Mike’s Apartment Blog

Another opportunity local to my area has shown itself. It’s funny how these opportunities blossom, only to shrivel up and die more often then not.

No doubt, the game has changed. What makes opportunities tough to get done is the constant rule changes. When rules like loan qualifying, short sale approval, and seller expectations keep changing, even the most steadfast buyer cannot make it happen.

I hear a lot of folks stating “cash is king”. It’s a fun buzzword and people like to say it a lot about real estate investment. They believe great deals can be purchased for all cash. I have not found this to be true.

All investment decisions are based on ROI and, more importantly, IRR. The big draw to real estate is the availability of leverage which allows you to multiply your ROI. In absence of this, ROI suffers, often times leaving you with an average investment you could beat by investing in other markets.

Until leverage becomes readily available, real estate will continue to be ostracized by the investment community.

Does this mean time to get out? Heck no! Being the investor who can see when financing comes back will position you to make incredible returns when the pent up demand for commercial real estate returns.

It’s the 4th of July, a time when Americans celebrate their declaration of independance from England.  It’s funny that we celebrate our “declaration”.  The declaration didn’t really do anything – it was our steely resolve, focus, and unwaivering determination that brought us freedom.  The declaration was really just words.

That determination during a very dismal and dangerous time is what we have to celebrate.  I bring this up now, because we are in another dismal and dangerous time.  The world wide economy is collapsing around us, multinational corporations and even state governments are going bankrupt, and North Korea is firing “test missiles” at nervous neighbors.  It doesnt get any worse, and its our determination that will get us through.

Never give up.  This awful economy is a precursor to the greatest opportunity for wealth investors will ever see.  Keep focused, stick to you plan, and you will succeed.

Just never give up.

It’s no secret the housing market has been hammered.  Prices are down and inventory are up – the worst its been in decades.  Add to it the lending standard and apprehension banks have in giving anyone a loan, sales have come to a grinding halt.  Foreclosures and bank owned properties dot neighborhoods all over the USA, and few areas have been unaffected.

But what about commercial real estate.  Apartment buildings in particular?  Depends on the area, but most areas are starting to feel the pinch.  Check out this articlefrom Bloomberg.

Basically, the worst is yet to come – at least for banks.  A rash of unprepared buyers, lofty proformas, and lax underwriting led to many building being over leveraged.  These over-leveraged buildings now present a huge issue for banks, for as the asset value comes down, owners walk away.  Defaults to the tune of 5.5% of all mortgages are anticipated in 2010.

So what does this mean for investors? 

Well, if you own buildings you are probably already feeling the pressure.  Increased vacancy and decreased collections are apparent due to job loss, while increased energy costs can pinch cash flow.  Many loans are expecting to go variable or hit their balloon payment terms within the next couple years and those owners will be unable to sell their property or refinance their loans.  Banks will be staring at an inordinate amount of REOs.  They will have to change their standards just like they are doing with home loans.

If you are a buyer, this in an incredible opportunity.  There will be many properties stuck at the banks looking for owners.  Whether it is discounted price, killer terms, or extra leverage opportunities, it will be time to capitalize.

I am in the unique situation that I will be in both camps.  I intend on negotiating with any of our current buildings to take advantage of any leniency the banks offer while attempting to pick up additional assets in the downturn.  No doubt, it will be a interesting time to be an apartment investor!

Every cloud has a silver lining and every problem is really an opportunity.  That could not be more true when looking at our economy.

When the economy is in a depression, a dollar gets you more.  People drop their prices to make a sale, retailers get desperate, and overall business goals go from maximizing margin to just simply surviving.  That is where we are and why you get more for your money these days.

Case in point: we had a move out in a rental unit and have decided that instead of installing carpet, we will do tile.  I was amazed at prices for tile these days.  First, you can get quality materials for a very low price.  Second, you can get quality installation service for cost.  At this point, it’s cheaper than having your maintenance team do it and looks more professional.  You cannot beat that!

At this point, you can get a full job for $3/sqft which includes demo (removal of old carpet and pad), floor prep, installation, and clean up.  There really isnt a better deal out there that I have ever heard of (even in the past).

So keep in mind, when a problem shows up (especially a wide spread problem) think about how you can turn it into an opportunity.  This is the core of entreprenuerial ideals.

If you have been following the news and the state of the U.S. government these past couple decades, you know our social security system is on a collision course with bankruptcy.  How did this happen?  Pretty simple… our social security system is like an insurance company.  It gets paid premiums today which it will pay back to you later in life.  The problem is it’s run like most government operations where it spends more than it takes in.

The stress this puts on the social security system is increasing.  Unless something changes, very soon the stress will become too great and it will collapse.  Once this happens, those currently relying on social security will become destitute and those who are expecting social security as a means to retire will be out of luck.

The only answer is to take charge of your own retirement.  Decide when you want to retire and how much you will need to be comfortable and start executing that plan.  We are experiencing one of the largest transfers of wealth in the history of the United States, don’t get caught on the wrong side of that transfer!

Came across a very good, though simplified, explanation of derivates and how our economy melted down.  Found this off a forum site I frequent to discuss investing with thousands of other investors.  This particular story was a comment posted by buddiee18 off Yahoo! Finance.

An Easily Understandable Explanation of Derivative Markets:

Heidi is the proprietor of a bar in Detroit . She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.

She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Heidi’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Heidi’s bar. Soon she has the largest sales volume for any bar in Detroit .

By providing her customers’ freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi’s gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank’s corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don’t really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.

Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers.

Now, do you understand?

Why is it that things always make more sense when alcohol is involved?