Wealth redistribution by hook or by crook …

You’ve probably heard the expression …

“There’s more than one way to skin a cat.”

We’re not sure why anyone would want to skin a cat… that sounds gross and cruel.  But the idea is there’s often more than one way to get something done.

In this case, we’re talking about wealth re-distribution.

We realize that’s a politically charged topic, but anyone who’s rich … or plans to be … should be paying close attention to the winds of change on this hot topic.

No matter which side of the political spectrum you’re on, the problem everyone is staring at is the same …

There’s a big and growing gap between the rich and the poor.

Meanwhile, only a small percentage of middle-class are successfully fighting their way into the realm of the rich.

Most are falling off the back of the bus into the pit of poverty.

We’re not here to point fingers.  There’s plenty of blame to go around.

But we think it can be credibly argued that the Fed’s decade-long easy-money policy has inflated both asset prices and the cost of living.

This worked to the advantage of asset owners, but to the detriment of the paycheck-to-paycheck folks.  It’s no surprise they’re mad about it.

Of course, there’s no point in ranting about what we think policy makers should or shouldn’t do.  They don’t listen to us anyway.

So we simply watch and consider how the future might unfold … then get in position to capture opportunity and mitigate risk.

You’re probably aware, the USA is ramping up for yet another knock-down drag-out presidential election cycle.

In addition to stocking up on popcorn, we’re thinking about which issues will frame the debates.

Based on the mid-term results … and the predominant philosophies espoused by the challengers …

… it seems a major objective is to make rich people do more for the poor … by hook or by crook.

There’s the “Robin Hood” approach of taxing the rich and giving benefits to the poor … free college, healthcare, basic income, etc.

Let’s call the Robin Hood approach “by crook.”

Then there’s the “Opportunity Zone” approach …

The Opportunity Zone idea is to provide tax incentives to the rich so they voluntarily move their money into poor areas … thereby creating jobs and commerce for the currently disenfranchised.

We’ll call the Opportunity Zone approach “by hook.”

There’s a lot of history on the crook approach … and it doesn’t have a strong track record of creating abundance.  But it’s easily sold to desperate people.

Obviously, no one yet knows how the Opportunity Zone “hook” will work out … but the idea seems promising, so we’re watching it closely.

And when you consider the common sense wisdom in the saying …

“The definition of insanity is doing the same thing over and over but expecting a different result.”

… at least Opportunity Zones are a new approach to the problem of getting capital to where it’s needed most.

That’s why when we saw Yardi Matrix had released this well-written and informative white paper on Opportunity Zones, it captured our attention.

You should read it, but there are a few excerpts we think are noteworthy …

“… within Opportunity Zones, there are either in place or under construction 1.9 million multi-family units, 960 million square feet of office space and 189 million square feet of self-storage.”

Clearly, Opportunity Zone pioneers are quickly moving from idea to action.  And even though it’s still ramping up, the scope is impressive …

“As a percentage of total space, properties in opportunity zones that are in place or under construction represent 13.1% of total multifamily units nationwide, 13.7% of total office space and 11.4% of total self-storage space.”

So Opportunity Zone development is already up to over 10% market share nationwide in not one, but THREE real estate niches.

That’s impressive.

And even though many details about the Opportunity Zone program remain unclear ….

… BIG money is moving forward NOW and creating a wave of capital small investors can potentially ride to profits of their own.

This creates an unprecedented opportunity for Main Street investors.

Because while a small investor might have the means to fix up a single derelict property on his own, he can’t really change the local economy all by himself.

Sure, a large group of small investors might team up to upgrade a specific neighborhood … changing the personality of the neighborhood and improving everyone’s chance of seeing their value-add stick long-term.

But only BIG money can rehab entire regions … or “zones.”

And when it does, it creates critical mass which can fundamentally change the economic drivers and opportunities of entire local economies …

… including jobs, and access to services and opportunities for those people who get left out of financial boom times.

After all, you can only benefit from asset inflation if you own assets.  Most lower-income folks don’t.  For them, inflation just means higher living expenses and a higher hill to climb to become an asset owner.

But Opportunity Zone incentives entice rich people to move their profits from inflated financial assets into depressed real estate.

But not as flippers.

The best Opportunity Zone perks go to those who stay in their markets for at least TEN years.  That’s enough time to light a permanent flame in a local economy.

And as jobs are created to do the actual work of rehabbing these regions …

(and remember, these are jobs which can’t be off-shored)

… the workers will have both the incomes and opportunities to purchase affordable properties themselves.

