Don’t get lost in the lag …

Investors and economists often talk about cycles … business cycles, credit cycles, even news and legislative cycles.

Cycles are the ebb and flow of causes and effects sloshing around in the economic sea we all swim in.  They’re big picture stuff.

For nose-to-the-grindstone Main Street real estate investors, cycles are barely interesting, seemingly irrelevant, and mostly boring.

But a danger for Main Streeters is not seeing something dangerous developing on the horizon.  Another danger is getting lost in the lag.

The lag is the gap between when a “cause” happens and when the “effect” shows up.

For example, in a typical supply-and-demand cycle, a shortage of homes could cause prices to spike.    The effect of the supply-demand imbalance is higher prices, which in turn becomes a new cause.

Rising prices causes builders to increase production … and existing property owners to put their homes on the market … thereby increasing supply.

As supply grows, price escalation slows. If supply overshoots demand, prices might actually fall.  If you’re structured for only rising prices, you might have a problem.

Of course, there are other factors affecting pricing such as interest rates, wage growth, taxes, labor and material costs, availability of developable land, and on and on.

But our point is … an amateur investor often doesn’t see the cause for price escalation (or anything else) until the effect happens.

Once prices rise, they jump in to ride the wave … believing prices will go up tomorrow because they went up yesterday …  and their speculation only adds to the demand and fuels the fire.

At least for a while …

What’s often overlooked is the production pipeline … until the supply shows up and softens pricing.  Near-sighted investors often get lost in the lag.  They’re not sure where they are in the cycle.

It’s what happened to “GO Zone” investors after Katrina and Bakken investors during the shale boom.

Folks bought in during a boom, not considering the “production lag” … and didn’t structure for a slowdown.  When it happened, they didn’t have a Plan B.

It’s a simple example … and before 2008, that was about as deep as our analysis ran.

But the pain of 2008 opened our eyes … and 10 years later they’re still as wide open as we can keep them … because we know there are cycles as sure as the sun comes up.

That knowledge isn’t bad.  In fact, it’s good.  Because when you see the bigger picture, you also see more opportunity.

So we study history for lessons … current events for clues … and we talk with experts for different perspectives.

It sounds complicated … and maybe it is a little … but it’s like the old kids’ game, Mousetrap.

There’s a lot of fancy machinery hanging over our heads …and it’s just a series of causes and effects.  “A” triggers “B” triggers “C” and so on … until it’s in our faces.

But even at the street level with our nose on the cheese, if we watch the machinery, we can see events unfold and still have time to react appropriately.

So let’s go past a simple supply-and-demand example.

Back in 1999, Uncle Sam decided to “help” wannabe homebuyers get Fannie Mae loans … so the government lowered lending standards and pushed more funds into housing.  It seemed like a nice thing to do.

But at the time, observers cautioned it could lead to financial problems at Fannie Mae … even to the point of failure.  It took nine years (lag) … but that’s exactly what happened.  Fannie Mae eventually failed and needed a bailout.

But before things crashed, it BOOMED … and people made fortunes. We remember those days well.  It was AWESOME … until it wasn’t.

Folks were profitably playing in the housing jumphouse from the time the easy money air pump switched on until the circuit blew.  Lags can be a lot of fun.

Because few understood why the party started and why it might end … most thought the good times would roll forever.  So they were only structured for sunshine.

Oops.

People who urged caution at the height of fun … like Peter Schiff and Robert Kiyosaki … were derided as party-poopers.

Of course, they both did well through the crisis because even in the boom they were aware of the lag and the possibility of a downturn … and were structured accordingly.  Smart.

Now, let’s go beyond supply, demand, and mortgages … and look even further up the machinery …

In late 2000, Congress passed the Commodity Futures Modernization Act of 2000.

Doesn’t sound like it has anything to do with real estate … BUT …

This was the birthplace of unregulated derivatives … like those infamous credit default swaps no one in real estate ever heard of …

… until they destroyed Bear Stearns and Lehman Brothers in 2008, while bringing AIG to the brink of bankruptcy, and nearly crashing the financial system.

This mess got ALL over real estate investors in a big and painful way … even though there was an 8 year lag before it showed up.

Remember, for those 8 years a lot of the money created through derivatives made its way into mortgages and real estate … adding LOTS of air to the jumphouse.

Back then, real estate investors were riding high … just like today’s stock market investors.

And those who only measured the air pressure in the jumphouse … ignoring other gauges … didn’t see the circuits over-heating … until the system failed.

Then the air abruptly stopped, the inflated markets quickly deflated, and the equity-building party turned into a balance-sheet-destroying disaster.

And it happened FAST.

Which bring us to today …

The Atlanta Fed recently raised their GDP forecast for the booming U.S. economy.

Stock indexes are at all-time highs.  Unemployment is low.  The new Fed chair says, “The economy is strong.”

Some say these are the effects of tax cuts and a big spending bill.

Makes sense … because when you measure productivity by spending, when you spend, the numbers move.  Spending, or “fiscal stimulus” is an easy way to goose the economy.

But some are concerned this is a temporary flash fed by debt and deficits.

Others say it’s fiscal stimulus done right … kindling a permanent fire of economic growth and activity.

Could be.  After all, Trump’s a real estate guy, so he understands using debt to build or acquire long-term productive assets.

Real estate investors know better than most that not all debt and spending are the same.

Of course, government, geo-politics, and a national economy are a much different game than New York City real estate development.

And there are certainly some cracks showing in all these strong economic numbers …

A strong U.S. dollar is giving emerging markets fits.  Home buyingbuildingappreciation, and mortgages are all slowing.

