As long as the moon has been circling the globe the tide has come in and gone out. When the tide comes in it raises all boats. When home prices were going up all real estate went up just like boats in a harbor. Today as the proverbial tide is heading out, the question really is "How deep is the water"? That is, as the tide heads out, have we hit bottom or is there still a ways to go? From where I am standing there is no bottom in site. At the end of the day I think a house is worth what you can do with it.
I was speaking at a ULI program recently and I made a statement there that I will repeat here; just because a home on your street was sold for $25,000 does not mean your home or all of the homes on your street are now worth $25,000. I also stated that I am seeing a correlation between 2005 selling prices (not listing prices mind you) and selling prices today. That correlation is the value today is about 1/3 of the 2005 selling prices. It is not a perfect relationship but I keep seeing it over and over again.
With that said, if you have a home with a mold issue and it cannot be lived in then that home is not worth much. If I can rent out a home for $1,000 net per month then that home is worth considerably more.
A friend of mine was driving though Georgia a few months ago and ran across a home in a remote area that appeared to have been built with expensive materials. My friend shared with me that he thought the house was a terrible waste of money. So what is the value of a remote "expensive" home? Maybe zero. Maybe some. Probably not what was spent to build it. My point is some houses will never be worth their construction cost and no minimum price exists. The bottom line is if a home has utility, it's forward value will be based on that utility.
Thursday, December 18, 2008
Monday, December 15, 2008
A Couple of Cartoons
I've been traveling and am currently preparing my next blog entry.
In the meantime, here are some cartoons that I found funny. I hope you enjoy them.
Happy Holidays to you and yours.
Wednesday, November 19, 2008
What is Land Development Consulting?
Many people ask what I do for a living when I meet them as I am sure happens to you. I tell them I am a land development consultant which results in a puzzled look followed by a "huh?".
I briefly explain my background in civil engineering, planning and development to them and I tell them that I use my experience to help those less familiar with the development process. This leads to a sigh of relief from my new friend and a comment such as "oh, so you are a builder?" or "oh, so you are an engineer?".
Okay, yes, I have done both of those things but I offer so much more! More time with your family, more money in the bank and more neighbors happy to see you. Let me explain it this way; my son loves to turn all of the lights on in our house but cannot remember to turn them off. We are trying to teach him to turn lights off when you are not in the room. Much of the time he forgets to turn the lights off even though we remind him all of the time. We have implemented a new strategy in our house to help him remember to turn the lights off - we charge him a quarter for every light he leaves on! We explained to him that electricity costs money and since we are getting charged, he is going to get charged. A few nights ago we took two crisp dollar bills from his piggy bank to pay for the eight lights he had left on up stairs. To say he was upset would be an understatement. He did not want to see his money leave his bank. I am sure it will happen again since he is only six years old, but let's just say he has not left a light on since then and he has even reminded us to shape up!
The purpose of sharing a personal story with you is to convey the point that until something costs YOU money, it really is not very important. A developer will hire an attorney, an engineer and a planner and assume these professionals will tell them all they need to know for a successful project. You have to admit it makes sense. The problem is there are many ways to spend money when developing a project. There are many ways to lose money on a project. Who does it hurt in the long run? The attorney? The engineer? The planner? NO! It is the developer that pays.
What is the incentive for any of these professionals to learn how to not cost you money? A very good (and rare) professional may advise you on a subject within their specific area of expertise such as a title issue, a drainage issue or a zoning issue, but which one is going to warn you (before it is to late) the neighbors will fight the project if you do or don't do something? Which one will tell you why you should avoid asking for too much density in a rezone case? Which one will explain how the timing of a project can mean huge savings?
A land development consultant has been "there" and has spent their own money on unnecessary issues at the direction of a "professional" They have had situations where they were told "don't worry about it" and it cost months of delay at a cost of $25,000 per month. A land development consultant has watched as one professional after another has said "they have to approve this" and then seen the project denied approval.
Can you imagine a football team without a quarterback? There is a lot of talent on the field but without a leader, someone to call the shots, the talent is misused or underutilized. At worst, a land development consultant is an extra layer of review and additional costs. What is so bad about an extra layer of review from within the team? While money is always tight, is an extra $30,000 in land development consulting fees on a $12 million project significant? If that $30,000 in "extra fees" saved you three months of interest carry would it be worth it? You bet. I am here to help those in the development industry and those serving the industry such as banks and investors. Are you unsure if you need my help? Give me a call or email and tell me what you are thinking of doing and I will give you an answer on the spot - no strings attached.
Why make mistakes that can be avoided?
Monday, November 3, 2008
Back in the saddle again
I just got back from the Urban Land Institute Fall Meeting in Miami Beach. It was a very informative week with just about every real estate topic covered in multiple programs.
The three items I found most interesting are:
1) The new stimulus package being talked about in congress will be different this time with no checks going to taxpayers. Instead a hundred or so billion dollars will be offered to the states to speed up the funding of new infrastructure projects. The catch is in order for states to get the money, they will have to match all or a portion of the funds. No match, no funds!
2) It does not matter who is elected President, taxes will have to go up to repay all of the spending our country has been doing since the beginning of the Iraq war.
3) The bad news is the recession will last 12-18 months. The good news is we are about a year into the recession and improvements in our economy's outlook should be clear around next fall.
This financial mess we find ourselves in will lead to structural changes in lending for any type of real estate transaction. What has not changed is our country and the world is getting older. The world is also growing in terms of population. More people means more demand for rooftops. Here in the U.S. I learned we built about 1.2 million too many homes from 2004-2007. Based upon customary absorption models, the U.S. should fill those homes with new immigrants, college graduates and other new households over the next 12-18 months. Keep in mind the absorption rate I just mentioned will be an average across the nation so in some places like Lee County, Florida there is more like a 3 or 4 year supply of vacant homes while in other places (say Texas) there is a shortage of homes.
I do agree with both presidential candidates, our best days are still in front of us. Things will get better, is just not be better by tomorrow.
So that leaves us with a real estate market that appears to be on life support. Going forward, everything old will be new again.
Remember due diligence? Hey knowing what you are buying is cool again! Fundamentals matter! It feels good to be back in the saddle again. My comfort zone is to look at a deal without rushing, crunch the numbers, lower my expected selling price and raise my carry costs then crunch the numbers again. When the analysis shows my conservative numbers still make sense I feel like I am back my horse and riding high. The bucking bull is more exciting, but also much more dangerous.
I personally prefer the old fashioned way of real estate investing where fundamentals are everything and just like a horse, if I take care of it, it will take care of me. Happy Trails to you my friend!
The three items I found most interesting are:
1) The new stimulus package being talked about in congress will be different this time with no checks going to taxpayers. Instead a hundred or so billion dollars will be offered to the states to speed up the funding of new infrastructure projects. The catch is in order for states to get the money, they will have to match all or a portion of the funds. No match, no funds!
