode? Breaking News: Time Ain’t Your Friend

Posted @ 8:41 pm – Filed under Buying Income Property, Economy, Financing, Market Correction, RE investment strategies, San Diego Property Owners

Let’s talk a little real estate history tonight, along with (takes a deep breath) some governmental lessons we’ve already lived through, if not learned from. (That screamin’ you hear in the background is my high school English teacher.) This isn’t a post on politics as much as it’s a review of the litter left on the roadside by history — litter some of us prefer calling empirical evidence.

As I said last night, the ’70’s was the first time economic policy went full speed executing the combination of massive spending + tax hikes + huge increases in our money supply. That troika proved beyond a doubt to be THE slam dunk recipe for record inflation, real estate appreciation not seen in my lifetime ’till then, or since the end of WW II for that matter, interest rates over 15%, and a continued marginal tax rate for the biggest income earners of — wait for it — here it comes — 70%! If you lived in California back then, and found yourself in that tax bracket, you netted roughly 21¢ on every subsequent dollar of income after taxes. In technical terms, I think economists call that a disincentive.

History has recorded the result. A recession lasting years. Loss of jobs, property, and hope so staggering, the ‘Misery Index’ was born. It was the first really bad times I’d experienced as an adult. Compare our status quo now to the economic nightmare of the early ’80’s.

Back then there was rising unemployment, a recession, double digit interest rates, and a mortally wounded real estate market. Now? We have rising unemployment, a mortally wounded real estate market, proposals for higher taxes, and massive new spending everywhere we look. The point is that we appear to have much in common with the period ‘76 through give or take ‘83/84. A mercurial rise in real estate prices followed by recession, and severe lending challenges.

Interest rates aren’t 15% now you say? True enough. But ask the nearest real estate investor the difference between losing a great deal due to high rates, or underwriting so silly even ultra-conservative investors raise eyebrows. There is no difference, as the result is identical — no deal.

Here are the results demonstrated in the ’80’s and the circumstances preceding them in the ’70’s. Do they sound somewhat familiar?

# High marginal tax rates — rising rates on capital gains
# An unreliable source of real estate financing
# High unemployment — still on the rise
# Massive government spending — with no end in sight
# Historic increases in the nation’s money supply
# A gravely wounded real estate market

I now quote a relatively (couldn’t resist) credible source on the subject of insanity. Einstein put it succinctly when he so pithily said — “Insanity: doing the same thing over and over again and expecting different results.”

Under what rational school of logical thought does anyone think we’ll end up with different results this time out? Please, don’t answer, as it’s a rhetorical question.

Here’s where I bring up two very important factors which are currently in play — only one of which was existent in our historical example. First, regardless of what the LameStream media would have you believe, real estate remains fiercely local in nature. What’s true in San Diego can be almost foreign in another region. This isn’t opinion. While Las Vegas is floating face down in the water, some selected regions are producing very solidly positive fundamentals — a result which still acts as a siren song to prudent real estate investors.

Second, the status quo in which we currently exist doesn’t include, at least for the moment, double digit interest rates. Hence the window I wrote of last night. That window has a shelf life people. Those in ‘wait and see’ mode will find themselves up the river without a paddle — or newly acquired income property with rapidly rising net operating incomes and low fixed rate financing.

Those who took advantage of this same window back in 1979 soon found themselves in an atmosphere of upward spiraling rents, crashing vacancy rates, and ever increasing cash flow.

I dunno, sound OK to you?

It’s time to move it or lose it people. Tick tock.

Take a minute and give me a call. One thing most folks tell me is how they learned answers to questions they hadn’t known to ask. 619 889-7100 will find me. Have a good day.

Fork in the Road, Real Estate Investments, Jeff Brown, Bawld guy

A Fork in the Road

Here’s another guest post (part 1 of 2) from my friend and real estate investment connoisseur Jeff “Bawld Guy” Brown.   Jeff spends his days helping people invest in real estate as a road to retirement (something everyone is having a harder time reaching these days.) 

Jeff and I have spent considerable time discussing his “fork in the road” theory and I’ve got a couple of thoughts to chime in:

• I think there’s a very high probability that he’s right and the next few years are going to go one of those ways.
• I think that it’s worthwhile reading not only for those who are investors, but anyone who has a financial stake in the real estate world.   