Now the worker can get into the asset owner class.  And until they do, they have paychecks to pay YOU rent.

Of course, as the workers’ labor is partnered with investors’ capital to improve the Opportunity Zone, the asset owning laborers also get to ride the equity wave they’ve helped create.

And so do YOU … if you’re in the right position.

So we encourage you to read the Yardi Matrix white paper because there’s useful data and insights to help identify specific markets to explore.

Opportunity Zones may not yet be a proven model for creating access to prosperity for lower-income folks, but the potential is there.

And if YOU aren’t as high up the economic food chain as you’d like to be … consider syndication as a way to get rich helping the rich get richer.

When you syndicate, YOU marry your capital and labor to the capital of your wealthy investors … and then marry all that to the BIG money driving the growth in these Opportunity Zones.

It’s a win-win-win.

Until next time … good investing!


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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.


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Growing Greenbacks in Greenhouses in Paraguay

Growing Greenbacks in Greenhouses in Paraguay

 

One thing everyone on earth needs is food! That’s why greenhouse farming can be a secure investment … and Paraguay is a smart place to do it.

Long ago, some ancient human decided that growing food was safer than trying to chase it down. Since then, the agriculture sector has never stopped GROWING.

It’s simple. Demand has grown as the global population soars … expected to come in at 9.7 billion by 2050. In our opinion, NOW is the perfect time to consider agricultural investments … and there’s lots to intrigue us about Paraguay.

Paraguay is one of the most productive agricultural countries in Latin America. Its products feed some of the largest countries in the world … like China and Russia. Its mild climate, year-round sunshine and abundant natural water sources give it every ingredient for growing great produce.

Modern methods have made Paraguay’s fertile farms even more profitable through the use of greenhouses … an artificially controlled environment that ensures reduced disease susceptibility and increased crop yields.

In this special report you’ll explore:

  • The advantages of greenhouse farming … including reduced labor costs
  • Key details on greenhouse investing in Paraguay
  • An overview of greenhouse construction and irrigation
  • And much more!

See all the benefits of high produce yields, reduced plant disease, lower labor costs, and consistent crop production through greenhouse farming in Paraguay.

Start now by filling out the form below. We’ll send you a complimentary copy of Growing Greenbacks in Greenhouses in Paraguay.

 

Rising rates, oil, and an angry Amazon …

Even though the Fed skipped a rate hike last meeting, someone forgot to tell the 10-year Treasury yield, which has broken over three-percent … DOUBLE where it was just two years ago.

In case you don’t know, the 10-year Treasury yield is arguably the single most important interest rate on Earth … certainly for real estate investors.

Of course, oil broke over $80 a barrel last week also … in spite of dollar strength.  So while dollar-denominated gold dipped … oil rose.

It makes us wonder what oil will do if (when) the dollar starts falling again!

Now before you check out, let’s consider what all this means to Main Street real estate investors.  

Obviously, interest rates matter because most real estate investors are liberal users of mortgages.  Higher rates mean higher payments and less net cash flow.

But as we often point out, rising rates also affect your indebted tenants.  Higher rates mean bigger payments on credit card, installment, and auto debt.

And speaking of auto-debt, sub-prime auto loan defaults have spiked above 2008 levels.  It seems consumers at the margin are starting to struggle.

Now back to oil

If you’re an oil investor … or you buy real estate in areas whose economies are

strongly supported by the oil industry … higher oil prices can be a GOOD thing.

For everyone else, it means gas … and all petroleum derived products … andanything produced or transported with oil-derived energy … are all getting more expensive.

And for your working class tenants … the cost of filling up their commuter cars is getting worse too.

So until all this “wonderful” inflation makes its way into wages, working class people are still getting squeezed.

All that to say, it’s probably a good idea to tread lightly on rental increases unless you’re very sure your tenants can handle it.

But of course, these are the fairly obvious concerns.  But there’s something even MORE ALARMING circling on the horizon …

Pension Problems Potentially Pinching Property Owners

(Sorry.  Peter Piper purposely pressured us to print that prose. ‘pologies …)

In a recent post, we highlighted a SHOCKING proposal by the Chicago Fed to punish property owners by imposing an additional one-percent property tax … to pay for Illinois’ severely under-funded pension plan.

Of course, Illinois isn’t only the place with pension problems, so be on the lookout for a punitive tax proposal coming soon to a neighborhood near you.

This is why we continually point out it’s REALLY important understand the markets you’re in.