2) It does not matter who is elected President, taxes will have to go up to repay all of the spending our country has been doing since the beginning of the Iraq war.
3) The bad news is the recession will last 12-18 months. The good news is we are about a year into the recession and improvements in our economy's outlook should be clear around next fall.
This financial mess we find ourselves in will lead to structural changes in lending for any type of real estate transaction. What has not changed is our country and the world is getting older. The world is also growing in terms of population. More people means more demand for rooftops. Here in the U.S. I learned we built about 1.2 million too many homes from 2004-2007. Based upon customary absorption models, the U.S. should fill those homes with new immigrants, college graduates and other new households over the next 12-18 months. Keep in mind the absorption rate I just mentioned will be an average across the nation so in some places like Lee County, Florida there is more like a 3 or 4 year supply of vacant homes while in other places (say Texas) there is a shortage of homes.
I do agree with both presidential candidates, our best days are still in front of us. Things will get better, is just not be better by tomorrow.
So that leaves us with a real estate market that appears to be on life support. Going forward, everything old will be new again.
Remember due diligence? Hey knowing what you are buying is cool again! Fundamentals matter! It feels good to be back in the saddle again. My comfort zone is to look at a deal without rushing, crunch the numbers, lower my expected selling price and raise my carry costs then crunch the numbers again. When the analysis shows my conservative numbers still make sense I feel like I am back my horse and riding high. The bucking bull is more exciting, but also much more dangerous.
I personally prefer the old fashioned way of real estate investing where fundamentals are everything and just like a horse, if I take care of it, it will take care of me. Happy Trails to you my friend!
Thursday, October 16, 2008
Repost: Recession: What it is and what it is not
I decided to repost an oldie but goodie from several months ago considering our current market and my new subscribers.
Enjoy. -Dave
Recession: What it is and what it is not
Recently a reader of this blog asked me what causes a recession.
The definition is pretty easy; namely a recession is when our economic growth is negative for six consecutive months. The actual cause of a recession is, in my opinion, fear.
Many people and companies are fearful right now. They are afraid of losing their jobs, they are afraid of losing customers and they are afraid things will not get better. Deep inside, we know things are constantly changing. Why it was just yesterday things were booming and many thought that would never end too.
Something I want to point out is the word "recession" is associated with "bad" economic times; yet, the definition is simply our growth has slowed down or declined slightly. That does not sound so bad does it? Here is where I think I may be able to shed some light on why the reader asked the original question. On a personal level things do not look good right now. Many have lost jobs or have more than one friend that has lot a job. Everyday we hear about a friend or friend of a friend that has lost their house to foreclosure. Gas costs more. Food costs more. Heck almost everything costs more but we are not making more money. Budgets are squeezed and folks are learning to get by with far less than we are accustomed to having.
When 25% of our population are experiencing what I just described they stop spending on anything but the necessities (the money they used to spend is called discretionary money). When they stop spending on crazy indulgences like eating out (at McDonalds), buying clothes (at Target) and entertainment (going to the movies twice a year) our economy feels it in terms of reduced earnings on Wall Street. When that happens we start to hear on the nightly news about how our economy is slipping into a decline. The news of a decline reinforces the notion that we are in economic trouble and even more of the population cuts back on spending. This reduced spending trickles down to wait staff at restaurants, car dealerships, movie theaters and even Wal-Mart.When will it end??
It is going to take some time for people to feel better about their lives and begin spending again. As I have mentioned in a previous blog, listen to your friends and neighbors. When they are eating out again, going to the movies and buying new cars you will see light at the end of the tunnel. One important fact I left out is in order to spend more you not only have to feel better but you need more money to spend. So we do need jobs to be more plentiful and such for incomes to rise to provide the additional cash needed to spend in our economy.
Have you heard the US dollar has lost value against most foreign currencies? While that is bad for people who save (and buy oil from foreign countries) it is good in that Europeans are encouraged to visit our country and spend money as everything here is literally on sale, everything. The infusion of outside spending may be just the shot in the arm we need. On the other hand, I hate simple solutions and so that will not be the only thing needed to push our economic growth into positive territory.
If that explanation helps you understand and feel better I am very happy to be of service. If you are happy right now, you may want to stop reading.For those of you still with me, I have a confession to make; I don't think we are in a recession, but not because I think like the US government idiots who claim inflation is nil and everything is fine.
I think where I live in SW Florida, we are in a depression. And that folks, is a whole lot worse than a recession. When I was a kid (late 70's) there was talk of the country in a recession and I asked my parents what a recession was. I cannot remember the answer but I do remember my follow-up question which is what is the difference between a recession and depression.
My parents told me about two people; one guy did not get a raise and was concerned about losing his job the other guy had lost his job and was about to run out of savings. The first guy was in a recession and the second was in a depression. The funny thing is the two guys were neighbors. My point is this, forget about labels on the economy as they are meaningless. The important thing is how are YOU doing? Are you in a depression? Do whatever you have to to get by. Things will get better in time. You may have to move or change careers. But things will change
Enjoy. -Dave
Recession: What it is and what it is not
Recently a reader of this blog asked me what causes a recession.
The definition is pretty easy; namely a recession is when our economic growth is negative for six consecutive months. The actual cause of a recession is, in my opinion, fear.
Many people and companies are fearful right now. They are afraid of losing their jobs, they are afraid of losing customers and they are afraid things will not get better. Deep inside, we know things are constantly changing. Why it was just yesterday things were booming and many thought that would never end too.
Something I want to point out is the word "recession" is associated with "bad" economic times; yet, the definition is simply our growth has slowed down or declined slightly. That does not sound so bad does it? Here is where I think I may be able to shed some light on why the reader asked the original question. On a personal level things do not look good right now. Many have lost jobs or have more than one friend that has lot a job. Everyday we hear about a friend or friend of a friend that has lost their house to foreclosure. Gas costs more. Food costs more. Heck almost everything costs more but we are not making more money. Budgets are squeezed and folks are learning to get by with far less than we are accustomed to having.
When 25% of our population are experiencing what I just described they stop spending on anything but the necessities (the money they used to spend is called discretionary money). When they stop spending on crazy indulgences like eating out (at McDonalds), buying clothes (at Target) and entertainment (going to the movies twice a year) our economy feels it in terms of reduced earnings on Wall Street. When that happens we start to hear on the nightly news about how our economy is slipping into a decline. The news of a decline reinforces the notion that we are in economic trouble and even more of the population cuts back on spending. This reduced spending trickles down to wait staff at restaurants, car dealerships, movie theaters and even Wal-Mart.When will it end??
