3/7/10: Using Real Estate to Fund College – Making Good Choices in Today’s Market
How to pay for college can be as important and difficult a decision as selecting which school to attend. With all the changes in the market, can real estate still help?
To school us on this important topic, plus provide a timely warning about an old law that has taken on new relevance in one of the largest real estate markets, we dialed up (for those old enough to remember a dial) one of the smartest attorneys we know!
In the classroom for College Funding with Real Estate 102:
• The Professor of Profit and Your Host, Robert Helms
• Teacher’s Aid and Co-Host, Russell Gray
• Professor Emeritus and the Godfather of Real Estate, Bob Helms
• The Dean of Decision Making, Attorney Jeff Lerman
After a quick stop at the campus coffee shop for some pre-class caffeination, we slid into our school desks behind the golden microphones and Professor Robert Helms calls the class to order.
Like many topics in school, the first thing we discuss is why this topic is relevant. Not everyone has children or wants to send them to college – or maybe all of that is in your rearview mirror. But we soon discover that this type of real estate investing is just a niche like any other – and there’s money to be made!
College is expensive and getting more so every day. And in a soft economy, finding creative ways to pay for some or all of it is more important than ever! As entrepreneurs, we get excited when there’s a problem like this in the market that we can solve – and this one is no different.
Since Jeff Lerman is an “A” student, while the rest of us are…well, not as smart as Jeff…we have him lead our study group. And like a typical “A” student, he starts talking about math and homework. Yes, there’s homework involved! But asking the right questions and doing the math is one of the secrets to success. Jeff takes us through his own real life analysis and the questions and answers he’s finding as he goes through this process himself.
Jeff explains how he uses the cost of on-campus housing as his baseline for doing the investment analysis. How can he get more value for the same cash flow? Great question!
This leads to a discussion about which advisors he calls on to help him. Yes, even advisors have advisors. We discuss who you need and how to work with them.
The very important topic of single family homes versus condominiums comes up, which opens up the door for a lively classroom discussion. Jeff reveals how his initial idea was contradicted when he got into the math. See? It’s true! Do the math and the math will tell you what to do! Of course, you have to do the right math – which includes accounting for all the variables. So we talk through all of this. Good stuff!
As we wind up the discussion of funding college with real estate, Jeff throws in some extra credit work – and tells us what every investor must know about the California Home Equity Sales Contract Act.
Never heard of it? Neither had we. But it poses some real risks to active real estate investors looking to cash in on today’s distressed property bonanza. And even if you’re not actively investing in California, you’d be wise to be aware of this legislation – because often times other states follow California’s lead on consumer protection. This is especially true in the currently distressed property market.
Before we knew it class was over. But as always, we learned a lot and had some fun. Many thanks to Jeff for another enlightening appearance on the show!
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Problem or Opportunity?
Sorry – not a particularly catchy title for this post – but it’s still an important concept that merits reinforcement. In Equity Happens, we talk about how real estate investing is a business of fundamentals. When you master the fundamentals, then you master the business. In this case, the fundamental we’re talking about is one’s attitude towards “adversity”.
Watchers, victims, people who are waiting for “someone” (like the government) to do “something” see adversity as a problem. “Oh my gosh. There’s a big problem. Someone needs to do something!”
Doers, entrepreneurs, capitalists (you know, the people the government likes to take money from to fix the problem while often blaming them for causing it – oops, didn’t mean to let that slip out) look at adversity and say, “WOW! What a great opportunity! Everyone is crying in their soup, brain-locked with fear and unwilling to act. All I have to do is be creative and bold, and I can convert this adversity into an opportunity!”
Case in point: Today, the Wall Street Journal reports that real estate developer Young Woo is planning to convert the top 40 floors of AIG’s 66-story building into luxury condominiums. The Journal reports that Woo bought the distressed building (though actually, it was the OWNER that was distressed, not the property) for $150 million or $105 per square foot. If you don’t know, that’s cheap. He couldn’t build it for that.
After conversion, Woo hopes to sell the condos for close to $2,000 per square foot. Even after all his expenses, he could realize a profit of $500 per square foot or roughly $600,000 per condo! Not too shabby.
Of course, the plan looks good on paper and Woo has to actually execute the plan in order to realize his profit. But that’s what America and real estate is all about.