It’s like buying a condo in a troubled complex, but never bothering to review the HOA financials …

YOU might be hyper-responsible, but if the HOA’s in trouble … you could be too, because they have the the power to assess YOU to pay for it.

As we pointed out at Future of Money and Wealth, governments sometimes do desperately dumb things when they’re facing financial challenges.

Don’t Slap an Amazon

The latest case in point comes to us from the super-city of Seattle … home of Amazon, Starbucks, Boeing and several other mega-employers.

You may have heard, the city council of Seattle voted 9-0 to impose a “head tax” on all businesses doing over $20 million in GROSS revenue.

The original tax proposed was over $500 per person.  But after businesses complained, they backed off to “only” about $275 per head.

The purported purpose of the tax is helping the homeless, which is a noble cause.  But regardless of how you or we feel about it, what matters is how the employers feel … and they’re NOT happy.

Amazon fuming after Seattle votes to tax high-grossing corporations to help the homeless

“ ‘We are disappointed by today’s city council decision to introduce a tax on jobs,’ [Amazon Vice President Drew Herdener] said in a statement.

 “ ‘While we have resumed construction planning… we remain very apprehensive about the future created by the council’s hostile approach and rhetoric toward larger businesses, which forces us to question our growth here…’ ”

 Starbucks Corp., another of the 300 businesses that will have to pay the job tax, seconded that.

 Think about this …

These are two pre-eminent brands and major economic drivers for Seattle and its surrounding neighborhoods … and there are 298 other big businesses also affected.

While they’re not likely to all pack their bags and move out in the middle of the night, Amazon’s comments make it clear they’re also not committed to staying or growing.

Again, it doesn’t matter how YOU feel about these companies, the homeless problem, or the role of government in redistributing wealth …

… what matters is how employers feel and what they choose to do when slapped with taxes or regulations.

Because if these companies go in search of a friendlier environment, one area will lose current and future jobs … and others will gain them.

As real estate investors, we want to be on the right end of that shift.  That’s why we’re always watching for clues in the news.

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.

Profits, jobs, and opportunity …

In spite of rising rates and concerns about bubbles … real estate is looking pretty good right now.  At least the right real estate in the right markets.

Of course, “real estate” can mean a lot of different things.  In this case, we’re talking about good ol’ fashioned single-family residences.   Houses.

Yes, we know mortgage rates are rising.  But that just means it’s harder for renters to buy a home … which keeps them renting … from YOU.

And if you proceed with caution, there are some reasons to pursue single-family homes even though prices have recovered substantially from the 2008 lows.

Consider this Yahoo Finance headline:

Small business earnings hit all-time high, NFIB declares

“Small business earnings rose to the highest levels in at least 45 years last month, according to the results of a survey from the National Federation of Independent Businesses (NFIB) …” 

“ …  the 17th consecutive month of ‘historically high readings.’”

That’s good news for small business owners … and for the U.S. economy.  It’s commonly believed that small business drives a majority of job creation.

So perhaps this CNBC headline isn’t a big surprise …

Job openings hit record high of 6.6 million

Of course, job creation is good for landlords.  It’s a lot easier for tenants to pay rent when they actually have jobs.

But there’s the issue of wages.  Even though the unemployment rate fell below 4% … which is considered “tight” … wages still haven’t risen substantially … yet.

Meanwhile, life is getting more expensive as rising interest ratesgas prices and healthcare premiums are among several factors squeezing household budgets.

While jobs are good, it’s hard to save up for a down payment when living costs are going up faster than paychecks … which keeps people renting.

And if all that isn’t a big enough challenge, there’s the problem of high housing prices.  Obviously, higher prices also make it harder for renters to become homeowners.

So all that’s not horrible news for landlords … especially those who are investing in more affordable markets and property types.

But there are two more parts to the story …

First has to do with a deeper dive into the jobs market.  The April jobs report didn’t seem great at first blush.

But in the past, the reports looked great at first, then you’d drill down and discover the jobs created were low-wage service industry jobs.

Notably, recent jobs reports reflect a subtle but important shift in the composition of jobs.

So while the quantity of jobs created might be not bad … the quality is actually looking pretty good.

According to this Wall Street Journal article, manufacturing added 24,000 workers in April … after adding 22,000 and 31,000 in the last two months.

“While manufacturing employment has been generally declining for decades, hiring picked up in the sector over the past year.” 

Way back our 2011 blog, What Washington Could Learn from Real Estate Investors, we argued that not all jobs are equal. We like what’s happening.