It is going to take some time for people to feel better about their lives and begin spending again. As I have mentioned in a previous blog, listen to your friends and neighbors. When they are eating out again, going to the movies and buying new cars you will see light at the end of the tunnel. One important fact I left out is in order to spend more you not only have to feel better but you need more money to spend. So we do need jobs to be more plentiful and such for incomes to rise to provide the additional cash needed to spend in our economy.
Have you heard the US dollar has lost value against most foreign currencies? While that is bad for people who save (and buy oil from foreign countries) it is good in that Europeans are encouraged to visit our country and spend money as everything here is literally on sale, everything. The infusion of outside spending may be just the shot in the arm we need. On the other hand, I hate simple solutions and so that will not be the only thing needed to push our economic growth into positive territory.
If that explanation helps you understand and feel better I am very happy to be of service. If you are happy right now, you may want to stop reading.For those of you still with me, I have a confession to make; I don't think we are in a recession, but not because I think like the US government idiots who claim inflation is nil and everything is fine.
I think where I live in SW Florida, we are in a depression. And that folks, is a whole lot worse than a recession. When I was a kid (late 70's) there was talk of the country in a recession and I asked my parents what a recession was. I cannot remember the answer but I do remember my follow-up question which is what is the difference between a recession and depression.
My parents told me about two people; one guy did not get a raise and was concerned about losing his job the other guy had lost his job and was about to run out of savings. The first guy was in a recession and the second was in a depression. The funny thing is the two guys were neighbors. My point is this, forget about labels on the economy as they are meaningless. The important thing is how are YOU doing? Are you in a depression? Do whatever you have to to get by. Things will get better in time. You may have to move or change careers. But things will change
Friday, October 10, 2008
Knock Knock...is Mr. Market there?
If you have been reading my blog over the last two years you know I am an investor at heart. I like real estate. I like stocks. I like to make money.
Let's be honest with each other, the last month has been full of gut wrenching twists and turns in the stock market and there is no liquidity for investors or developers to buy land or distressed assets. It seems as though even foreign money has left US investment markets.
If you watch the news all you see is everything wrong with the world, financially and otherwise. Remember September 11? Remember when the dow sank to 7600 in 2002? Remember the RTC (the predecessor to the 700B plan we have now)? No doubt about it, things look as bleak as ever.
On the other hand, we are still here right? We are still free citizens and we have our families. I would like you to realize not all is as bad as it appears.
As I write this blog on Friday morning, the dow started the day with a 500 point drop. Sounds like we are going from bad to worse...
Yet, at the same time, some banking stocks are RISING. Imagine that, some financial stocks are being purchased when EVERYONE knows the banking system is the last place you want to be right now.
Again, not everything you see and hear is as it appears. As I read what I have written I realize I do not have anything of substance to point to, other than the past 100 years, that proves things will get better. An investor named Benjamin Graham proposed a philosophy about investing that he called "Mr. Market". I want to talk about Mr. Market a bit here because I think it helps to put the stock market and the real estate market into perspective. Here is a direct link to a site that talks about Mr. Market in detail (http://www.buffettsecrets.com/mr-market.htm).
Essentially Mr. Market is a crazy fool that shows up on your doorstep every business day to make you an offer for your stocks or other investments. You can choose to listen to him or slam the door in his face. Either way, he will not be offended and will be back tomorrow to make another offer. Some of his offers are insanely high while other offers are incredibly low. Oh, I left out one important fact, Mr. Market is crazy. In fact, you would be wise not to listen to him at all!
Would you go to an insane asylum for advice on investing? Hell no! If you own a quality investment feel free to listen when Mr. Market offers a great price. However, please realize just because Mr. Market is offering you a high price does not mean your investment is worth that much. Sometimes you are better off to sell when the crazy man offers you a price that cannot be justified.
The point I am trying to get across to you is the market IS crazy. Yeah I feel like dirt too when I see one or all of my stocks being traded for less than what I paid for them. I am sure you do too. If you invested in some penny stock(s) you may never see your money back. There are many stocks, thousands of them in fact, that are down because of fear. I bought a stock for 9.30 that pays 1.87 per year in dividends. That stock is now trading at 7. I think it will be bid up in price over time (at least I hope it will) but until that day, I still get a 20% dividend every year.
Take a look yourself. There are great companies that make real money and pay real dividends for crazy (low) prices. At some point soon we will see a bounce off the lows we are seeing this week and surely into next week too. By bounce I do not mean the dow will be at 12,000 by Halloween but the market will recover. There will be some catalyst (I have no idea what it will be) causing the market to move back up.
Remember, Mr. Market is crazy and should not be consulted on value issues. Keep your chin up, try to stay positive and spend some time with you family...unless of course Mr. Market is a member of your family...
Let's be honest with each other, the last month has been full of gut wrenching twists and turns in the stock market and there is no liquidity for investors or developers to buy land or distressed assets. It seems as though even foreign money has left US investment markets.
If you watch the news all you see is everything wrong with the world, financially and otherwise. Remember September 11? Remember when the dow sank to 7600 in 2002? Remember the RTC (the predecessor to the 700B plan we have now)? No doubt about it, things look as bleak as ever.
On the other hand, we are still here right? We are still free citizens and we have our families. I would like you to realize not all is as bad as it appears.
As I write this blog on Friday morning, the dow started the day with a 500 point drop. Sounds like we are going from bad to worse...
Yet, at the same time, some banking stocks are RISING. Imagine that, some financial stocks are being purchased when EVERYONE knows the banking system is the last place you want to be right now.
Again, not everything you see and hear is as it appears. As I read what I have written I realize I do not have anything of substance to point to, other than the past 100 years, that proves things will get better. An investor named Benjamin Graham proposed a philosophy about investing that he called "Mr. Market". I want to talk about Mr. Market a bit here because I think it helps to put the stock market and the real estate market into perspective. Here is a direct link to a site that talks about Mr. Market in detail (http://www.buffettsecrets.com/mr-market.htm).
Essentially Mr. Market is a crazy fool that shows up on your doorstep every business day to make you an offer for your stocks or other investments. You can choose to listen to him or slam the door in his face. Either way, he will not be offended and will be back tomorrow to make another offer. Some of his offers are insanely high while other offers are incredibly low. Oh, I left out one important fact, Mr. Market is crazy. In fact, you would be wise not to listen to him at all!
Would you go to an insane asylum for advice on investing? Hell no! If you own a quality investment feel free to listen when Mr. Market offers a great price. However, please realize just because Mr. Market is offering you a high price does not mean your investment is worth that much. Sometimes you are better off to sell when the crazy man offers you a price that cannot be justified.