We’re not here to prognosticate about what might happen.  Lots of smart people are already doing that, with a wide variety of opinions.

We just keep listening.

Our point today is … there’s a lag between cause and effect smart investors are wise to consider.

When lots of things are changing very fast, as they are right now, some are tempted to sit out and see what happens.  Probably not smart.

After all, the air in the jumphouse could last a while.  No one likes to miss out on all the fun.

But others put on sunglasses, toss the umbrella, and go out and dance in the sunshine … without watching the horizon.  Also not smart.

Dark clouds could be forming in the distance which might quickly turn sunshine into storm.

The best investors we’ve met take a balanced approach … staying alert and nimble while enjoying the sunshine, but not getting lost in the lag.

Changes in economic seasons aren’t the problem.  It’s not seeing them coming and being properly prepared.

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.

Profitable Niches – Real Estate Development

In this episode of our Profitable Niches series, we’re starting from the ground up. Inventory of homes is tight in many US markets, and returns are diminishing. Enter real estate development.

Our guest, Jay Hartley, saw an exciting opportunity to expand his business into the real estate development space, and he’s got a wealth of knowledge to share.

In this episode of The Real Estate Guys™ show you’ll hear from:

  • Your stately host, Robert Helms
  • His developing co-host, Russell Gray
  • Returning guest, Jay Hartley, real estate developer and property manager in Dallas-Fort Worth

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Beginning with the basics

One of the questions we ask in our seminars is which is more risky: buying an existing building and renovating or building from the ground up? The truth is, there isn’t a right answer to that question.

From inheriting problems in an existing property to building too much or building something the market doesn’t want, there’s a lot to consider when deciding whether to build or buy. The key is knowing the market, the demand, and the supply.

One of the most exciting things about real estate development is the number of entry points. Throughout the lifecycle of a property, there is value being added. Taking raw land from a zoned area to a lot with utilities and a finished building are all steps in the process.

For those who find themselves in a market with a lot of demand but a squeeze on supply, real estate development can be a FANTASTIC way to add more houses into the market, whether or not you hold on to that inventory long term.

Shifting your investment mindset

Jay Hartley is known as one of the best property managers in the Dallas-Fort Worth real estate market. He began like many investors with buying and renting fixer uppers.

Eventually, inventory started getting tight, prices escalated, and returns diminished. That’s when Jay took his first steps into development.

“We had to look at the marketplace and see where the opportunity would be to add inventory,” Jay says. “We started looking at acquiring vacant lots that were already in subdivisions and doing what they call infill.”

Infill meant building one or two homes on lots in subdivisions and then either renting or selling those homes to investors as turnkey properties.

It wasn’t long before Jay’s successful turnkey model got plenty of competitors and Jay took it to the next level. He utilized the economies of scale by getting into bigger developments and subdividing tracts of land. That’s also when he started building his network and expanding his education.

“I had some clients in the building business,” Jay says. “I took them to lunch and started picking their brains.”

Jay soon learned it was a smart idea to partner with a few builders early on. But then the key to sustaining his business was to keep his contractors busy with his projects so he didn’t lose them to other projects.

Real estate development doesn’t necessarily mean you’re the one swinging the hammer. In many ways, it’s orchestrating OTHER contractors and moving parts to complete a job. That also means managing labor.

“One of the biggest issues we’re dealing with right now is having labor ready and available,” Jay says. “If we don’t keep them busy, we lose that framer, we lose that concrete guy, we lose that roofer. We try to set them up to go to one job site to the next to keep them busy and on my job.”

As the deals got larger, Jay had to deal with the growth spurt in his business. He was always known as the property management guy, but had to shift his mindset as he shifted into real estate development. One of those moves was toward selling properties rather than buying and holding.

“I’m not afraid to sell them anymore,” Jay says. “I was a collector before, and it was tough for me to wrap my head around selling them.”

But, with some help and guidance, he was able to work through those mental roadblocks and scale up his business!

Get rich in a niche with a network

Rolling with changing markets is what makes an investor successful long term. Even though Jay was doing really well in property management, he saw a need for more inventory in the market. So, he became one of the people to create it! That has also set him up to know about lots of different types of real estate, and it’s another tool in his toolkit.

“It’s not about what I’ve done. It’s about who I’ve met,” Jay says.

Building a network of people with all kinds of unique backgrounds is a way to tap into their experience. Jay says you can take classes and watch videos, but watching flipper shows on television doesn’t mean you know how to flip a house. Partnering with people on a build job, however, is worth its weight in gold.

And that’s the essence of most development. It’s done through syndication and joint ventures. You can partner up with people who have the land, capital, or expertise you need, and you can put together a great deal.

Jay started out financing his own projects, but it wasn’t until he started tapping into syndication that his business really took off. He attended a few of our programs on syndication and sales, and they catapulted him into success.

“I’ve been in real estate all my life,” Jay says. “The training there, I didn’t think I really needed it. It was enlightening … it gave me the tools and the ability and the confidence to talk to clients and investors and pitch!”

Jay’s journey has been propelled by his ability to be ambitious and coachable. The ability to shift and adapt to new markets is how he keeps his skills sharp and his business growing.

If you’d like to learn more about real estate development and property management in the Dallas-Fort Worth market, get on the inside track with Jay. Send an email to dallasdeals (at) realestateguysradio (dot) com, and we’ll connect you with Jay and his expertise!

And, we hope to see you at some upcoming events. Secrets of Successful Syndication and How to Win Funds and Influence People are packed full of information that you won’t want to miss. Register now!


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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.

Avoiding Bubble Trouble – Tips for Hot Market Investing

“Are we in a real estate bubble right now?” Trust us, we’ve heard this question asked a LOT lately.

