Friday, May 25, 2007

Bond Rates Peak + Caps Dropping

This is NOT what we want. Solid asset retail centers have been been getting more expensive since March as an adjustment to the low cost of financing which bottomed out at about 4.5% + whatever spread your local lender is charging. Deals were being financed at 5.75% for 10 year money. So caps went from 7.0 to 6.5 or lower. Now, rates are at a peak and financing is costing 6.1% or more. This wipes out most deals in expensive markets like California. It also makes deals in less expensive areas not as great. Cap rates have to rise to adjust for this. It is also a fact that sellers are less likely to react to this movement as quickly. It reminds me of gas stations and their quick and slow reaction to the cost of fuel.

Tuesday, May 22, 2007

Dallas Single Family Homes

A great leader I just met at the Mike Ferry Manager's Retreat in Irvine was teaching me about the single family market in Dallas. For $120,000 you can buy a 3 year old rental house. Rent would be $900 per month. After paying a interest only payment and all expenses with 10% down, you can cash flow $200 per month. Not a bad place to put $12,000. Find the right property management company and you can ride the Dallas resurgence. Apparantly that market is growing in very good ways. Hmmm... thanks for sharing Joel.

Monday, May 21, 2007

Las Vegas - what do you think?

Two real estate friends of mine (yes, there is a differnce between real estate friends and "regular" friends) just got back from Vegas where they put deposits down on 3 condo hotel units. One development in downtown and the other on The Strip. The sales pitch attempted to counter the negative media news of slumping sales in that market. Suggestions were varied as to why the market is doing better than what is being reported. Examples: 1. A large number of "sales" are pre-construction contracts, which will not close (and hence, record) for a year or more. 2. Volume may well be down, yet average sales prices are holding firm. (I believe in supply, demand & price curves - sorry I don't believe this unnatural phenomena) Builders need to hold recorded sales prices high so that the rest of the development will continue to sell at similar prices. That is why many units are sold at higher prices because the developer is kicking in extra bling (upgrades, upgrades, upgrades). Finally, they countered the concern of the glut of hotel rooms. They're reply was "if we build it, they will come>" Sure, to an extent. I have a hard enought deciding which hotel to stay at now. I only imagine the hell when there are 5 Bellagios side by side.

Sunday, May 20, 2007

Condo market in San Jose soft

Unless it has something very special. The condo inventory is increasing and sales are weakening. There will always be sales, yet the winning seller is the one who cuts to the chase faster. A friend's condo was listed at $469,000 in Evergreen area. The competing condo that had been on the market for $499,000 with a better location in the complex, reduced their price to $479,000. They're going in the right direction, yet it makes a buyer decide whether to spend $10k or not on a better location. 50/50 shot perhaps that the location best unit wins. Bad results if they don't. Then the next comp is $469k or lower. When you have an advantage, price is the same as the unit without. That's an easy choice for a buyer and a 100% chance you will get the offer.

Tuesday, May 15, 2007

Gas Prices and Investment Real Estate

I've always believed that transportation influences real estate. The house in Tracy may be far cheaper or more beautiful than the house in Sunnyvale near your job. Yet, the 3 hours in the car commuting will tip the scale to the Sunnyvale location. This makes Sunnyvale more expensive. Will much higher gas prices further this imbalance? Core location real estate is always more expensive. It is also the asset that holds the best value especially in rougher times.

Thursday, May 10, 2007

Bay Area Trends by WaMu

Kari Noomen, goddess of multi-family lending in the Bay Area, held her bi-annual investors forum this evening. The talk in San Mateo was about rent growth, cap rate growth (slightly) and strength in the diversity of the market. Still odd phenomena with an inverted yield curve, although most people are not talking about that being a precursor to the R word anymore. This is a wonderfully strong, and therefore expensive, market. Great place to own and slowly, over-time build equity. Definitely put the next forum on your social-business calendar for sometime in December.

Wednesday, May 9, 2007

Trash in San Jose

Garbage collection costs are expected to rise 20% or more for household collections. San Jose's multi-family building owners will only feel a 4% increase. Why the difference? Thank a young Chuck Reed, attorney representing the apartment association some 20 years ago. He led the push to separate the billing and servicing of the two trash collection services. Now, decades later, it is one win the landlords can relish. It is some compensation for a group that tends to lose most of the expense battles.

Tuesday, May 8, 2007

Do you bet on real estate or businesses?

I suggest you buy real estate and bet on the business. Will Blockbuster video survive, thrive or dive? It's less important some of the intrinsics such as price per square foot, traffic counts, ingress/egress, than will the business model be here next year. I'm villified for this and I still stand behind my position - Starbucks is a fad. Should you really pay a 5% cap rate for that tenant? Will people tire of coffee or will another vendor do it better in the future? I suggest yes, perhaps on both counts. Then what, Mr. Landlord? Re-tenant a 1,200 square foot coffee shop with a DRIVE-THRU? Point of clarification - I love my grande lattes.