The point I am trying to get across to you is the market IS crazy. Yeah I feel like dirt too when I see one or all of my stocks being traded for less than what I paid for them. I am sure you do too. If you invested in some penny stock(s) you may never see your money back. There are many stocks, thousands of them in fact, that are down because of fear. I bought a stock for 9.30 that pays 1.87 per year in dividends. That stock is now trading at 7. I think it will be bid up in price over time (at least I hope it will) but until that day, I still get a 20% dividend every year.
Take a look yourself. There are great companies that make real money and pay real dividends for crazy (low) prices. At some point soon we will see a bounce off the lows we are seeing this week and surely into next week too. By bounce I do not mean the dow will be at 12,000 by Halloween but the market will recover. There will be some catalyst (I have no idea what it will be) causing the market to move back up.
Remember, Mr. Market is crazy and should not be consulted on value issues. Keep your chin up, try to stay positive and spend some time with you family...unless of course Mr. Market is a member of your family...
Monday, August 4, 2008
Which Way is Up?
The real estate market is a funny thing. Real Estate is similar to the stock market in that you have "value" plays, "growth" plays and "momentum" plays. One big difference is in the stock market there are a lot of buyers and sellers for every stock making the "investments" easy to liquidate (convert to cash) whereas in the real estate market there is just one seller and one buyer for each property making the "investment" not very easy to liquidate.
Today, all over America, there are many sellers and few buyers. Let's face it, "Cash is King". Another saying I have heard is the Golden Rule - "those who have the gold make the rules". Home and general real estate prices will have decline until there are an equal number of buyers and sellers a point which is known as either a balanced market or market equilibrium. Everyone wants to know when this balance will occur. As you have heard before, real estate markets are local so every area will have a different answer to that question.
In Michigan with many lay-offs and still more future lay-offs there are fewer buyers than sellers and it is conceivable that imbalance will continue for years, many years. Here in sunny Florida, our job market is not too healthy either but we do have tourism going for us. While we too have fewer buyers than sellers, I think we will recover a little faster than other areas of the country.
Last week I attended an Urban Land Institute program called Market Trends where the speaker was my good friend Mike Timmerman. Mike is a smart guy. Gutsy too. Mike said in 2005 things were "pricey" but still selling. In 2006 he said things were slowing down and could even slow down a whole lot more. In 2007 Mike said in hind sight we saw a peak in 2005 and we were (in June 2007) about 18 months into a predicted 36 month cycle. There is no science to predict how long a market will take to recover other than looking at past cycles and comparing them to the features of the present cycle. I want to be clear- Mike did not give a date and time when the market would be "fully recovered". However, he did say he thought this down-turn would last longer than more recent times such as the 1991-93 market. As I said, Gutsy. Well it turns out Mike may have called it just right. We won't know for another year or so but he is looking smarter and smarter as the months click by.
So, which way is up? I think there is a lot of anxiety with most living breathing people out there. There is the pending Presidential Election, more foreclosures are hitting the market every day, homes are selling for less than it cost to build them let alone what you paid for the same house two years ago. Let's face it, there is just not a lot of good news right now. So the immediate answer to the question is DOWN. As (asking) prices fall, more buyers will enter the existing home market and remove the deeply discounted homes from the listed inventory. As inventory declines, the number of sales will eventually match demand and then we will start to see slight appreciation...eventually. While I hate to see homes on my street sell for less than it would cost to build today, at least they are selling and that is the key to prices heading up.
I have a quick story for you about someone that called to sell me a lot near my office. The lot is just beautiful and is in a great location. In 2005 the lot would have sold for $300k. Today they are asking $85k and wanted to know if I had an interest. I passed on the opportunity and the reason I gave them was sure it is a good price compared to 2005 but with so many existing homes on the market for less than replacement cost, when would someone want to buy the lot from me to build a new home AND pay me enough to make a profit? The answer is nobody knows, so I passed. At $40k I would take the risk. At $85k I just cannot. If they reduce the price I may buy it. Until then at least I get interest on my cash.
Today, all over America, there are many sellers and few buyers. Let's face it, "Cash is King". Another saying I have heard is the Golden Rule - "those who have the gold make the rules". Home and general real estate prices will have decline until there are an equal number of buyers and sellers a point which is known as either a balanced market or market equilibrium. Everyone wants to know when this balance will occur. As you have heard before, real estate markets are local so every area will have a different answer to that question.
In Michigan with many lay-offs and still more future lay-offs there are fewer buyers than sellers and it is conceivable that imbalance will continue for years, many years. Here in sunny Florida, our job market is not too healthy either but we do have tourism going for us. While we too have fewer buyers than sellers, I think we will recover a little faster than other areas of the country.
Last week I attended an Urban Land Institute program called Market Trends where the speaker was my good friend Mike Timmerman. Mike is a smart guy. Gutsy too. Mike said in 2005 things were "pricey" but still selling. In 2006 he said things were slowing down and could even slow down a whole lot more. In 2007 Mike said in hind sight we saw a peak in 2005 and we were (in June 2007) about 18 months into a predicted 36 month cycle. There is no science to predict how long a market will take to recover other than looking at past cycles and comparing them to the features of the present cycle. I want to be clear- Mike did not give a date and time when the market would be "fully recovered". However, he did say he thought this down-turn would last longer than more recent times such as the 1991-93 market. As I said, Gutsy. Well it turns out Mike may have called it just right. We won't know for another year or so but he is looking smarter and smarter as the months click by.
So, which way is up? I think there is a lot of anxiety with most living breathing people out there. There is the pending Presidential Election, more foreclosures are hitting the market every day, homes are selling for less than it cost to build them let alone what you paid for the same house two years ago. Let's face it, there is just not a lot of good news right now. So the immediate answer to the question is DOWN. As (asking) prices fall, more buyers will enter the existing home market and remove the deeply discounted homes from the listed inventory. As inventory declines, the number of sales will eventually match demand and then we will start to see slight appreciation...eventually. While I hate to see homes on my street sell for less than it would cost to build today, at least they are selling and that is the key to prices heading up.
I have a quick story for you about someone that called to sell me a lot near my office. The lot is just beautiful and is in a great location. In 2005 the lot would have sold for $300k. Today they are asking $85k and wanted to know if I had an interest. I passed on the opportunity and the reason I gave them was sure it is a good price compared to 2005 but with so many existing homes on the market for less than replacement cost, when would someone want to buy the lot from me to build a new home AND pay me enough to make a profit? The answer is nobody knows, so I passed. At $40k I would take the risk. At $85k I just cannot. If they reduce the price I may buy it. Until then at least I get interest on my cash.