In this episode of The Real Estate Guys™ show, we’ll dive into that question.

We’ll discuss:

  • The three components that converge to create market bubbles
  • Why real estate is a good investment class for avoiding bubble trouble
  • How to react in a hot market … AND
  • How to prepare for when prices inevitably do deflate

You’ll hear from:

  • Your bubbling host, Robert Helms
  • His falling-a-bit-flat co-host, Russell Gray

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Are we in a real estate bubble?

Our primary caution to you is that all-time highs do NOT equal market bubbles.

It can be difficult to parse whether a bubble is, well, bubbling up. Here are the three different components to rising prices:

  1. Leverage. Financing means pulling money from the future to bring in dollars today. But the ready availability of money can end up driving prices higher, even though many loans are fashioned to make things more affordable.
  2. Disparity between supply and demand. When there’s more demand than supply, prices go up … even if the price no longer matches the value of the commodity.
  3. Inflation. Inflation causes currency to literally lose its purchasing power. So it takes more currency to buy the exact same things.

When you see runaway price increases, take a minute to consider what the cause is. Is the fundamental value of the property increasing, or is rampant speculation driving prices up?

When the factors above start to change, the price of a property can increase … or decrease … significantly. So pay attention.

Don’t get so caught up in a hot market you get blinded to the actual value of an investment. Buy because it makes financial sense … and not because everyone else wants to buy.

If you don’t know better, it’s easy to believe you shouldn’t be buying anything right now.

But real estate is a very different investment than most. Every single deal is unique, which means YOU have a ton of flexibility to add value to a property.

Real estate allows you to negotiate on the front end, manage operations on the back end, and analyze any given property on its own individual merits, instead of just looking at the market or asset class as a whole.

Real estate is not a commoditized asset. That gives you the power to strike individual bargains.

Tips for buying in a hot market

The vast majority of investors invest in stocks and bonds. They’re used to having zero control. As a real estate investor, there’s a lot you can do to position your portfolio for success.

Avoid the bubble mentality. Don’t buy because everyone else is buying.

Don’t treat properties like commodities and hope something good will happen. Pick your investments individually, and make sure you have a Plan A … and a Plan B and Plan C.

Then, do a sound analysis and underwriting.

Wondering whether there’s a difference? There certainly is.

Analysis means gathering the numbers and putting them together to get an estimated return.

When you get a pro forma, make sure you double-check the analysis … the math isn’t always correct.

Underwriting goes one step further. A proper underwriting process pulls third-party financial statements to verify the numbers from the analysis match reality.

It’s very important to underwrite all of your deals. Do this by gathering all the information you can from trustworthy parties … financial statements, rent rolls, copies of rental agreements.

You can even go a step further and verify information with tenants independently.

Next, you need to make sure your assumptions hold water. Check the property tax, the property condition, and maintenance schedule.

Evaluate the total cost of an investment, including needed rehab.

Last, look at your potential revenue. Evaluate rents to see if they match market rates, and see whether there’s any opportunity to make improvements and increase revenue.

A note … you CAN’T underwrite your way out of risk. But to minimize risk, you want your eyes as wide open as possible.

How to position your existing portfolio

Underwriting is important when making a new investment, but what can you do about your existing portfolio?

Quite simply, you can go through the same process you would with a new purchase.

Use zero-sum thinking to ask yourself whether you’re getting the most from your investments.

Look at the numbers … cash flow, debt and interest rates, and equity. Is there any room to improve the property?

You might think about moving some equity around. Many real estate investors think the only option for accessing equity is selling a property or doing a 1031 tax-deferred exchange … but you have a third option.

Consider a cash-out refinance, which allows you to transfer equity from a developed property to a market or property type with upside potential.

To proactively strategize about bubbles, separate your equity from your properties.

But be cautious … always do underwriting and analysis on potential purchases. You do run a risk when you thin out your equity, so make sure you hedge your bets as much as possible.

Making a risky purchase could mean being locked into a property when equity and cash flow decrease during a downturn.

So, ensure you have a plan for holding on to the properties you purchase in the event the market crashes and you go underwater.

Time heals a lot of wounds … we’ve seen many investors hold onto properties during a downturn only to make a killing once the market starts perking up again.

It may well be that the market you’re in has bubbled to the point where selling makes sense. When considering where to put your equity, be cautious and be smart.

Roll with the highs and lows

There are quite a few things you can do to protect yourself from the downside of bubbles and benefit from the upside.

  1. Seek out recession-resistant pricing. You want to look at rent pricing that is just below the market median. This is the sweet spot … you’ll get people coming down from the top in bad times and people coming up from the bottom in good times.
  2. Follow the barista rule. Some markets are more affordable than others. If your barista can afford to live in the same area they work in, that market has recession-resistant pricing that isn’t artificially inflated.
  3. Be in a position to pick up bargains when the downturn comes. Have the wits to pull some chips off the table when the market’s at the top so you can make a killing when the market deflates and there’s blood in the streets. In other words, keep some liquid equity close at hand when the market starts getting hot.

Bubbles aren’t bad … markets naturally rise and fall. You just have to be resourceful enough to catch the waves.

Now go out and make some equity happen!


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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.

A big story keeps getting bigger …

We’re just two weeks removed from an epic educational and networking experience at the New Orleans Investment Conference.

While we were there, we threw a little private party and Robert Kiyosaki, Peter Schiff, Chris Martenson, and Brien Lundin all showed up to hob-nob with our listeners.  Very fun.

During the conference, Robert Helms emceed a fascinating panel called The Future of Money, with panelists Doug CaseyDanielle DiMartino Booth and Chris Martenson.