Seems to us if the American economy can keep this up, it’s a tailwind for housing … in spite of rising rates, inflation, and high debt levels.

And speaking of wind …

As we discussed at length during Future of Money and Wealth, the entire financial system is based on debt.  So to grow the economy, debt MUST grow.

The why and how of all that is too big a topic for today’s discussion, but if you take it at face value, it really explains a lot.  It also has some big ramifications for real estate.

After 2008, lenders ran away from real estate … but debt still needed to expand.  So new debt-slaves borrowers were needed.

Student debt soared.  Sub-prime auto loans spiked.  Credit cards hit record highs. Corporations borrowed heavily to bid up their own stock.

But today, students are reconsidering the value of a financed college education.  Auto sales are slowing.  Credit card losses are mounting.

Corporations are slowing down their borrowing … with nearly 14% of the largest companies unable to pay their interest payments from earnings.

In fact, a recent Bloomberg article quotes Gregg Lippman of “Big Short” fame as saying corporate debt will trigger the next financial crisis.

“ … corporate debt and equities will face the biggest pain when the next downturn comes. Investments linked to consumer debt, unlike the last crisis, will be relatively safe …”

“The consumer is in much better shape than corporates. Consumers are less levered than they were pre-crisis. Corporates are more levered than they were pre-crisis …”

So let’s wrap this all up and put a bow on it …

If it’s true debt MUST expand, lenders will be looking for where they can make loans.  Remember, your debt is their “investment”.

There are already tremors in the debt markets.  Lenders will be looking for quality.

Similarly, there are tremors in the stock markets.  Investors and consumers will be looking for an alternative for their wealth building (remember, consumers consider their home an investment).

So we think there’s a good chance the focus will shift to real estate again.  Just like it did in the early 2000s.

Yes, we know the run-up from 2000 – 2008 ended badly.  But not for everyone.

If you buy the right markets, use sustainable financing structures, and pay attention to cash flow, there’s an argument to be made that single-family homes still have solid potential for long-term wealth building.

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.

The margin is calling …

Shhh … do you hear it?  It’s the margin calling …

“Margin” is a term we hear all the time but can be a little confusing … because it means different things depending on the context.

But margin comes up often in financial conversations because it’s an important concept … and worth taking a look at.

In stock trading, margin is debt secured by the stocks you’re buying.  It’s like the way real estate investors use mortgages to acquire property.

Typical margin leverage with stocks is fifty percent.  So you put in half and borrow the rest.  If the stock goes up, you get to keep ALL the gain … just like real estate.

BUT … if the stock goes DOWN … you get a “margin call” … which means you need to bring in cash to restore the loan-to-value ratio.  No fun.

We’re sure glad that doesn’t happen in real estate!

The term “margin” has another important meaning.  It’s the “edge” or “fringe” … things that are farthest from the center of the target.

So when you think about your personal budget, you have things at the core … food, clothing, shelter, medical care, etc.

Out at the far edges … the margin … are highly discretionary, non-essential expenditures.  These are things you can easily live without, but you enjoy when you’re flush.

These are the first things to get cut when you’re squeezed.

Households, corporations, even governments all have “core” expenses and activities … and “marginal” expenses and activities.

Again, when prosperity recedes … things at the margin fall off the target.

Our point in all this is you can learn a lot about the direction of the economy simply by watching what happens at the margin.

Make sense?

That’s why this headline caught our attention …

Rising Home Prices Push Borrowers Deeper Into Debt

– Wall Street Journal, April 10, 2018

“ … higher mortgage rates make homeownership out of reach for many,

pressuring lenders to ease credit standards.”

“ … rising debt levels are a symptom of a market in which home prices are rising sharply in relation to incomes, driven in part by ahistoric lack of supply that is forcing prices higher.”

Hmmm … some of that doesn’t make sense to us.  But before we go there, consider this headline …

Home builder confidence slides for fourth straight month

– MarketWatch, April 16, 2018

“The 69 reading is still quite strong. In the go-go days of the housing bubble, between 2004 and 2005, sentiment averaged 68. Still, the fact that confidence is declining so steadily is notable. When NAHB’s index started to fall in late 2005, it was one of the signals that foreshadowed the coming housing bust.”

“ … builders are keeping the pace of construction slow and steady. And they’re worried about their costs.

And then there’s this one …

US home building rose slightly in March, led by apartments

– Associated Press via ABC News, April 17, 2018

“… driven by a big 16 percent gain in apartment buildings. Single-family home construction slipped 3.7 percent.”