Friday, July 25, 2008
Top 10 reasons how you know it's time to buy
10. Loan officers are going door to door with applications like girl scouts selling cookies
9. Your 10 year old is thinking about buying her own place and moving out
8. Houses are listed as buy one get one free
7. Poor Iraqi's are buying are buying vacation homes in the U.S.
6. Your stimulus check exceeds your 20% down payment
5. Owning a home is cheaper than living in your car
4. Your loan papers say "pay us when you have the money"
3. There are more "for sale" signs on the street than there are houses
2. You can buy a McMansion for a Happy Meal price
1. Even Ed McMahon can afford to buy
9. Your 10 year old is thinking about buying her own place and moving out
8. Houses are listed as buy one get one free
7. Poor Iraqi's are buying are buying vacation homes in the U.S.
6. Your stimulus check exceeds your 20% down payment
5. Owning a home is cheaper than living in your car
4. Your loan papers say "pay us when you have the money"
3. There are more "for sale" signs on the street than there are houses
2. You can buy a McMansion for a Happy Meal price
1. Even Ed McMahon can afford to buy
Monday, June 30, 2008
Recession: What it is and what it is not
Recently a reader of this blog asked me what causes a recession. The definition is pretty easy; namely a recession is when our economic growth is negative for six consecutive months. The actual cause of a recession is, in my opinion, fear. Many people and companies are fearful right now. They are afraid of losing their jobs, they are afraid of losing customers and they are afraid things will not get better.
Deep inside, we know things are constantly changing. Why it was just yesterday things were booming and many thought that would never end too. Something I want to point out is the word "recession" is associated with "bad" economic times; yet, the definition is simply our growth has slowed down or declined slightly. That does not sound so bad does it? Here is where I think I may be able to shed some light on why the reader asked the original question.
On a personal level things do not look good right now. Many have lost jobs or have more than one friend that has lot a job. Everyday we hear about a friend or friend of a friend that has lost their house to foreclosure. Gas costs more. Food costs more. Heck almost everything costs more but we are not making more money. Budgets are squeezed and folks are learning to get by with far less than we are accustomed to having. When 25% of our population are experiencing what I just described they stop spending on anything but the necessities (the money they used to spend is called discretionary money). When they stop spending on crazy indulgences like eating out (at McDonalds), buying clothes (at Target) and entertainment (going to the movies twice a year) our economy feels it in terms of reduced earnings on Wall Street. When that happens we start to hear on the nightly news about how our economy is slipping into a decline. The news of a decline reinforces the notion that we are in economic trouble and even more of the population cuts back on spending. This reduced spending trickles down to wait staff at restaurants, car dealerships, movie theaters and even Wal-Mart.
When will it end?? It is going to take some time for people to feel better about their lives and begin spending again. As I have mentioned in a previous blog, listen to your friends and neighbors. When they are eating out again, going to the movies and buying new cars you will see light at the end of the tunnel. One important fact I left out is in order to spend more you not only have to feel better but you need more money to spend. So we do need jobs to be more plentiful and such for incomes to rise to provide the additional cash needed to spend in our economy.
Have you heard the US dollar has lost value against most foreign currencies? While that is bad for people who save (and buy oil from foreign countries) it is good in that Europeans are encouraged to visit our country and spend money as everything here is literally on sale, everything. The infusion of outside spending may be just the shot in the arm we need. On the other hand, I hate simple solutions and so that will not be the only thing needed to push our economic growth into positive territory. If that explanation helps you understand and feel better I am very happy to be of service. If you are happy right now, you may want to stop reading.
For those of you still with me, I have a confession to make; I don't think we are in a recession, but not because I think like the US government idiots who claim inflation is nil and everything is fine. I think where I live in SW Florida, we are in a depression. And that folks, is a whole lot worse than a recession. When I was a kid (late 70's) there was talk of the country in a recession and I asked my parents what a recession was. I cannot remember the answer but I do remember my follow-up question which is what is the difference between a recession and depression. My parents told me about two people; one guy did not get a raise and was concerned about losing his job the other guy had lost his job and was about to run out of savings. The first guy was in a recession and the second was in a depression. The funny thing is the two guys were neighbors.
My point is this, forget about labels on the economy as they are meaningless. The important thing is how are YOU doing? Are you in a depression? Do whatever you have to to get by. Things will get better in time. You may have to move or change careers. But things will change
Deep inside, we know things are constantly changing. Why it was just yesterday things were booming and many thought that would never end too. Something I want to point out is the word "recession" is associated with "bad" economic times; yet, the definition is simply our growth has slowed down or declined slightly. That does not sound so bad does it? Here is where I think I may be able to shed some light on why the reader asked the original question.
On a personal level things do not look good right now. Many have lost jobs or have more than one friend that has lot a job. Everyday we hear about a friend or friend of a friend that has lost their house to foreclosure. Gas costs more. Food costs more. Heck almost everything costs more but we are not making more money. Budgets are squeezed and folks are learning to get by with far less than we are accustomed to having. When 25% of our population are experiencing what I just described they stop spending on anything but the necessities (the money they used to spend is called discretionary money). When they stop spending on crazy indulgences like eating out (at McDonalds), buying clothes (at Target) and entertainment (going to the movies twice a year) our economy feels it in terms of reduced earnings on Wall Street. When that happens we start to hear on the nightly news about how our economy is slipping into a decline. The news of a decline reinforces the notion that we are in economic trouble and even more of the population cuts back on spending. This reduced spending trickles down to wait staff at restaurants, car dealerships, movie theaters and even Wal-Mart.
When will it end?? It is going to take some time for people to feel better about their lives and begin spending again. As I have mentioned in a previous blog, listen to your friends and neighbors. When they are eating out again, going to the movies and buying new cars you will see light at the end of the tunnel. One important fact I left out is in order to spend more you not only have to feel better but you need more money to spend. So we do need jobs to be more plentiful and such for incomes to rise to provide the additional cash needed to spend in our economy.
Have you heard the US dollar has lost value against most foreign currencies? While that is bad for people who save (and buy oil from foreign countries) it is good in that Europeans are encouraged to visit our country and spend money as everything here is literally on sale, everything. The infusion of outside spending may be just the shot in the arm we need. On the other hand, I hate simple solutions and so that will not be the only thing needed to push our economic growth into positive territory. If that explanation helps you understand and feel better I am very happy to be of service. If you are happy right now, you may want to stop reading.
For those of you still with me, I have a confession to make; I don't think we are in a recession, but not because I think like the US government idiots who claim inflation is nil and everything is fine. I think where I live in SW Florida, we are in a depression. And that folks, is a whole lot worse than a recession. When I was a kid (late 70's) there was talk of the country in a recession and I asked my parents what a recession was. I cannot remember the answer but I do remember my follow-up question which is what is the difference between a recession and depression. My parents told me about two people; one guy did not get a raise and was concerned about losing his job the other guy had lost his job and was about to run out of savings. The first guy was in a recession and the second was in a depression. The funny thing is the two guys were neighbors.
