"THERE’S VALUE IN REAL ESTATE, IF YOU FIND YOUR FLORIDA”
Author: Paul Sullivan
The last thing most people are thinking of investing in right now is real estate. The collapse of residential values stung almost all homeowners. And the commercial market, from offices to shopping malls, is full of uncertainty as unemployment rises and consumer spending continues to be weak.
“Florida is in a storm right now,” said Greg Rand, managing partner at Better Homes and Gardens Rand Realty. “It’s overdeveloped, over speculated and overleveraged.”
Paul Sullivan writes about strategies that the wealthy use to manage their money and their overall well-being.
Yet there are those who argue that this is a once-in-a-generation opportunity to buy property. Greg Rand, managing partner at Better Homes and Gardens Rand Realty, a brokerage in the suburbs north of New York, even has a theory to guide investors. He calls it “house rich.” Simply put, the days of buying almost anything and watching it appreciate are over. Those who want to make money in real estate now will have to do extensive research and expect to hold the property for at least a decade.
The crux of the idea is not buying a distressed property but “finding your Florida.” By that he means investing in a piece of real estate, be it residential or commercial, in a hard-hit place that has to rebound. “Florida is in a storm right now,” Mr. Rand said. “It’s overdeveloped, over speculated and overleveraged.” Yet, with 78 million baby boomers expected to retire in the next two decades, the state’s long-term prospects are solid: a good proportion of them will want to be someplace warm and sunny when they stop working.
Mr. Rand is not alone in this. Some of the biggest players in real estate see opportunity around the country.
“We are now looking at one of those rare opportunities to invest in commercial real estate,” said Hassam Nadji, managing director at Marcus & Millichap, a commercial real estate investment adviser based in Encino. Calif. “There are plenty of properties in the $5 million to $20 million range, whether they’re apartments or shopping centers, that are located in places where supply is constrained.” He added that these otherwise solid properties were for sale now because losses elsewhere were forcing their owners to raise money.
While many investors may not believe that real estate is returning as a steady, performing asset, the following criteria can guide those ready to re-enter the market.
DUE DILIGENCE
Investing in real estate has always carried risk. But where many people went wrong was in taking a house vanity approach — they bought their dream home without knowing how its price compared to either historical levels or the prices in nearby neighborhoods.
Mr. Rand tells the story of the Trump Tower, in White Plains, which he represents. When the sales office opened during construction, buyers focused on the penthouse condominiums with views of Long Island and New York City. At that time in 2004, the going price for 2,200 square feet on a high floor was around $1.8 million, he said. That would seem to be a deal for a buyer in Manhattan, 30 miles south, but in White Plains, few single-family homes had ever sold for that much.
He said investors who bought units on lower floors — priced closer to $700,000 — did much better. The reason was that their fixed costs — mortgage, fees and taxes — were lower, which meant they could attract a larger pool of renters to cover their investment.
The lesson here was that anyone who really knew the White Plains market would have been more hesitant in buying a $2 million apartment as an investment. “The key is due diligence over sex appeal,” he said.
THE COSTS
What makes or breaks any real estate investment is fixed costs. Investors need to know how they are going to cover the amount they have to pay, whether the property is rented or not.
In Trump Tower, the monthly fixed costs for the penthouse apartment were $11,100 with an expected rent in 2005 of $8,000, Mr. Rand said. On the lower floors, the costs and expected rent were the same, both about $5,000.
Any experienced real estate investor will tell you there are times when even the best properties, whether apartments or shopping centers, have vacancies and that means some of those costs fall on the investor. This sounds obvious, but from 2005 until early last year, there were plenty of amateur investors who only realized this after their tenants left.
What signals a return to understanding that basic principle is a return of savvier investors? “A lot of people who are coming back into the market that I’ve known for decades are saying the market is normalizing again,” said Harvey E. Green, president and chief executive at the commercial real estate brokerage Marcus & Millichap, and a 40-year veteran of the real estate market. The years “2005, 2006, and 2007 were the frothiest part of the marketplace, and these people stepped out on the sidelines.” In other words, the smart money is back after years of watching.
YOUR GOALS
Consider the South Florida market again. Many people who got caught had visions of renters covering all the costs on properties they bought. When renters became scarce and values plummeted, these investors did not have a backup plan. A better way is to set a goal for the investment. Do you want to add to your cash flow immediately or can you afford to take a longer view of 10 to 15 years?
If your goal is to make money now, you will probably have to buy an older property and fix it up. This requires a more active role, and still, the return will not be what it was at the peak. Mr. Nadji said investors in Class B commercial real estate — solid but not marquee properties — can expect returns in the high single digits. But most of those properties are not likely to appreciate in value for two or three years.
With a longer view, the options change. Ruth Trettis, a broker at Premier Properties in Naples, Fla., said one investor bought nine homes, worth more than $32 million, in the last year in Port Royal, the town’s most affluent neighborhood. Another investor bought three homes in Port Royal worth $14 million over a single weekend in May and a fourth one last month for $13.5 million (it was listed at $19.9 million).
So far, she said, neither buyer has done anything with the properties. Even though both bought these houses at steep discounts, the costs of just holding them are immense. But they clearly have a long-term goal and a belief in the area.
THE RISKS
Real estate is like every investment today. Experts and amateurs alike have strong opinions on what will work and what won’t.
The message within the real estate market itself is mixed. Last week’s report on flat home sales from April to May seemed to be heartening, but it was misleading. Homes sell better as the weather warms up. The better indicator of a bottom will come when year-on-year numbers are flat, and those have yet to appear.
The one upside is inflation, or at least the fear of inflation. Hard assets like real estate historically do well when there is inflation.
What this means is the longer your time horizon for investing in property, the better your chance of achieving real returns.