Take the time, read it over and then either e-mail Jeff Brown  or call him at (619-889-7100) or e-mail me at Straight Talk or call me at (616) 292-7559.   We’d both like to talk with you further.

Tom Vanderwell

P.S. Part 2 will be coming Thursday night

Are We Coming To A Real Estate Investment Fork In The Road? · BawldGuy Talking

Are We Coming To A Real Estate Investment Fork In The Road?

Posted @ 7:15 pm – Filed under Buying Income Property, Cash Flow, Economy, Financing, Market Correction, RE investment strategies, San Diego Property Owners, Texas

Yeah, I know, there are more than two schools of thought when we start talkin’ about what’s next in the national economy — especially in the context of the oh so important real estate markets. I get that. But the fork I see are two roads really more or less going in the same direction, which I realize is confusing. Hang with me.

This isn’t new ground by any stretch, as many have written endlessly on ‘what’s next’ — to the point we’re all hittin’ the weary wall. Sooner or later though, it’s gonna break one way or the other, something on which there is universal agreement.

The most likely direction I see us taking is on the same sad dirt road on which we found ourselves in the ’70’s and early ’80’s. I was gonna go all linky on ya, but decided it’d be far more instructive to simply begin the discussion.

Inflation followed the ‘74-75 recession. In fact, it was the first time it had ever reached double digits in my lifetime — at least to my knowledge. From ‘76 through fall of ‘79 inflation was an infection and the doctors seemed to have gone fishin’. For example, San Diego real estate went up a more or less steady 2% — a month — for those nearly four years. We’d never seen anything like it.

When it predictably hit the fan, prime rate was over 20%, FHA was about 16.5%, and both were there to be seen, not used by anyone but the most desperate. It’s a very close call in my opinion, but I think we’re maybe about to be headed that way.

The other road on which we may find ourselves sports the above mentioned inflation but without the accompanying robust economy. Seems oxymoronic doesn’t it? But the phrase ‘Stagflation’ was born just about 30 years ago. Inflation was off the charts while recession deepened. Interest rates remained high for so long, I remember celebrating at the local steakhouse when I closed a deal with an interest rate under 12%. Not makin’ that up. When rates finally dropped to single digits we nearly became euphoric.

Here’s the common denominator between the two scenarios: Both will have windows of opportunity (already open) for real estate investors. And no, this isn’t some convoluted NAR message saying “It’s a great time to buy real estate”.

In either case the entry level home buyer will find themselves shuffled off the stage. Either rates will be way to high, or prices will have left them behind. Meanwhile the supply of rental property, affordable that is, will begin to shrink. Nobody, or in any case very few, will be building. Vacancy rates will tumble as rents find new heights. This is already happening in some regions. Texas is one major example as you may have already guessed.

Those who lock in relatively long term, low interest rates now, will find themselves in the Catbird Seat. My hands-on experience with this came in San Diego of course. Vacancy rates not measured in percentages but rather time — sometimes hours. Really. Owners insisted on month to month rental agreements so they could follow (read: adjust to) the upward trending rents. Folks who’d began with a ‘break even’ property found themselves awash in cash flow a year or two later.

They did this at rates of 7.5-9%! When rates almost doubled shortly thereafter, they found themselves with slowly rising expenses, a fixed cost for borrowed money, and very quickly rising rents. Gimme that combination any time. That combo is in your future, in my humble opinion, no matter what happens.

The key though is to act before the bull’s waste product hits the wildly spinning metal blades. Once the interest rates and/or prices get their death grip on what makes investment sense — your ship will have sailed — whether you’re on it or not.

There’s no ‘being late’ to this particular party. That great deal at 5-7% becomes an easy ‘I’ll pass’ at 8-10%. So if you’re late, the party will go on without you.

I’m very interested in what you have to say — including how long you think this current window of opportunity might last.

If you wanna talk about how you might take advantage yourself, gimme a buzz at 619 889-7100 or email me. Have a good one.