“There is a severe shortage of existing homes, which has pushed up

prices in cities around the country … That’s lifting demand for new homes.”

Again, a few things here that don’t make sense to us.  And we could probably write a book just on the excerpts from these three news articles.

But let’s see if we can unpack all this briefly …

First, rising mortgage rates and prices are causing people at the margin of prospective home-ownership to remain tenants. Not great for them, but not bad for landlords.

Usually when prices rise based on DEMAND, builders ramp UP production to profit by selling into the increased demand.

So it seems to us home-builder confidence should be growing.  But it’s not.

That makes us think the number of people who can afford to buy isn’t growing either … it’s shrinking.

That’s because when prices rise faster than incomes, the ability to borrow eventually peaks.  Falling interest rates can delay the problem by getting more mortgage for the same payment.

But now that rates are rising, it seems people at the margin are getting pushed off the back of the affordability bus.

That may also explain why apartment building is growing, but single-family home building is declining.

It may also explain why Freddie Mac is lowering lending standards.

They can’t create jobs or increase incomes, but they can make it easier to borrow in spite of rising rates … and they are.

Freddie’s making it easier for first-time home buyers to get in and push up the market from the bottom.  It’s like the air inlet in an inflatable jump house.

The concern is when lower lending standards act as the air pump trying to compensate for higher interest rates and insufficient income … how long can the debt inflation go before it tapers off … or worse?

Don’t get us wrong.  We LOVE passive equity.  It’s fun to buy a property and just watch the equity grow.

But the market giveth and the market taketh away … unless you’re smart enough to get your equity off the table with cheap long-term debt while both are still available.

As John F. Kennedy said, “The best time to repair the roof is when the sun is shining.”

The sun is shining on real estate right now.  Enjoy it. But be sure you’re preparing your portfolio for stormy weather.

It’s probably smart to have some cash on hand … to be prepared for credit markets to tighten unexpectedly … and to lock in long-term rates where you can.

It’s also wise to pay close attention to cash-flow and avoid dependence on market factors to increase rents or values.

Make sure your deals pencil TODAY … based primarily on things you can reasonably control.

Sure, you might have to walk on some marginal deals … even though they’d be “winners” as long as the tide is high and the sun is shining.

But if the tide goes out and the storm comes, then marginal boats sink.  And if they’re tethered to your best boats, they ALL sink.

Now if you just can’t resist taking a chance on a marginal deal … consider structuring it so it can’t take down the rest of your portfolio if things don’t go as planned.

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.

Trump’s tariffs and your real estate investing …

Let’s take off our blue, red, and orange team colors … hold hands … and take a real-world look at trade tariffs in action.

Most nose-to-the-grindstone real estate investors may not pay attention to, or understand, trade tariffs … or how they could affect real estate investors.

But, like many things we obsess about after 2008, tariffs might mean more to your real estate investing than you realize.

Consider this headline from National Real Estate Investor Online …

Construction Costs Spike for Multifamily Projects 

It’s short and you should read it, but here are some quick highlights …

  • The cost of construction is rising for apartment developers and contractors … including materials, labor, and leasing.
  • Lumber prices are “out of control” having “increased substantially” … with March prices up 25 percent over January and February.  Yikes.
  • “The U.S. has added trade tariffs to Canadian lumber of over 20 percent over the last year” and “government policy is also pushing up the price of steel”. 
  • “Prices of construction materials are outpacing consumer inflation by a factor of two”. 
  • “Contractors have been forced to offer higher wages to attract more workers.” 
  • “… apartment projects are becoming more expensive to build … ‘You can only pass so much of that on to consumer,’ says … the National Home Builders Association.” 
  • “The number of job openings in the construction industry rose to record-breaking or near-record-breaking levels in each of the last five months of 2017 …” 
  • “The number of people employed in the construction industry rose … more than twice the growth compared to … overall non-farm payroll.”

Okay, so there’s the foundation.  Now let’s unpack it …

First, a boom in apartment building has caused a glut in some markets leading to rent concessions.

If increasing leasing expenses, construction loan interest; materials, and labor costs are all increasing … builders will need to either raise rents or stop building.

Both can be good for nearby owners of existing inventory over the long term.

But in the short term, be attentive to property maintenance and customer service … or you might lose some tenants to those short-term concessions.

But beyond the impact on builders, what about the impact of tariffs on markets, labor, and industries?

If tariffs successfully reset the pricing of commodities like lumber, steel, copper and concrete, there are many potential ramifications.