My point is this, forget about labels on the economy as they are meaningless. The important thing is how are YOU doing? Are you in a depression? Do whatever you have to to get by. Things will get better in time. You may have to move or change careers. But things will change
Sunday, June 8, 2008
Let's Make Hay While The Sun Shines
Remember when everyone was making money hand over fist in the real estate market? Boy the sun was shining then. Now that it is raining cats and dogs in the real estate market, I believe the sun is shining for investors. Sorry to mix my metaphors. I will not go out on a limb and say this is the perfect time to buy because "perfect" means different things to different people. Some investors are looking for income producing properties, and others are looking for an end return on their investment.
With that caveat behind me, I will say this; it is the perfect time to look for/at whatever type of property appeals to you. The market will be flat for some time, so many will want to wait for prices to move up before they buy. I respect that. However, the best properties will be purchased and therefore off of the market first. As prices rise it will be the inferior properties that will be left to choose from. The sellers and developers I am talking to are increasingly willing to deal if you have cash and a quick close. We are emerging from the winter of real estate market cycle and headed into spring. Spring is the time to sew our seed for future harvest. As investors we take on risk, that is just part of the job. That does not mean we need to take on unlimited risk. We can measure risk and take steps to mitigate for present or future risk. If you are concerned that you may buy something too soon, then you may want to take on one or more partners to share that risk with you. Another way to mitigate risk is to only buy when the investment pays for itself in terms of cashflow. The way to make money going forward is to NOT take large risks but a lot of calculated risks.
The market of 2005 is gone forever. It was too good to last and was therefore destined to end. There is nothing wrong with assets that do not double in value every year or two. While the stock market has been trading sideways for the last 6 months I have been buying stocks and selling options against those stocks to lock in a 25% return. In some cases I made 25% and in others I only made 25% while the stock doubled. My point is this; if you protect your principal with risk mitigation, there is nothing wrong with double digit gains. So, while it is raining cats and dogs, let's make hay while the sun shines. I am telling you the future is so bright we will need to wear shades.
With that caveat behind me, I will say this; it is the perfect time to look for/at whatever type of property appeals to you. The market will be flat for some time, so many will want to wait for prices to move up before they buy. I respect that. However, the best properties will be purchased and therefore off of the market first. As prices rise it will be the inferior properties that will be left to choose from. The sellers and developers I am talking to are increasingly willing to deal if you have cash and a quick close. We are emerging from the winter of real estate market cycle and headed into spring. Spring is the time to sew our seed for future harvest. As investors we take on risk, that is just part of the job. That does not mean we need to take on unlimited risk. We can measure risk and take steps to mitigate for present or future risk. If you are concerned that you may buy something too soon, then you may want to take on one or more partners to share that risk with you. Another way to mitigate risk is to only buy when the investment pays for itself in terms of cashflow. The way to make money going forward is to NOT take large risks but a lot of calculated risks.
The market of 2005 is gone forever. It was too good to last and was therefore destined to end. There is nothing wrong with assets that do not double in value every year or two. While the stock market has been trading sideways for the last 6 months I have been buying stocks and selling options against those stocks to lock in a 25% return. In some cases I made 25% and in others I only made 25% while the stock doubled. My point is this; if you protect your principal with risk mitigation, there is nothing wrong with double digit gains. So, while it is raining cats and dogs, let's make hay while the sun shines. I am telling you the future is so bright we will need to wear shades.
Thursday, May 1, 2008
Friends, Romans and Countrymen, Lend Me Your Ears...
Dear reader, I have started a new company called Keystone Development Advisors, LLC to share and provide access to our development expertise for investors and lenders.
We have started a new blog at this address
http://keystonellc.blogspot.com/. This will be my last entry at http://keystonecompaniesllc.blogspot.com/.
I look forward to serving the investment and lending community with integrity and expertise. While there are presently a multitude of consultants available with varying degrees of expertise, few can offer the personal experience I have making my own money and getting beat-up in public hearings.
Some may ask, "well then, why don't you just do your own (investing) thing if you are so good at it". To that I say I do invest. However, unlike the Easter Bunny I do not like to put all of my eggs in one basket, a lot but not all. Some of the deals I come across are in the 20 million to 300 million dollar range. Those have always been "big" deals but especially now with tight lending standards and an uncertain economy. Many consultants also are very specialized. They only focus on finances or construction or getting a certain type of permit. I have done all of the above with my own money at risk. I know how every "unexpected" zig and zag in the entitlement, permitting and development affects the bottom line. I am a risk taker yet conservative. I believe risk can be measured and mitigated or a deal is not worth doing. I am educated yet have street smarts. I know the fastest way to double your money is to fold it over and put it back in your pocket. How many "consultants" match that?
We have started a new blog at this address
http://keystonellc.blogspot.com/. This will be my last entry at http://keystonecompaniesllc.blogspot.com/.
I look forward to serving the investment and lending community with integrity and expertise. While there are presently a multitude of consultants available with varying degrees of expertise, few can offer the personal experience I have making my own money and getting beat-up in public hearings.
Some may ask, "well then, why don't you just do your own (investing) thing if you are so good at it". To that I say I do invest. However, unlike the Easter Bunny I do not like to put all of my eggs in one basket, a lot but not all. Some of the deals I come across are in the 20 million to 300 million dollar range. Those have always been "big" deals but especially now with tight lending standards and an uncertain economy. Many consultants also are very specialized. They only focus on finances or construction or getting a certain type of permit. I have done all of the above with my own money at risk. I know how every "unexpected" zig and zag in the entitlement, permitting and development affects the bottom line. I am a risk taker yet conservative. I believe risk can be measured and mitigated or a deal is not worth doing. I am educated yet have street smarts. I know the fastest way to double your money is to fold it over and put it back in your pocket. How many "consultants" match that?
Friday, April 11, 2008
Wednesday, March 19, 2008
David Farmer to Host Program for Urban Land Institute
On Friday March 14, 2008 I hosted a program for ULI called Deal or No Deal. The purpose of the program was to inform the standing room only crowd about land development potential and how to identify troubled properties before spending money on them. I began the program with some background on legal cases that give weight to planning concepts such as compatibility, concurrency and environmental planning. After covering these principles, we went over the importance of compatible development and how to minimize externalizing impacts to surrounding properties. I offered specific suggestions on how to work with surrounding property owners and what can be done to facilitate a responsible development. Then we discussed concurrency and I used Disney World as an example of this legal requirement. Can you imagine driving to WDW, parking and seeing the wonderful attractions in the distance yet not having a way to get from the parking lot to park itself? I know the example is absurd from a business point of view but it is a good illustration of why it is so important to have infrastructure in place when there is demand for it. Following concurrency I covered environmental issues related to development such as endangered species mitigation, wetland mitigation and water quality requirements for SW Florida.At the end of the program there were many questions so I spent over 30 minutes answering them. It was so much fun talking about what I know and do best. It was also nice to see people with light bulbs over their heads as I covered a subject and it "clicked" with them. I am looking forward to another program as soon as I can find a way to get the word out
Friday, February 29, 2008
Hope for the best, Plan for the worst
It seems every news report I watch on TV, hear on NPR or read on-line conflicts with the one before. Last night I was listening to a report that said a survey of the nations economists expected our GDP to be revised upward (as in our economic growth was better than expected) while a survey of everyday folks like you and me felt the numbers would be revised downward. I recently heard an economist representing a large bank stating we were not in a recession and we were not headed for a a recession. Then the next day Fed Chief Bernanke says it looks like we are most certainly headed into a recession. Then this morning I see Bernanke is predicting certain failure for some banks before this economic "lull" (my word not his) is over. Well, shock and awe and bake me a biscuit.