Bawld Guy, Jeff Brown, Real Estate, Fork in the Road

The Power Of The 21st Century Real Estate Investor: No Longer Hostage To Geography

This is another guest post from my friend Jeff Brown from San Diego. Had breakfast with Jeff the other day.   A great guy and someone with a very solid sense of what’s important in real estate.   I hope you’ll take the time to read this…..

Besides the real estate investment myths that have survived for decades, maybe the most costly carryover is this one: “Gotta stay local. Must be able to drive by my properties or the world will stop spinning, the sun won’t rise in the east, and McDonalds will stop sellin’ hamburgers.”

Really?

So many ‘age old truisms’ have fallen by the wayside in the 39 years since I started doin’ this. Exchanges are now ‘delayed’ instead of having to close simultaneously. Yeah, you heard right, simultaneously. You think identifying your uplegs in a tax deferred exchange bring with it a little pressure? Gimme a break. Try closing three properties being traded into seven properties — and all the lenders, title companies, ad nauseam have to cooperate so that all 10 properties close on the same morning. Sometimes I look back at those ‘cowboy’ days and wonder why more investment brokers didn’t just drop dead in the last days of an exchange.

But I digress.

Along with all the white noise driving us nutso, the information/communication age in which we live has also made buying real estate hundreds or thousands of miles away a real option. When I woke up one day back in the last months of 2003, knowing San Diego income property was no longer viable, I removed Brown and Brown’s San Diego borders. No longer would we or our clients be shackled by the artificial limitations of geographic location.

An example in real life.

Here’s the Reader’s Digest version of a couple who decided awhile back to Get Outa Dodge and get serious about their retirement.

Their ‘Dodge’ wasn’t San Diego, but very similar. The numbers simply made no sense anymore. They listed their rental home and triplex for sale. When they sold we came in and turned the sales into exchanges. When they closed we already had six properties waiting for contracts. About 40 days later those properties closed and their exchange was complete.

They signed all documents from beginning to end either in their own kitchen, or the escrow company. They received full inspections with any work needed done to their satisfaction. Property management came in at the end just before closing and captained a smooth transition. All loan docs were signed in their own home, at their convenience. The tax deferred exchange was handled by us while using an Accommodator in San Diego. How well do we know this company you ask? Well, I know the owner. My dad did business with his dad beginning around 1964. Now we do business with each other. That’s how well. Over 40 years of earned trust and demonstrated confidence.

I did business with them before delayed exchanges existed, or were even a gleam in the Starker family eyes. Who’s Starker? That’s a long story, but suffice to say they’re the reason we don’t hafta close exchanges simultaneously anymore. God bless them.

A multi-property, multi-state exchange managed by our firm in San Diego. Their properties were in a different state. The properties into which they traded were in yet another state — as was the lender. Their new real estate attorney (referred by guess who) resides in still another state.

Sensing a trend here?

Wherever you or your properties are, in today’s vastly reduced world, just isn’t relevant. What’s relevant?

The boundaries holding real estate investors hostage to their local market exist only in their minds. When regular folks can successfully do all these things, and without leaving town once — if that’s their preference — then all the roadblocks are only imagined.

Most local real estate markets around the country are not candidates for investment. You may correctly infer from that statement there are local markets proven to be not only attractive now — but also show all the signs of being fundamentally sound economically for a long time. We used to call places like that San Diego. Alas, times change. Those who recognize these changes and act accordingly will prosper. Those who don’t will no doubt realize years later, they were victims of Stockholm Syndrome, the real estate version. Bonding with the market that’s held you hostage ain’t the way to the retirement for which you’ve planned and worked so hard.

‘Local’ today is anywhere we want it to be. Anywhere it makes sense to be. Anywhere that will significantly advance your journey to retirement — or speed up that trip. Hey, now there’s a thought. Ponder that. But not too long, OK?

Tic Tock.

Use your local computer to get ‘puter’s attention. We’ll end up in a real life conversation about what local real estate market might be best for you. Meanwhile, browse through some of the podcasts and see if they don’t speak to your circumstances or what you’ve thought all along. Have a good one.

Some Straight Talk about Rents Part II

We ran part one of this series last week from my friend Jeff Brown.    Here’s the second part of it.   Enjoy!

