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

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.

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.

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!

I have a dream...

I have a dream to set up and run a fund specifically to take advantage of the current and unfolding real estate market. Three hundred million would be a nice start but a billion would be better. I know of a defunct project in a great location that can be had for 30 cents on the dollar. The problem is that is still about 100 million dollars. I know of a company ripe for a takeover but it would take 300 million dollars to do so. Some would say this is a pipe dream and maybe it is but my head is consumed with these potential deals. Some of them have a 300% return (again potentially) in the next 5 years. WCI (not one that I am going after) is a perfect example. Not to pick on them (WCI) but they have made some poor choices and too many people with too much money have been running the company. WCI is just the poster child, there are many more out there. Some can be nursed back to health and sold for nice margins or kept for nice dividends. If I were you I would ask, "why not put your money where you mouth is?" and the answer is I have and I do. I just don't have 100 million sitting around. I have made money and I will make money. Sometimes a guy just needs a little help. In my case I just need a few people to sit down with me and listen to the details about specific targets. I believe a reasonable person will like what I have to show them. Unlike a typical broker or agent that many times does not care about what happens after the deal is done, I want to run these deals. While commissions are great to pay bills and keep my office open, the real money will be in how the assets are managed and enhanced. Also unlike most "investment advisors" I will risk my own money to show I will put my money where my mouth is. I have a dream of making the right people a lot of money. I have a dream that luck is when opportunity meets preparation. I am prepared I just need opportunity. Feeling lucky?

The Way to Make Money

I found a quote by JD Rockefeller a couple of years ago that may have some application today. He said "The way to make money is to buy when blood is running in the streets." I have been working with a number of builders and developers that are willing to sell portions or all of their land holdings to reduce their expenses. One developer let me know they would sell finished residential lots for 46% of their cost. If you apply standard metrics for the ratio of lot price to home price you get a finished home and lot price of $220,000. If you apply the standard mortgage to income ratio of 28% the minimum income necessary to purchase the home is $60k (assuming 30 years at 6.5%). What I like about the previous calculation is it shows prices are starting to reach affordable levels for most people. The problem is there are many homes in the area of the afore mentioned subdivision that are being listed for $150k. Until those homes get off the market the ones for $220k will be at a significant disadvantage. I consume a lot of financial information during a typical week. This blog's content is a reflection of my constant search for information. I am seeing some signs indicating this summer (2008 that is) could be the apex of the "blood running in the streets". Only time will tell, and I have been wrong before. I know this is going to sound corny but a lot of my investment decisions are based at least in part on my gut feeling. My gut feeling is directly related to the information I consume over the previous 6 months or so. What I am getting at is my gut does not tell me to jump in with both feet yet. I feel cautious. A lot of people do. With that said, I remember when you could buy lots here in SW Florida for 5-10k just a few years ago. The prices were depressed because everyone thought "who would want one of those?". A broker once told me to avoid lots in a "bad" neighborhood even though the lots were selling for $500. This may not be sound investing advice but anytime you can buy something as tangible as lot for less than a used car you should at least ask yourself "why not?". Just because it looks like no one is buying or there is a lot of something does not mean it is not worth consideration. There are only two downsides I see to buying a cheap lot and they are opportunity cost (what else could I invest in that would provide a better return) and the carry costs such as taxes and interest payments. That is it for now. I hope all that read this blog had a good Thanksgiving. I will write again soon. If you have any questions, feel free to email me or post it on the board. Dave

A Dose of Fear

That was the subtitle to an Urban Land Institute Emerging Trends program I attended in Las Vegas at the ULI national conference. As I was headed into the office this morning I was listening to a story on NPR about the DJIA almost 400 point dive yesterday. The big talk in the story was about Morgan Stanley having to write down 2 billion or so dollars from the sub-prime mess. As I listened I felt very calm in a deja-vu sort of way. In fact, at the Emerging Trends program we heard it there first! Not about Morgan Stanley but about the broad credit market and how we are only 8 weeks (at the time) into a 2 or 3 year period of predictable instability. After that program I had a bad taste in my mouth. You know the kind of bad taste you get after taking some nasty "cherry" flavored cough syrup. The good news is now that I have "taken my medicine" I feel better. I know we are headed for more disclosure from various financial institutions about how many billions they are going to write off this quarter. Lets face it, times are looking bleak.
Too bad it took so long for the sub-prime mess to rear its ugly head. A dose of fear is just what the doctor ordered for investors pouring money into investments they do not understand - and that includes Wall Street, not just the little guys caught holding 4 houses when they can barely afford one.
When I did my market update this fall, I did not get it 100% correct. Things have declined a little since then and may in fact get worse. The questions are how much worse and for how long. I am an optimist. I cannot help it. I feel in my soul that we are in an opportune time to buy distressed real estate. Each deal needs to make sense (and cents) on its own merits. No more blind investing just because it is real estate. Here are a few ideas I want to share with you that may make you feel better. First, 80 million baby boomers are retiring in the next 20 years. This will not be a gradual event. Sure at first it will just be a trickle but in my opinion in the next 1-3 years we will see a wave of retirement analogous to drinking water from a fire hydrant. If you live or invest near the coast (any coast in America) AND within 60 minutes of a major airport, you better get on your wet-suit because the retirement tsunami is coming. Here in Southwest Florida I like to think we will see 1% of the baby boomers move or buy a second home here. I know it does not sound like much but a small sliver of a very large number is a very big number. In english 1% is 800,000 people. To put that into perspective our tri-county population is only 900,000. So our population will double just from baby boomers and that is not count the hundreds of thousands that will be needed to provide the necessary services to support the population. Another idea I want to share is our country is supposed to grow by another 100 million people in the next 30 years. Re-read the above and think about what I am saying. So there are maybe 15,000 houses on the market right now. So what?! Yes it is going to be painful to carry those houses and condos in the short run. In the long run (20-30 years) we will need another million or so homes. If you assume a linear population increase (it never happen that way, when it rains it pours) that is 50,000 homes and condos will be needed every year for decades. What will be different in the next 20 years from the last 5 is the majority of the new residents will not overpay for something here they can get in another state for half the price. Another fact is many of these people will prefer to rent instead of buy. Well that is it for now.
Take your medicine then tune out the news and be confident in our future.