What I hate about economic news is it hardly matches what is going on locally. You know how USA Today has the nations weather each day? It is a good general guide..."cold in the north and hot in the south", but it does not say much about where you are or I am does it? Well I am not an economist so I do not pretend to know what is going on nationally. From where I am sitting things look bad and they are going to get worse before they get better. Let me narrow that down a bit for you. Here in SW Florida we have about 1000 foreclosures on the books with another 10,000 or so in the pipeline ready to hit the market by August. Miami has a 39 months supply of condos listed with another 19,000 to be completed and added to the saturated market this year!! So things are going to get worse before they get better. How much worse and for how long? I don't believe in silver bullets or magic cures but as bad as things are in the economy and real estate market they will get better, they always do. On the bright side, this is a fantastic time to buy that second home you always wanted (assuming you still have that job you have always wanted to quit).Instead of trying to predict a date or number of months when thing will turn around lets focus on what has to happen to bring about a change economically both locally (where ever you are) and nationally. First, many, many people have to look at real estate prices and go "wow, I better buy now while the selection is good and prices are low". Next, people have to feel good about where they are going in life. Listen to your friends and try to figure out how they feel about their future. As people feel better, they will begin to spend and invest again. This will lead to growth and consumption. This will spur a slight increase in demand for housing. Eventually the supply will be short and new homes will have to be built. I know I am not going to win a Nobel Prize for that logic but I like it better than a random date in the future based upon some absurd calculation. My investor (stocks and real estate) friends tell me a bottom is near after multiple waves of drastic price cutting has happened (the consensus is 3 waves of said discounting) and sales prices are a lot less than replacement costs. I am not even sure if we are through the first wave yet. Prices still seem to be too high, that is, higher than replacement costs. With that said, often the proverbial baby is thrown out with the bathwater and great "too good to be true" deals arrive on the market out of fear or some other need for immediate liquidation. It takes guts but these are the gems that must be mined in turbulent times. I hope for the best for our country and my local communtiy. As of now I am planning for the worst and keeping my eyes peeled for that gem deal that got thrown out with the trash
What I hate about economic news is it hardly matches what is going on locally. You know how USA Today has the nations weather each day? It is a good general guide..."cold in the north and hot in the south", but it does not say much about where you are or I am does it? Well I am not an economist so I do not pretend to know what is going on nationally. From where I am sitting things look bad and they are going to get worse before they get better. Let me narrow that down a bit for you. Here in SW Florida we have about 1000 foreclosures on the books with another 10,000 or so in the pipeline ready to hit the market by August. Miami has a 39 months supply of condos listed with another 19,000 to be completed and added to the saturated market this year!! So things are going to get worse before they get better. How much worse and for how long? I don't believe in silver bullets or magic cures but as bad as things are in the economy and real estate market they will get better, they always do. On the bright side, this is a fantastic time to buy that second home you always wanted (assuming you still have that job you have always wanted to quit).Instead of trying to predict a date or number of months when thing will turn around lets focus on what has to happen to bring about a change economically both locally (where ever you are) and nationally. First, many, many people have to look at real estate prices and go "wow, I better buy now while the selection is good and prices are low". Next, people have to feel good about where they are going in life. Listen to your friends and try to figure out how they feel about their future. As people feel better, they will begin to spend and invest again. This will lead to growth and consumption. This will spur a slight increase in demand for housing. Eventually the supply will be short and new homes will have to be built. I know I am not going to win a Nobel Prize for that logic but I like it better than a random date in the future based upon some absurd calculation. My investor (stocks and real estate) friends tell me a bottom is near after multiple waves of drastic price cutting has happened (the consensus is 3 waves of said discounting) and sales prices are a lot less than replacement costs. I am not even sure if we are through the first wave yet. Prices still seem to be too high, that is, higher than replacement costs. With that said, often the proverbial baby is thrown out with the bathwater and great "too good to be true" deals arrive on the market out of fear or some other need for immediate liquidation. It takes guts but these are the gems that must be mined in turbulent times. I hope for the best for our country and my local communtiy. As of now I am planning for the worst and keeping my eyes peeled for that gem deal that got thrown out with the trash
Monday, February 11, 2008
Wild, Wild West
The real estate market is uneven and unpredictable at best (in my opinion). I was astonished to learn the NAHB "suggests" the bottom of the housing glut will be here this summer. I am not saying I disagree with them in general terms, I just think when you make a statement like that you need to qualify what market you are talking about. I think they mean the "average" market. I don't know about you but I don't give a darn about anyone else's market except the one's that I am investing in! Where I live in Naples, Florida, I agree and believe the worst will be behind us by the end of summer. But just a stone's throw from here, namely Fort Myers, their bottom is a year or two off in my humble opinion. The Fort Myers market has about 3 years of supply at current buying rates. Maybe the Fed's new interest cut and the Govt's tax rebate will shorten that time but I doubt it. Speaking of the Fed and my Wild Wild West title, the reduction in interest rates should lubricate the real estate market much like alcohol in a saloon on Friday night. I am not predicting a return to those heady days (daze) of '04 and '05 where things were completely out of whack in terms of real value versus prices paid. Let's face it, cheep money (for qualified credit risks) will aid (as in speed up) in the absorption of homes for sale. Since this is my column, I will get away from "just the facts mam" and insert my biased opinions for a moment; cheap money is not what this country needs right now as inflation is rampant and cheap money today will only delay the pain we must go through until later...plus interest of course. Heck, the "party" has not even started and I am dreading the hang-over. Okay, enough of my Saloon analogy.Lately, I am being invited to many meetings with developers and investors that have "deals" to pitch/sell to me or investors I know. There are so many "deals" out there it can be quite a challenge to keep them all strait. Of course one man's deal is another man's curse. The main keys to most of these deals is; how much cash do you have and how long can you hang on. The answer to these two questions is the difference between making money and losing money. The difference between making money and making a lot of money is duration of the holding period. What I am trying to do is sift through the deals as they are presented and try to determine the quality of the land in terms of location and proximity to essential services. Just in case I seem to be rambling on with out making sense, what I am trying to say is one acre in town is worth more than a hundred acres in the Everglades both in terms of value and in terms of demand for the property.Deals in good, and I mean really good, locations that have flexibility of use and something unique about them will return your money the fastest. Poor quality land, as in way out there, and the allowable uses are just like everyone else's will take a long time for you to see a profit. So in these days of reminiscent of the Wild Wild West try to look at each deal for quality and not on some else's "projected profit". As always, quality deals are hard to find and they often may not look like a deal, in terms of price, at first glance. If you are not sure about the price, look back to 2002 prices and use that as a rough guide to determine value, keeping in mind that you may need to compare the subject property to a better location to get make up for growth that has improved the quality of many properties since 2002.Keep your powder dry and your eyes peeled. Bang-Bang.