(Side note: Chris Martenson, Brien Lundin and Peter Schiff are all confirmed for the 2018 Summit at Sea™ … and we’re still recruiting several other VERY notable speakers.)

It’s clear the future of money and wealth is on the threshold of MAJOR change.

For most people “the dollar” is synonymous with money because their income and wealth are denominated primarily in dollars. So the future of the dollar is an important topic.

Right now, the U.S. dollar is the world’s reserve currency … and Treasuries are considered the safest, most liquid place to save excess dollars.

Treasuries are Uncle Sam’s IOUs.  They’re technically called bills, bonds, and notes … but they’re all debt.

Treasuries also play a major role in how market interest rates are determined … so if you’re a user of debt, the future of Treasuries affects you also.

Yields (rates) and prices of Treasuries are a function of supply and demand.

Like apartment buildings, when investors bid prices UP, yields (like cap rates) fall. 

You may already know it, but just in case, the math is simple:  Income / Price = Rate

For example, $60,000 net operating income on an $800,000 property is a 7.5% cap rate. 

If investors bid the property up to $1 million, it’s $60,000 / $1,000.000 = 6% cap rate.

So high demand creates upward pressure on prices, and downward pressure on yields (cap rates).  Make sense?

The same with Treasuries.  As long as demand is robust relative to supply, interest rates are low.  Strong demand for Treasuries means low interest rates.

If anything substantially alters the supply / demand equilibrium in Treasuries, YOUR asset values and interest rates will feel it.

Lots of government debt means lots of Treasuries for sale.   We’re pretty sure that’s not changing soon.

But TOO MUCH supply means lower prices.  Just like when lots of houses in a neighborhood are for sale at the same time.

DEMAND for Treasuries comes from private investors (small and large), and political investors (governments and central banks).

Private investors buy Treasuries to park large amounts of cash, use as gambling chips in the Wall Street casinos, or serve as collateral in complex financial transactions.

Governments also buy Treasuries as a place to park their reserves.  China and Japan are at the top of the list with over $1 trillion each. 

Treasuries are denominated in dollars.  So countries buy dollars with their own currency, or sell things to the United States and get paid in dollars … then use those dollars to buy Treasuries.

To keep the worldwide economy going, Uncle Sam issues lots of Treasuries and the Fed prints lots of dollars.

As long as everyone trusts the dollar, it’s all hunky-dory.  And this is why so many of our big-brained friends are concerned. 

As we chronicle in our Real Asset Investing special reportChina’s been making substantial moves to undermine the dollar as the world’s reserve currency.

We recently commented on this … and the story continues to unfold.

Here’s the quick backstory …

When the dollar became the most trusted currency on earth in 1944 it was backed by gold.  In 1971 Uncle Sam defaulted on the gold backing.

Not surprisingly, the world dumped dollars which triggered excessive inflation (rising prices, loss of purchasing power).  The U.S. quickly came up with a plan to save the dollar.

Uncle Sam made a deal with Saudi Arabia … for oil to ONLY be sold for dollars and the Saudi’s would invest their profits in Treasuries.  Clever.

Then the Fed raised rates to nearly 20% to “break the back of inflation.”  If you wonder why inflation is scary, look at life in Venezuela right now.

Inflation is caused by too many dollars in circulation relative to goods and services available.

High interest rates slow borrowing.  It’s a long story, but new dollars are born when you borrow.  Reducing borrowing slows the birth of new dollars.

High interest rates also suck excess dollars into banks and Treasuries, as people and nations save for yield (interest).

These moves shifted demand for the dollar from Uncle Sam’s savings (gold) to the oil and bond markets. 

Back then, the U.S. had the biggest manufacturing economy, most productive workforce, the strongest military, and very little debt.

Of course, MANY things have changed … and more change is likely coming to an economy near you.

Today, no one cares about gold … except China and Russia, who are accumulating hundreds of tons a year.  Hmmm… that’s interesting.

Coincidentally, Russia and China are the #2 and #3 military powers in the world behind the United States.

China is now the largest manufacturing economy and top importer of oil.  Russia is the #2 seller of oil … behind (wait for it …) Saudi Arabia.

Russia and China recently made a deal to trade oil in Chinese currency (the yuan) … instead of dollars.   

China already has major oil producers Iran and Venezuela on board the petro-yuan train.

And now there’s talk China will “compel” the Saudi’s to deal in yuan too.  When you’re the big customer, you have negotiating leverage.

China also recently announced plans to create a yuan-denominated oil contract, which some say is a big step towards creating a robust yuan-backed bond market.

And to top it all off, it’s been reported China is flirting with the idea of backing those petro-yuan contracts with gold.

The Chinese are infamous for seeing a good idea and copying it. 

Right now, it seems China has reverse-engineered the dollar’s rise to dominance and is simply copying it … and it looks like they’re making steady progress towards their goal.

The BIG questions are …

What does it mean to YOU and what can YOU do to grow and protect YOUR wealth?

Of course, that’s a HUGE discussion and we’re working on something BIG to address it.

For now, when you think about the future of money and wealth, here are some things to consider …

Investors, many probably born after 1971, are piling into Bitcoin … driving it up at an insane rate.

Motives we’ve heard for Bitcoin-mania include moving wealth into an “asset” which can’t be simply printed out of thin air.

Interestingly, Bloomberg reports that online searches for “buy Bitcoin” have exceeded “buy gold.” 

Some use the border-less nature of Bitcoin to escape capital controls and discreetly move wealth out of totalitarian jurisdictions. 

Of course, some are buying Bitcoin simply because “it’s going up” and they want to strike it rich in dollar terms.