Real estate investors’ life blood is slam dunk knowledge of neighborhood rents. If they don’t know, or worse, think they do and are wrong, not much good happens. In fact, mistakes in what an income property can realistically produce in, ah, income, can lead to what Grandpa used to call unintended consequences. He liked to sugar coat bad news whenever possible.

Monday’s post talked about discovering rents/vacancy rates for a property in a neighborhood. Let’s add to that today by fillin’ in some potential comparative flaws.

By having the rents reliably documented in a given neighborhood, you’ve established a solid baseline from which you can now make informed decisions. Still, if you don’t include the following, you’re not outa the woods yet, and could still find yourself scratchin’ your head after the fact.

What’d he say?

Let’s say you’ve established rents for 2/2 bath units with 800-900 square feet. Operation clipboard yielded bunches of info on this unit. You have 14 to compare. The range of rents however, have you a little confused. Why is there a difference from low to high of over 15%?

I dunno, let’s look at the replay Coach.

Here’s what you’ll no doubt discover. The units rentin’ for $1,000 look the same as the ones goin’ for $1,175 — from the outside — especially to the dufus who just drove by. But the latter have 2 full baths instead of 1.5, and their kitchens sport dishwashers, which aren’t in the cheaper unit. If you’re a tenant and can afford the extra $175, are you gonna grab the bigger second bathroom plus a dishwasher to boot? If there’s estrogen in the equation you are. Oh, and did I neglect mentioning the granite tiled kitchen countertops? Bingo.

Knowing these differences is crucial to understanding the various neighborhood rents — anywhere. This goes for differences in parking too — both in quantity, quality, and location. One building offers 2 off street spaces per unit, the other just 1. Then there’s covered vs uncovered. Does the property you’re thinkin’ of buying have garages? Woo hoo! Garages are the gold standard.

One unit has a wall air conditioner and a wall heater, the other central heat and air. How’s the floor plan? Women especially are sensitive to what I’ve termed ‘I Love Lucy’ kitchens and floor plans in general. All these things, and the list is loooonger, affect the ultimate price for which you’ll be able to rent any particular unit in any neighborhood.

This is how more experienced real estate investors add value. They accomplish it by addressing what’s known as functional obsolescence. You know, a carport turned into a garage. An I Love Lucy kitchen quickly/cheaply morphed into the 21st century. Forced air heat & a/c added, especially in areas where they’re either expected or the weather dictates. One of my all time favorites was when a client, back in the late 90’s called up all excited, breathlessly tellin’ me about a great find he’d made on a couple fourplexes on separate but contiguous lots. When I asked what made them so good, he said the price was way lower than what I’d sold him months ago just around the corner.

I smiled. Knew exactly the units to which he was referring.

I said, ‘Hey Mike, before ya go off halfcocked, go out there again and check to see how many gas and electric meters there are for each fourplex.’ Yer catchin’ the drift here, aren’t ya?

Of course the prices were way below everything else. The owner paid all the power and gas for his tenants. In a 6% capitalization market, that meant a price reduction of at least $80,000 or so.

Oh. Never mind. It’s always the little things, isn’t it?

The central concept here is to understand what makes one unit more valuable to a tenant than the one across the street. The amateur drives by, quickly checks Craig’s List, or worse, asks the agent who sold them their home, what the rents should be. The pro looks at units, judges them if you will, much the same way a farmer looks at livestock at an auction. In other words, he wants to know exactly what he’s gettin’ for his money.

And the congregations said…..Duh.

If you were eyein’ a fourplex, and your personal operation clipboard showed that $30,000 would raise the rents on each unit by $200 monthly, what would ya do? Well, it depends, you answer cagily. Fair enough. Let’s say you can buy it for the market capitalization rate of 6% in that area. Now would ya do it? Would ya?

I’ll be puttin’ the real life answer in the comments section no later than end of day Thursday. I’d love to see what you come up with and your reasoning.

Meanwhile, back at the BawldRanch, where the heck have ya been? You can find me by clickin’ on the Contact BawldGuy doohicky. I love talkin’ with new folks. It’s like a fix. That’s ‘cuz I’m like, addicted to this stuff. Have a good one.