You may not be ready to take on a 66 story conversion project, but the principals apply at any level. The marketplace is full of distress and adversity right now. That means there are lots of opportunities IF you can see them, and IF you have the courage to lead.
Think and DO is better than Wait and See.
Start with education. Learn the fundamentals. Watch other investors. Learn from their successes and mistakes. Build relationships with experts you can call on when you’re in the middle of a deal. It’s always good to get lots of brains on the problem. But remember, it’s YOUR money and YOUR opportunity, so do NOT wait for someone else to empower you or assure your success. When you’ve done your homework and you see your opportunity, then YOU make the call – and go make equity happen for you.
Reality or Mirage?
Today’s Wall Street Journal reports that MGM Mirage is cutting the price of the condominiums in its spectacular City Center project in Las Vegas, Nevada. How big a cut? Thirty percent! We’re not sure what their margin is, but that’s probably all of it and then some. Ouch.
Worse, it’s probably still not enough. But only time will tell. The cuts are a little surprising to us, but clearly they’re the result of a major reality check for MGM Mirage. And this post isn’t really about Las Vegas, MGM or City Center. It’s about the LESSONS available in this situation for all of us.
Lesson #1 – The market sets the price. Whatever MGM needs to cover its cost is interesting, but only to MGM. The market decides what its willing to pay. In this case, MGM is hoping it’s just 30% off. Before it’s all done the market may want more.
Lesson #2 – The market is fickle. Three years ago people were willing to pay more. That’s why MGM sold so many. People had equity, unemployment was half what it is today, financing was readily available for almost anything related to real estate – even condo-hotels. But a funny thing happened on the way to the closing table. Okay, not so funny. But the stream of foreign money through Wall Street into mortgage backed securities got shut off almost over night, taking with it equity and working capital. A market heavily driven by momentum did an abrupt 180. Whether you’re rehabbing a fixer upper or building a skyscraper, if your success requires you to find a ready,willing and able buyer (or in MGM’s case, thousands of them), you better get to market fast – because things can change.
Lesson #3 – Have a Plan B. Donald Trump’s Plan A was to sell the condos in his Las Vegas project, just like MGM and every other developer participating in the Las Vegas rush for real estate gold. When Plan A bit the dust, he converted the project into a hotel. Still a tough gig, but the goal is to get some cash flow to hold the property until things improve. Rich Dad Advisor and Robert & Kim Kiyosaki’s investment partner Ken McElroy says they only do deals they can afford to stay in for 10 years. Plan A may be to build or fix up for quick sale, but Plan B is to structure the deal so it still makes sense if they have to hold. Plan A is a win and so is Plan B.
Lesson #4 – Understand the other party’s needs, wants and desires. When you’re in a deal that’s going sideways, whether for reasons under your control or those not (certainly MGM could not predict, much less control the mortgage meltdown), it’s easy to fixate on your own pain. If buyers aren’t willing to close on City Center, should it be assumed they are unwilling because of the price? Could they be unable because of lack of financing? Could they be afraid of reduced rents on their units due to the soft economy? Until you know what the issue are for the other party (again, in MGM’s case, thousands of them), you might give up or give away profit unnecessarily.
Lesson #5 – Use Creativity to Protect Profits (or minimize losses). Certainly we don’t know all the considerations for MGM, and presumably these are extremely smart people, but we know many investors who are in contract for units in City Center and we haven’t heard any discussion of owner financing. We know that condo-hotel pricing has all but disappeared. For many buyers getting a conventional third party loan is an impossibility. But what if City Center carried back the financing? It doesn’t get cash, but it gets an asset (a mortgage). For those buyers who need income to service the mortgage, couldn’t MGM as the hotel operator, steer more guests into the unit? After all, they still get their operator’s share of revenue, plus they get the mortgage payment. The owner may need to kick in a little cash flow to feed the mortgage, but better than losing one’s deposit. After all, it’s still one of the premier properties in the country. Where do you think values will be in 20 years?
You may not be a Big Time Operator like MGM. But real estate is real estate and when you watch what’s happening for the BTO’s, many of the lessons will apply to you.
(Side note: For more information on using private notes, check out our interview with creative finance guru Wayne Palmer called The Power of Pen: Using Private Notes to Get the Deal Done. )