Meanwhile, plans have been announced to launch a Bitcoin futures market … just like already exists for gold.  

Ironically, futures markets are the very mechanism many pundits claim gold prices are suppressed with … to discourage those concerned about the dollar from seeking safety in gold.

We’ll see what happens to Bitcoin.  Meanwhile, Russia, China and several other nations continue to accumulate gold.

As for the U.S., it’s all about the red-hot stock market.

Of course, as our friend Simon Black points out, the top performing stock market is Venezuela. So a booming market isn’t necessarily the bellwether of a healthy economy.

Where does real estate fit into all this?

History says real estate fares pretty well when shift happens.

Even in chaotic financial times, people still need a roof over the head, crops still need to grow, commerce goes on … and real estate is at the center of human activity.

Of course, that doesn’t mean all real estate investors everywhere make it. 

We took it hard in 2008 because we weren’t prepared for a sudden shift.  We’re working hard to be better prepared today.

One thing’s for sure … there’s never been a more important time to get SERIOUS about your financial education and strategic network.

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.

Impact of Zoning Policy on Prices and the Path of Progress

Zoning, zoning, zoning.

It’s a big deal in cities like San Francisco and New York … but what is it, and what impact does it really have on YOUR real estate investments?

In this episode of The Real Estate Guys™ show, we’ll discuss the way zoning can limit available land and have a huge impact on supply and demand cycles.

To zone in on this issue, we invited a special guest to present his take on how zoning has affected property markets in the U.S.

Listen in! You’ll hear from:

    • Your zoning-in host, Robert Helms
    • His zoned-out co-host, Russell Gray
    • Economist and Cato Institute fellow, Randal O’Toole

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Supply and demand isn’t so simple

Supply and demand seems like a simple concept. But there are a surprising amount of inputs that affect both sides of the equation.

Capacity to pay can crimp demand by limiting the number of people who CAN buy property, regardless of whether they WANT to buy.

And on the supply side, market factors restrict how much property is available to sell for a particular use.

It can be difficult to identify why markets with thriving demand and appropriate supply are so successful compared to similar but less profitable areas.

But part of real estate investing is identifying factors of success … before an area starts booming. Little details, like school district boundaries and zip codes, can have a huge impact.

Other government designations, like zoning restrictions, can have a monumental effect on housing value.

What happens when zoning rears its ugly head

Zoning has a tangible impact on the cash flow you can generate.

When previously residential areas are rezoned for commercial use, real estate investors can net quite a bit more bang for their buck.

On the other hand, failing to take into account zoning restrictions can completely crush attempts to make a profit.

For example, the owners of one church in Palo Alto found out the hard way that the building wasn’t zoned for commercial use.

In that case, the church had to stop leasing space to a dozen commercial tenants after the city cracked down on them for violating zoning restrictions.

So why do cities have zoning in the first place? And why do some cities have strict zoning requirements, while others, like Houston, have almost none?

Zoning allows the government to plan the future of certain areas in order to maximize the impact of public transportation, designate areas for certain use types, and even increase land values.

It doesn’t matter whether or not you’re a fan of the government butting their heads into property owners’ decisions about what to do with their land.

The truth is, there’s not a lot you can do about it … except use zoning (or the lack thereof) to your benefit.

Zoning is an important factor in the flow of people and money into and out of certain areas.

It’s your job to pay attention to zoning so you can invest in the areas that attract people and money.

Don’t get caught up in the way you want the world to be.

You invest in the real world … and confronting the brutal facts is the only way you can make good decisions.

What a public lands expert has to say about zoning

We were honored to chat with Randal O’Toole, an economist and senior fellow at the libertarian think tank Cato Institute. Randal focuses on urban growth, public land, and transportation issues. He gave us a bit of a backstory on zoning.

Randal said zoning began in 1947 with Britain’s Town and Country Planning Act … and quickly spread across the world.

Randal has strong opinions about zoning … and we appreciate his point of view because we think it’s smart to expose ourselves to a variety of perspectives.

Randal noted that in the U.S., anyone can own land … but what you can DO with that land is limited.

For example, some areas in California are zoned for minimum density. This means owners need to develop properties that will accommodate a certain number of people.

He also noted that there are no markets in the U.S. that are short of land itself … areas with highly reported housing shortages often suffer from a lack of developable land.

In the Bay Area, for example, 17 percent of land has been urbanized and 20 percent is set aside for public parks.

That leaves a whopping 63 PERCENT of land that is privately owned, but undevelopable due to zoning restrictions.

California as a whole is the most heavily populated state in the nation … yet 95 percent of its population lives on 5.5 percent of the state’s land, and it’s not because there isn’t land to spare.

It’s Randal’s belief that government restriction of land use creates a steep supply curve, causing huge fluctuations in pricing and eventually creating bubbles in the housing market.

Zoning requirements created the huge housing bubbles that led to the economic recession of 2008, Randal said, and are the reason that places without land regulation didn’t get hit as hard as other areas.

Randal also noted that zoning results in an exodus of low-income people who can no longer afford markets where zoning has driven values up.

This phenomenon hits vulnerable populations particularly hard, pushing people from highly zoned cities like San Jose to low-zoning cities like Houston.

Relaxing land-use laws, Randal suggested, would reverse the transfer of wealth from the poor to the rich and make land ownership more equitable across the board.

But changing those laws will require the courts to take action.

Interested in Randal’s take? You can read more of his work, including books on home ownership and government planning, at the Cato Institute website.

Zoning as a factor in housing market bubbles

We think Randal’s take on the economic crisis of 2008 is pretty fascinating.