Words….

A friend of mine, who I talk with often but have never met, Jeff Brown (aka BawldGuy) has a way with words.  I’ve learned a lot from our interactions and his outlook and view on the markets has stimulated and challenged my views of things as well.   It’s been a lot of fun.

This morning, I was talking to several of the bankers in my office (kind of reconnecting after being out of the office yesterday) and the majority of them were talking about how they or their clients were losing their shirts big time in the market.    Then I read Jeff’s post about Words and I thought it was worth reprinting here in it’s entirety.    So read what Jeff has to say (below) and then come back up here, click on Contact Jeff and talk to him.   He’s definitely worth the time!

Here it is:

I feel so much for those who’ve been watchin’ the retirement plans they have at work slide downward as if they’re on Teflon. Millions of Americans have worked honestly and hard building up their 401(k)/IRA’s. Seeing years, often many years of disciplined effort, shrink significantly in real time is a body blow to the spirit. I know, I’ve been there. I empathize with you.

So many of us, usually when we’ve been kicked in the groin financially, have vowed passionately if not also with righteous indignation, to take control of our own futures. By future, we meant our retirement. That word means so many different things to us, but one factor is shared by us all — the older we get the more valuable the stability and reliability of our retirement becomes.

BawldGuy Axiom: Words mean things. For example: The physics of economics will not be mocked.

What do the words ‘Take control of my retirement’ mean to you? Think about it honestly.

401(k)’s have been dealt tremendous pain in the last few months. Let’s quantify what those words mean, exactly.

If a taxpayer had $1.5 Million in their 401(k), and in the latest downturn has lost $300,000 — his retirement income (at 7%) has lost nearly $2,000 a month forever. They’ll never have that money. If they live 20 years after retiring, that’s well over $400,000 they never had to spend. Family visits not undertaken. Vacations not enjoyed. Cruises never booked. And on, and on.

For average folk out there, even if they’re 50 they don’t yet have $100,000 in their company’s plan. Yet to them, the recent slide in their plan’s value seems catastrophic. In reality, it didn’t change anything except in their own mind. Let’s take a page out of the book of silver linings, OK?

Stop kiddin’ yourself that you’ve taken control of your future. If you’ve not invested in real estate, yet your retirement plan has been sliding into the black abyss of mutual fund hell, you’ve only taken control of your newly extended working life. Did your plan include workin’ ’till you were 75? Don’t answer. It’s a rhetorical question. Grandpa worked ’till he was over 80, but then he considered getting paid for what he did nothing short of folly. Unless that describes you, today can be a watershed turning point in a massively positive way.

Take control of your future with strength of purpose. Stop throwing your money away in 401(k)’s. With the exception of an employer matching you dollar for dollar, it makes no sense, considering the alternatives available.

Received a call today that warmed my heart. Client did take most of his cash out of his company’s plan. Paid the taxes and the penalty. In his own words, he’s up $10,000 net so far. That’s taking control. Even if all he accomplished had been to avoid a loss, it would’ve been a win.

Though real estate is surely one of the alternatives, and in fact was one of his, it isn’t the only one by any stretch — nor was it the only option taken by him. He took control of his own future — his retirement — by slowing down the talking and increasing the walking.

Don’t allow recent events to defeat your spirit.

Rather, allow them to renew your resolve to grab your future by the throat! Take control of your retirement — become more involved. For most, in my experience, the extent of their involvement is the occasional perusal of their periodic 401(k) statement.

How’s that workin’ out for ya so far? Exactly. I’ve been there. I’ve lost too. I’ve felt the pain of a defeated spirit. Then someone who cared, asked me if I was gonna take charge of my future, or pout. That was in another life, but I’ll never forget the power of putting those words into action. At some point in our lives, we’re all given the opportunity to Walk our Talk.

Take control. Make recent events the inspiration for pivoting away from so much Talk, and towards much more Walk.

Towards that end, let’s get together. Scratch out a quick note to me, and we’ll figure out what makes sense for your newly turbo charged future. Let’s give these black clouds some silver linings — with the aid of your own Purposeful Plan. Have a good one.