Wednesday, January 16, 2008
Gold Up, Dollar Down, Inflation out the Wazoo
What the heck is the Fed Chair thinking? I know, I know, keep the country out of a recession. Yeah, right, like that is going to happen. The good news is my gold stock is way up. The bad news is so is my Canadian bacon. This country is in so much trouble from the Cheap Credit Party that the only real solution is to turn on the printing presses and print our way out of "real" debt. I knew the hang-over (from that credit party) was going to hurt but man, now to add insult to injury my savings is worth a lot less this year than it was in just 2005.Thanks Federal Reserve Geniuses. I appreciate being penalized for actually (shock and awe) having a savings account instead of being 10 bazillion in debt. Don't get me wrong I have a mortgage just like everyone else but I did not go out and buy 10 Miami condos on margin to rack up my debt. The only silver lining is our real estate is now comparatively cheap to foreign investors and tourists.Inflation is now getting ready to leave the earth's orbit ala 1970's style. I can't wait to order my first $100 cup of coffee. Okay, enough complaining and feeling sorry for my country, now on to what are we going to do from here.The only way I know how to preserve buying power (wealth) is to own hard assets such as gold, real estate or some other object that does not deteriorate over time. Gold is sky high because the dollar is in the toilet not because it has "gone up in value". The price of gold has gone up, not the value. If you don't believe me check out the price of gold in Euros. Sure it is higher now than a few years ago in terms of euros but in dollars, it has tripled!I think the best investment is real estate! With that said, I don't think everyone should go out and buy a house or office building but referring back to a blog entry this summer "When it Pays to Buy, Buy" there is a time and place to buy real estate. I have a personal example to share with you. I just love the beach. I have always wanted a place at the beach where my family can spend holidays and lazy weekends. Here in SW Florida, there are some tremendous deals on beachfront condos. Many of these condos demand high rental rates from December through April. If you find the right deal the rent from this period of time may cover you entire ownership costs. So while inflation is rampant and your banker is only paying you 2.5% for your money why not invest in something that pays for itself and you enjoy.Another example is rental property. While we are in this huge housing slump it is a good time to hunt for bargains where the rent will cover your carry costs. Office space is another option however, one must be particularly careful when considering office and industrial property as the economy is slowing down and many small business will go under and potentially a lot of vacant space may emerge driving down rental rates.My favorite asset type is either bulk lots from builders or complete developments where the developer is in hot water for one reason or another. The key to these deals though is CASH! The reason why investors and companies are in trouble is DEBT! Don't get me wrong, debt is a wonderful tool but it is analogues to a sledge hammer; hit the right spot and mountains will move, hit the wrong spot and you lose your left foot. If investors and companies did not have debt on their books they could afford to hold their assets forever without fear of bankruptcy. Of course the way to make money is to turn your assets over and over making profits along the way. Obviously no sales equal no profits. So if you are long on cash and short on investment real estate, take another look around you for opportunity.I was just offered bulk lots by one developer for 33% of the development costs. I was sharing this with a friend of mine yesterday and he asked how I know that particular deal is worth going after. My answer was simply, when you can buy something for less, or in this case a lot less, than what it costs to build you will be way ahead of your future competition. I can turn around and sell these bulk lots to another investor a year to two from now for 50% of the cost to build and still make a 50% profit on my investment. Not too shaby when you consider the alternative is a 2% or 3% money market rate.I am still taking questions so feel free to email me.
Monday, January 7, 2008
Investing WIthout Training Wheels
I hope you had a good holiday break! I spent a lot of time with my 6-year old son while he was out of school. My wife and I had talked about teaching him to ride his bike without his training wheels over his winter vacation. I understand the fear of crashing can be overwhelming when learning to ride a bike but I was not prepared for what my son had to say when I talked with him about taking off his training wheels. He said "Daddy, I like my training wheels!" and then he said "I don't want to learn how to ride without them and I don't want to crash!" Something about his tone and sincerity got me thinking not only about his training wheels but about how we as investors can get comfortable with our own version of the training wheels, namely guaranteed returns (i.e. CD's and money market accounts). I like CD's too but when they are paying 4.5% and real inflation is north of that it is time to venture into other areas for real return on our investment dollars.Training wheels are great for teaching the basics, how to move forward, how to stop and how to steer. Just like my son enjoys riding his bike with the training wheels we investors can get a little too comfortable with super "safe" investments. My son does not yet understand that his mobility will greatly increase allowing him to change direction more quickly and take corners faster. Of course his fear of falling is natural and real (it is great to know that his sense of self preservation is intact). I am sure he will skin his knees a few times and it will hurt, but he will learn and as he gains skill he will fall much less often until he does not fall at all. Back to investing without training wheels. Sure you can buy REIT stocks as a form of investing in real estate but that is like watching someone else ride the bike.If you have the courage to learn about real estate investing it can be just as rewarding as the free feeling of riding a bike without training wheels. While the risks are higher in real estate than in CD's, the mobility, maneuver ability and real return on investment can also be greater. The best way to protect yourself with real estate is to not have all of your investment capital in real estate! If you are unsure about how much to invest in real estate, start with 10% of your cash reserves. Since some of my real estate investments are raw land, I hold a significant amount of my reserves in CD's to balance the increased risk of my investment strategy.One of the best ways to mitigate risk in the real estate market is to align yourself with a knowledgeable partner and learn from them. This could be from a commercial real estate broker, a developer looking for partners or just other like minded people with investment objectives similar to your own. You may skin your knees on your first few investments but once you learn how to invest and what types of investments work for you then you will be well on your way to making real returns on your investments.I know the real estate market is looking pretty rough right now. A little fear is healthy (remember we have that sense of self preservation for a reason). Too much fear and you will have to find a way to live with less money than when you started.While I am trying to build a regular base of readers, you can email me with questions or even challenges. Happy New Year. Things will be great in 2008!
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