We spent all of 2008 trying to figure out what caused the housing bubble. Traditional theories focus on the economy, the federal government, and the banking industry.

Randal has a completely different take. It’s his view that crisis-level housing bubbles are caused by the restriction of property supply, limiting the ability of the market to meet demand.

And Randal’s theory makes sense … the economic crisis affected different markets much more severely, and the ones that were impacted the most had the strictest zoning policies.

Our take is that a combination of economic and zoning factors caused the recession.

Although zoning may seem like a small factor, it’s something we’ll be paying a lot attention to going forward.

How to profit from zoning restrictions

Zoning isn’t necessarily all bad.

Pay attention to zoning restrictions, and you can find BIG OPPORTUNITIES.

When areas that have outgrown their original use are rezoned, investors are presented with a chance to increase property value.

Take the meatpacking district of New York City, for example. An area formerly used for, you guessed it, industrial meatpacking operations, is now a thriving mixed-used area packed with residential and commercial properties.

But sometimes, bureaucracy can’t keep up with the evolution of society.

As an entrepreneurial guy or gal, it’s your job to look at the market and evaluate what it needs.

Don’t get confused or infuriated. Pay attention.

Ask yourself:

  • Is a neighborhood on the verge of transitioning from one use type to another?
  • Can you influence the zoning of a property (for example, by stepping down the zoning)?
  • How can you meet demand and stay within the zoning restrictions of your city?
  • What zoning practices do the markets you’re interested in follow?

From one perspective, zoning can be a big problem. From another, it can create golden opportunities.

It’s up to you to decide which perspective you’ll take.


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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.

Certainty in an uncertain world …

It’s been said the only thing certain in life is death and taxes.

Of course, properly structured and well-advised real estate investors can usually mitigate most of their taxes. 

Meanwhile, before people die, they live.  Along the way, they get older.  And as people age, their needs change …

… and because entrepreneurship is about serving needs, it’s a safe bet there’s some opportunity in meeting the needs of aging people.

In a recent radio show, we talked about investing in undeniable demographics … specifically, the baby boomers … who are moving into retirement and beyond.

A few days later, this headline popped up in our news feed:

More Growth Ahead in Seniors Housing – NREI August 16, 2017

“… research shows continued confidence in improving fundamentals …”

 Of course, if you’ve been following The Real Estate Guys™ for any time, you know senior housing in general … and residential assisted living in particular … is a niche we REALLY like.

The article affirms our belief that …

“ Demographics continue to be a big driver for development.”

“ ‘As active as the market is with the product that we have today, we are looking at the tip of the iceberg in terms of boomers hitting retirement age,’ says Scott Stewart, a managing partner at Capitol Seniors Housing, a private equity-backed real estate acquisition, development and investment management firm based in Washington, D.C.”

‘The fast-paced growth of that population in that sector is going to make today’s discussion of overbuilding obsolete, because there just aren’t enough places for everybody today,’ ” he says.”

 The article is addressing … diffusing … concerns about over-building in the niche …

“ Demand mops up new supply.”

“Despite the new supply coming online, respondents remain confident in improving fundamentals. A majority of respondents (78 percent) anticipate that rents will rise over the next 12 months …”

Other notable comments include …

“When asked to rate the strength of market fundamentals by region, the South/Southeast/Southwest rated the highest.”

“When comparing with other property types, respondents continue to rate seniors housing as a highly attractive property type. Its scores topped that of the five major property types on a scale of one to 10.”

Okay, so it’s probably clear there’s some real opportunity here. 

But if you’re a Mom-and-Pop investor, does it make sense to jump into a niche that’s attracting big players … or are you just cruising for a bruising?

No … and YES!

When you invest in housing for seniors it’s critical to understand the difference between a high-density community and a residential facility …

… and not just from the investor’s perspective, but from the resident’s perspectve.

Let’s start with the resident …

 There are some seniors … probably MOST … and their children (the decision makers in many cases) who’d rather see Mom or Dad live in a real home …

… in a tree-lined residential neighborhood, with a backyard, and neighbors … where residents don’t feel like inmates in an institution.

Please understand … we’re not slamming the great people or services provided in bigger facilities. 

We’re just saying from a senior’s perspective, having a room in a home in a regular neighborhood FEELS a lot different than living in a room at a campus for old people.

But for a BIG investor, those individual homes are a logistical problem. 

To move BIG money, you need economies of scale and the ability to buy or build a lot of inventory at one time.

It’s the same problem Warren Buffet alluded to when he told CNBC …

“I’d buy up a ‘couple of hundred thousand” single-family homes if I could.”

The challenge, as noted in this Forbes article about Buffet’s statement, is …

“… the cost and logistics of making such an investment in large enough size to move the needle for Berkshire Hathaway is prohibitive.”

The point is big money can’t play well at the single-family residential (SFR) level …

… even if the SFR’s are being converted into highly-profitable residential assisted living facilities.

But YOU can.  And that’s why we like them.  Think about it … 

The supply and demand fundamentals are solid. 

The priority for expenditure is near the top of the list for any family.  Taking care of Mom or Dad is far from a discretionary purchase …

… so as an investor, being that far up your tenant’s payment priority ladder is a much safer place to be in uncertain economic times.

Plus, much of the money to pay you comes from insurance, government, and the senior’s estate.  In other words, you’re very likely to get paid … even in a weak jobs and weak wages economy.

Also, you don’t have to compete with big money investors, even though they clearly see the opportunity and are moving into the space. 

That’s because the barrier to entry for the big money isn’t how MUCH money is needed … it’s how LITTLE is needed.