The motivation behind tariffs is to wean domestic buyers off cheaper foreign goods … and make it more profitable to produce those goods domestically.

The goal is to create domestic jobs in lumber, steel, and mining.

In other words, if Chinese steel or Canadian lumber become more expensive, it could pull up domestic prices to where it’s profitable for businesses to expand domestic production … and hire more workers.

This could mean job growth and subsequent housing demand in those markets which produce these items.

So we’re watching this whole tariff tussle carefully for clues about which geographic markets might end up catching a boom … just like the energy industry markets did after 2008.

But rising commodity prices can creep into consumer goods too … making MANY things more expensive.

And if prices rise faster than wages, people will actually be poorer in terms of purchasing power … which puts downward pressure on prices … including rents.

Squeezed far enough by rising costs of living … people will move to more affordable housing … and even to more affordable areas.

So again, this is something to pay attention to.  In spite of the current economic “good times” … we’re still fans of the more affordable markets and properties.

Lastly, we’ve learned to be cautious about construction driven employment and wage booms.  We think it’s dangerous to invest long-term based on a short-term boom.

Think about it … construction is about building something.  But after it’s built, the work is done.  Then what do those workers do?

Unless there’s perpetual building, workers need to change industries or move to where there’s more building going on.

So it’s good to remember that housing is a reflection of economic growth, not a driver of it. Housing is built for and occupied by people who work at something else.

In other words, you don’t want to be buying apartments to house people who are building apartments … or anything else that will be “done” at some point.

Whereas a business is a “going concern” and generates on-going revenue, sustainable jobs, and a long-term pool of tenants.

So even if you’re a residential investor, pay attention to commercial, industrial, warehouse, and office in terms of construction, absorption, and occupancy.

These are leading indicators of where residential property demand might increase.  Because when businesses are expanding in an area, it’s a pretty safe bet residential will too.

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.

12/9/12: Competing in a Down Market with New Construction

Sooner or later, new construction has to happen – at least in residential markets where the population is increasing.  After all, those new people need someplace to live.

And while home builder confidence is improving, it’s still a far cry from “happy days are here again”.

So how can a small time real estate developer compete in a fragile economy?  We get some great ideas in this episode of The Real Estate Guys™ radio show.

In the studio to talk boutique residential real estate development:

  • Your well constructed host, Robert Helms
  • Special guest, real estate developer Beth Clifford

Real estate development is a great way to “force equity” (a term from our book Equity Happens for making money by changing the use of a piece of real estate).  But when the economy is soft, building properties “on spec” (building without a specific buyer secured) can be risky business.

Big developers look for growing economies that push populations out to undeveloped areas.  This is the famous “path of progress” everyone talks about.  But it takes a growing economy and population growth to feed the sprawl.

Usually development begins around some piece of infrastructure.  Early in a country’s development, it’s usually a river, ocean or some other natural resource or means of transportation.  Later, it’s around existing population centers and just pushes out (downtown to the suburbs to the country, which eventually becomes the suburbs).

At some point, the development sprawl meets some natural resistance point.  It could be physical (like a mountain range or body of water), political (like a border), or the population’s resistance to travel longer distances to access amenities near the center (commute times).

When this happens, the big developers have a hard time because they need big chunks of land to do their huge developments.   This opens the door for small, “boutique” developers to do “in fill” projects on smaller patches of land inside the already developed area.

So whether you’re in an up or down economy, there’s always opportunity for in-fill development.  But in a down economy, you need to be very careful about your project so you don’t end up sitting on inventory you can’t sell.  Soft local economies, especially those where existing product can be purchased for less than replacement cost, will not allow fat margins.  And carrying costs on unsold inventory can quickly erode those thin margins.

Beth says the key is to pick the right market, product type and price point.  Then manage your project carefully.  It may sound obvious, but there are some nuances Beth cautions us about.

In Beth’s case, she’s active in the Washington DC metro.  It’s dense (not just the politicians ;-)), so there are no big developers to compete with.  No one can find a big chunk of land to dump a bunch of inventory on the market.  That’s good for the little developer.

DC is also affluent.  The U.S. Government is a huge operation which pulls in lots of money from all over and dumps it into the local market.  It’s a very powerful market driver.  It also attracts a lot of people to the area, so when it comes to residential real estate you have little supply, high demand and good capacity to pay.  That’s our favorite recipe for equity!

So listen in as Beth shares her practical advice for creating new construction profits – even in a down economy!

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