“Real estate was never a short-term investment,” Mr. Green said. “It was just in that frothy market.”
In this sense, the one certainty is that the age of the flipper is behind us.
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Published: August 28, 2009
"WHY FUNDAMENTALS OF THE HOUSING MARKET ARE RIDICOUSLY STONG.”
Dr. Steve Sjuggerud from Daily Wealth points out some keen insights about the fundamentals of the current housing market. He suggests that supply hasn't been this low in a long time, and yet housing is very affordable. These are some of the reasons that real estate could be one of the best places to put your money right now. Continue reading to learn more.
$800,000.That's about what the median home in San Francisco sold for at the height of the boom three years ago. Then the bust came, and prices fell 45%, according to the Case-Shiller home price index.
But a funny thing has been happening lately... something people haven't really noticed...
Home prices in San Francisco actually bottomed in March. According to the Case-Shiller Index, they've been up every month since... up nearly 4% in the latest month.
On my side of the country in Florida, the same thing is happening. Again, people are almost refusing to notice... But for 11 consecutive months, home sales in Florida have INCREASED over the same period last year.
Meanwhile, homes in Florida are now ridiculously affordable.
The median home price in Florida is now $147,600. That's a mortgage payment of about $650 a month (at current mortgage rates with 20% down). The median household income in Florida is about $50,000, roughly $4,000 a month before tax. That's about 16% of your household income – way below any rules of thumb about how much to spend on a house.
From coast to coast, housing affordability is better than it's ever been, getting a big boost from two things: the housing bust and super-low mortgage interest rates. The recent government incentives have helped, too.
As an investor, I'm seeing what I love... It's an ideal situation that's rare, but incredibly important if you can recognize it. It's when people's emotional opinions are clearly at odds with the reality of the numbers.
The numbers for housing are really great right now. But after three years of losses, people are sour on housing. Perfect!
Three years ago, we had the opposite situation... The numbers for housing were terrible. Housing was completely unaffordable, and builders were building at a frantic rate. But people were incredibly enthusiastic.
Today, the value is there. What will cause prices to climb again? When the supply of homes available for sale shrinks, its Economics 101. And guess what? We're there...
Right now, fewer homes are available for sale than at any time in the last 40 years (adjusting the supply for the growth in the U.S. population). If I hadn't crunched the numbers myself, I wouldn't believe it. Take a look:
Economics 101: When the Supply Is Low, Prices Go Up
Even better, when you do the simplest, dumbest comparison – the price of homes versus the supply of homes – you get exactly what you'd expect: When the supply of homes gets low, home prices rise.
David Dreman agrees... In 1980, he literally wrote the book. It's called Contrarian Investment Strategies. In it, he recommended going heavily into stocks. In the current issue of Forbes magazine, Dreman recommends U.S. residential real estate.
If inflation hits hard, the chief culprit of the bear market – real estate – is likely to be one of the best investments in the years ahead. Buy a home if you don't already have one or a second home if you can afford one.
Time to buy a house (Or two!).
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September 2, 2009
"STATE BOARD TOLD TO INVEST IN FLORIDA"
The governor and two Cabinet-level officials want more of state pension fund in real estate.
St. Petersburg Times - St. Petersburg, FL
Author: Shannon Colavecchio
Stung by a $250 million Manhattan real estate investment that tanked, Gov. Charlie Crist and two other Cabinet-level elected officials want to see more of Florida's retirement pension fund invested in Florida real estate.
"What's the saying, 'Buy low and sell high?'" Gov. Crist on Tuesday told Ash Williams, head of the State Board of Administration that oversees the pension fund.
Crist has never owned a home and has long rented a St. Petersburg condo, but he said "acquaintance after acquaintance" is buying residential real estate at rock-bottom prices across Florida.
"I can't remember a time in my life when Florida real estate has been such a deal, and it occurs to me that if you have cash, if you have equity, maybe a smart investment would be residential real estate in Florida right now," Crist said. "There is opportunity in a downturn."
Chief Financial Officer Alex Sink agreed, saying the state will need more affordable housing in the future - and now might be the time to acquire it.
Attorney General Bill McCollum, the Republican running for governor against Sink, a Democrat, chimed in to say he agrees it's a strategy worth considering.
Williams agreed to come back at the next quarterly State Board of Administration meeting with a deeper look at how such a strategy might work, but he cautioned that there has been a mixed record in other states.
Tuesday's meeting was the first quarterly meeting between the three Cabinet members and the State Board of Administration, which they oversee. Sink requested quarterly meetings this summer to ensure the state's investments and finances are in order.
The meeting lasted more than three hours, covering a range of topics including strategies for long-term investing and the improved risk level of the state's Hurricane Catastrophe Fund. The fund is now about $7 billion short of what's needed to cover a major storm, compared to the $18 billion shortfall estimated in January.
Williams also said the value of the state's pension fund stands at $99.6 billion, nearly $10 billion more than the previous quarter.
The pension fund's uptick comes in spite of the recession and a major real estate investment that went sour. In 2007, the agency invested $250 million in Peter Cooper Village, a residential real estate project built for World War II veterans in the 1940s on 80 acres in Manhattan. Metropolitan Life sold it in 2006 to asset management firm Black Rock and to the New York-based real estate firm Tishman Speyer.
Williams, who was not leading the State Board of Administration when the state invested in Peter Cooper, told Cabinet members Tuesday that officials thought the project was a potential moneymaker because of planned upgrades and the chance to bring in younger tenants at higher rents.
But the project is in such trouble, the agency is now valuing Peter Cooper "as a zero on our books," Williams said. "The market has softened dramatically," Williams said. "When you make investments, they don't always work." But overall, real estate investments in the pension fund are exceeding expectations.