Meanwhile, the customers would rather live in YOUR product than big money’s product.  So while big money is adding to supply, they’re not really in your niche.

This is a BEAUTIFUL thing.

But it gets better …

Residential assisted living homes can’t be mass produced.  They need to be built or converted one at a time.  There’s very little threat of a big player glutting the market.

And taking lessons learned from watching hedge funds move into the SFR space … big money was only able to acquire tens of thousands of SFRs because huge blocks of inventory were available temporarily through mass foreclosures. 

We don’t think there’ll be mass foreclosures in residential assisted living facilities.  They’re way too profitable.

But because this kind of senior housing is in high demand and highly profitable, at some point big money will start assembling them …

… buying up groups of homes from multi-facility operators … and then buying up nearby individual facilities which can strategically integrate into existing operations.

It’s called consolidation … and when it comes, big money will bid up existing operations (creating equity for those already there) …

… because they can recover the “over-payment” through operational efficiencies and financial leverage.

Between now and then, for the street level investor, the big opportunity is to be part of building the inventory by converting homes into residential assisted living facilities …

… cash-flowing along the way … then one day cashing out to big money players. 

And if those big money players never show up … just keep on cash-flowing while providing a much needed service to the community.

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.

Clues in the News – Housing Sales, Home Improvement and Foreign Investors

Every real estate investor is afloat in a vast economic sea. As an investor, it’s easy to believe you’re on stable ground … only to wake up and find you’ve drifted far from your goals.

We believe SMART real estate investors (you!) have to act a bit like ocean biologists … tracking the winds, noting the undercurrents, and keeping detailed observations of the environments you find yourself inhabiting.

One way to take your notes is to read the news. And in this edition of Clues in the News, we bring the news to you! Listen in to hear from:

  • Your economic sea biologist host, Robert Helms
  • His lowly research assistant, Russell Gray

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Slumps in home sales, builder confidence

This is a trend we’ve been observing for a while … existing home sales are decreasing. In June, they dropped 1.8% to the second lowest level this year.

If we stopped right there, you might think the economy is in trouble because people aren’t buying houses. But let’s take a closer look.

While sales of homes overall are dropping, the median home price in June was $263,800 … 6.5% higher than the same time last year.

All housing types aren’t equal. While prices are rising for houses in the 250k+ category, they’re falling for homes under 100k.

Just further evidence, like Robert Kiyosaki says, that the rich are getting richer while the poor are getting poorer.

The article linked above quotes Lawrence Yun, NAR chief economist, who says, “The demand for buying a home is as strong as it has been since before the Great Recession.”

So why are home sales dropping?

Many factors could contribute to a slow market … the growing number of millennials with high debt and inadequate income, for example. And the flux of institutional investors entering the real estate market.

Severe housing shortages are also leaving folks on the sidelines.

While the average median home price has risen, the median price of a new home has dropped by 3%.

Homebuilder confidence in recent months has reached record lows … leaving buyers hoping for a new home in the lurch.

If you look at the stock market, it would be easy to believe everything is peachy. But look at homebuilders … and you’ll see an indicator that not everyone has a bright outlook right now.

Fewer new homes, more home improvement

Speaking of homebuilders, housing inventory is at a 30-year low.

This while home prices have risen to pre-crisis levels in most markets (and far higher in a select few).

It’s a conundrum. Why are homebuilders moving at a snail’s pace? Why is homebuilder confidence so low?

Take a look at capital markets, and you’ll get a partial answer … real estate is heavily dependent on financing, and while the markets may have recovered from 2008’s recession, banks are still wary about giving loans.

In addition, 78% of homebuilders complain that labor shortages are their No. 1 concern.

Reliable, skilled labor is difficult to find. One reason? Construction workers found different careers during and after the recession … then never returned to the home-building business.

In lieu of buying new homes, homeowners are instead spending record sums on home improvements.

According to an article in the Wall Street Journal, “A shortage of new single-family homes across the U.S. is pushing up prices and locking many buyers out of the market.”

Note the certainty in that statement? Reporters are quick to assign cause and effect.

It’s your job to look at the bigger picture and see what’s going on. Then reexamine the conclusions made in the news … and draw your own.

Sales to foreigners up, buyers and sellers struggle outside U.S.

While home sales overall are down, Forbes reports that foreign investments in U.S. properties have skyrocketed recently. Sales to foreigners are up 49% over last year.

If you’re a U.S. investor familiar with the current political situation, you may be wondering what these investors are thinking.

But think about it … the U.S. has strong property rights, lots of renters, a relatively stable government, and strong infrastructure.

Buyers from China and Canada want to move their cash to a place where they see a better long-term future … and the U.S. fits the bill.

Speaking of Canada, a model produced by Better Dwelling predicts that Canadian home prices still have farther to fall.

Canadian real estate markets started crashing when the Canadian government made policy changes that hinder foreign investment.

It’s a lesson for investors to look at both the economics and the politics of a situation … then align themselves financially to policy decisions for the smartest payoffs.

You also need to be aware of the data … and what that means in terms of rising trends. While the Canadian housing market is struggling, lonely urban centers are predicted to be the next big real estate trend in the country.

While our friends across the border are seeing home prices fall drastically, our friends across the pond are seeing a dearth of affordable housing. 

An article we found recommends the London government lower tax rates for new homeowners and suggests 100% mortgages as another option.

The alternative is that London will see a “brain drain” as young workers unable to find affordable housing move outside of London.

This is a problem in the U.S. too, as large companies seek to find locations where workers can afford decent housing and quality-of-life measures are high.

The good thing about problems? (And there is a good thing.) If you’re creative, a problem is only an opportunity to create a solution.

Businesses and people need good places to live. Real estate markets have the opportunity to create them.

Homelessness and hedge fund managers

A recent article in Bloomberg listed the cities where rent hikes leave the most people homeless.

The bottom line is markets with less slack see more homelessness. The message for you? Slack is good.

It’s crucial for you to dig into your local market and figure out the dynamics driving outcomes. Many things can put a squeeze on your bottom line … make sure you’re aware of current and potential trends in demographics, jobs, and the local economy.

Winning markets don’t require a good economy to stay viable. They allow you to stay profitable even when factors change and be the recipient of demand when other markets are struggling to keep prices down and renters happy.

Remember, when you invest in the rental marketplace, you’re getting into a long-term contract. But a stable one.

Stability is probably one of the big reasons hedge fund managers and other wealthy investors are making a break for real estate.

They see the opportunity for a safe haven … but most don’t want to get their hands dirty. If you do, you may find doors opening for you.

Tune in to our next episode to hear an amazing guest make his case for entrepreneurship.

Until then, go out and make some equity happen!


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.

Real estate prices plunge … and soar

Can real estate crash … and boom … at the SAME time?

Sure.

We were reminded of this when we dug into the following headline …

New York Real Estate Prices Plunge in 4Q As Listing Days and Discounts Soar
Maybe you don’t have any plans to invest in New York real estate … now or in the future.  Neither do we.

That’s not why this headline caught our eye.

Sure, we look for clues in the news to see challenges and opportunities in those markets and product types we’re interested in.

But we also look for patterns and principles … and consider what they teach us about strategic real estate investing, even when the news is about markets we’re not currently following.

So there are a few reasons why this article attracted our attention.

First, we know the world’s wealthy like to store chunks of their wealth in premium real estate in non-domestic markets with strong property rights.

If you’re an American, you’d look outside the United States.  Many non-U.S. wealthy favor U.S. markets. Chinese and European investors tend to like New York … Manhattan,  in particular.

Of course, activity in any specific market is a blend of local and out-of-area demand.  To really understand what’s happening, you need to look into the various components of demand.

From the report the article refers to, we can’t tell what role foreign demand played in the decline of Manhattan prices.

We can’t simply assume a decrease in foreign demand caused prices to drop.  In fact, based on data in the report, we’d expect the change probably was not primarily due to changes in foreign activity.

But we don’t know.  You can read the report yourself and see what you think.

The more important principle for markets you’re tracking is that when prices move … either property prices or rents … it’s worthy of digging in to find out WHY.

If you determine the cause is temporary, it might be a great time to move into acquisition mode … so you have boats in the water when the tide comes back in.

Another thing to look at when the tide recedes … where the demand flowing?

In this case, the pricing collapse referred to is happening in Manhattan,  a sub-set of the greater New York market.  Did the demand flow elsewhere?

Citing a Bloomberg report, the article also says …

“… while buyers are abandoning Manhattan en masse, Brooklyn seems to be the key beneficiary with purchases there soaring 22% YoY and median prices climbing 15%.”
Again, it’s not Manhattan and Brooklyn we’re necessarily interested in.  We’re simply looking for patterns and principles we can apply to any market we’re observing.

The contrast between Manhattan and Brooklyn reinforces the notion that when it comes to real estate markets, there will always be winners and losers.

So a savvy real estate investor should be able to make money in any economic climate by paying attention to these flows.

Does that mean in soft economic times, high-priced markets always lose and low-priced markets always win?

If only it were that simple!  But that’s what makes market analysis and selection so fun.

You have to consider economics, demographics, politics, supply and demand factors, social patterns, taxation, business climate, job and income growth, quality of life, and market sentiment.

That sounds intimidating, but it’s not as tough as it seems.

In fact, it’s largely common sense. After all, you’re a human being. You can relate to why another human being would prefer to live, work, or run a business in one place over another … when you see challenges and opportunities from their perspective.

That’s why doing your homework is important … both statistically and anecdotally.

We like to research markets from afar, and then go there and put boots on the ground to affirm or refute our long-distance assumptions.

Stats only look in the rear-view mirror.  Data tells you what already happened. It’s just one valuable point on a trend line … the past.

But when you add feedback from people who are in direct contact with the market right NOW … bidding on properties, marketing properties, screening tenants … you get another valuable point on the trend line … the present.

And just as businesses are wise to listen to feedback from frontline employees … folks dealing with customers and operational issues on a day-to-day, real-time basis … real estate investors are wise to listen to their property managers, real estate agents, turnkey providers … even the tenants.

These are the boots-on-the-ground folks who are best qualified to say what’s happening NOW.

Your job is to consider the past and the present in the context of macro-factors and your personal objectives.  Then make appropriate moves.

The good news is that real estate markets and trends typically move and develop slowly. 

So there’s usually plenty of time to adjust … to get in when opportunities are emerging … and get out or restructure early as challenges start showing.

But ONLY if you’re paying attention.

The bad news is it’s easy to fall asleep at the wheel.

So as you’re planning the new year, be sure to schedule some time to monitor the news coming out of markets you’re interested in. 

Dig deeper into the reports and data to see what they’re saying.  Then schedule touch points with your team in the markets you’re in or considering.

If you don’t have relationships in the markets you’re interested in, get to work on developing them.

Staying informed and in touch is important and easy to do.  You don’t need a fancy MBA, PhD, or genius IQ.

However, like most things important but not urgent, “easy to do” is also “easy not to do.”  Just remember, life doesn’t give you credit for intentions … only for actions.

Scheduling time converts intentions into actions.

A person of average intellect who acts will always surpass a genius who fails to act.

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.