Sunday, May 6, 2007

Condo Towers in San Jose or a House

Someone has to have the vision of a changed landscape, vibrant lifestyle, robust businesses for the skyline to change. People like Donald Trump, who may be despised by many, change the face of cities all the time. San Jose is being redeveloped and will be drastically different in the decade to come. Condos will be more the norm for first time buyers and the 1,400 square foot ranch house on a 6,000 square foot lot will be more up-scale. What will increase in value more? It's a timing issue. The first condos that hit the market must be sold at attractive prices to get the projects underway. Then values will go up as the market matures and as people get more accustomed to the condos. Then the market will flatten as more inventory hits. This rapid rise in prices and flattening will differ from the stable rise of the single family home prices.

Auburn, Grass Valley & Nevada City

Very nice communities that have benefited hugely from Bay Area retirement dollars. The baby boomers have purchased many houses in the area at prices less than what they sold their Bay Area homes. The communities have boomed in value and population, yet the retail is a significant missing factor. Diversity of restaurants and shopping tend to be sorely missed. New retail in these areas will do very well. Also upgrading shopping centers with nationally recognized tenants is a good move. I would rather invest there than the more open Central Valley.

Saturday, May 5, 2007

Flexible 1031 Exchange Intermediaries

Can you get away with a closing on an exchange past 180 days? NO. That is not a debate. Can you fudge the 45 day rule? Some do and some get away with it. Don't expect your national exchange company to do it. By the way, this is illegal. And just fixing that document does not put you in the clear. Do purchase contracts have dates on them? Do lender docs have dates? This is a very risky strategy that I cannot stand behind. It's best to be very clear on what is available to replace your property with before your 45 days is anywhere near up.

What to buy?

Buy the perfect house, it will make your life much easier in the future. There will be many temptations to buy a less than perfect house for the savings of some money. Take my word for it, remodels take more time and money that you initially plan for. You cannot move a busy street or noisy overpass. You will have to heavily incentivise a future buyer to buy your castle. Also, is time not money? Do you enjoy or just tolerate weekends at Home Depot? Do you like the beach, the mountains, Disneyland or Yosemite? Does you boss like you rested on Monday's and most importantly, what does your significant other really think?

Google, Yahoo & Apple

These three and other large, well-capitalized tech companies are buying large tracts of land in Silicon Valley for future expansion. This is a great sign for the long term health of the Valley. With large investments, these companies will be more apt to stay than ship off their workforce to cheaper locales such as Austin. That was a boondoggle that Apple went through in the mid 1990s. Many dissappointed Apple families moved back to the Bay Area only to find a costlier transition. Silicon Valley is here to stay. That's why most tech giants are betting long.

Cookie Cutter America

Every city in this country has a Starbucks (or dozens of them), a Quizno's, a Walgreen's, a McDonald's, a Cheesecake Factory, etc. What's a foreign visitor going to say when he visits all the major cities in this country and sees the same things? OK, I'm being cynical, yet it is true. Companies are expanding rapidly due to a variety of factors: franchising, investors buying coupon clipper investments, distribution channels, large volume purchasing discounts, etc. Every American wants the cheap goods Wal-Mart or Target can offer. This the trend my fellow investors. Make decisions with that in mind.

Banking Relationships

When buying a house or any other real estate, consider the deep relationships you may already have. Banks want to vertically integrate their existing customers. It cost less for them to prospect their current clients than advertise for new ones. Therefore they can be more competitive to them. And existing customers have more for the bank to go on than just a FICO score. Finally, existing bank customers tend to have savings or at least healthy checking accounts to verify. This why one of my current buyers acheived a 1/4 point better interest rate from a certain large bank than what my super loan broker could acheive.

Scratch That, Buy a Fourplex

Never mind what I said about the condo purchase over the land deal. There is still 100% financing possible on fourplexes as long as your FICO scores are healthy. This give you leveage of rents and on appreciation value. If your $300,000 condo goes up 5%, that's a $15,000 gain. If the $1,000,000 fourplex does the same, that's $50,000. I also bet that the fourplex on an after tax basis is the cheaper ownership.

Newbie Investor's Land Speculation Goals

Let me buy a $15,000 single family lot in the desert above Los Angeles. The goal is that the lot will sell for $30,000 in a few years. Small $5,000 downpayment (feel free to extrapolate for ye with bigger budgets) and small monthly negative. Is this a good investment? Will the effort be worth the possible $15,000 gain less the cost of ownership? That same small downpayment will cover the closing costs on a zero down condo for our investor to live in. Then she benefits from tax sheltering and better financing. In this case, go for the condo.

Deep Data from PropertyShark

Do you want to know everything about a property from your desktop? PropertyShark does just this and in a way no one else ever has. Property Shark will give you: comparable sales, property details, ownership info, maps, photographs, listings, foreclosures, pre-foreclosures, mailing lists and more, directly from the web. This information, as per their website, will "level the playing field." What is this fluidness of the real estate market going to do for prices? Illiquid assets tend to get lower valuations. Therefore....?

Housing Incentives Fleeting

No more flat screen TVs, Home Depot gift cards, tens of thousands of dollars in upgrades for your new K&B home. Sorry, the market is strengthening and builders are adjusting their prices. The glut of new homes coming on line is also short. Soon, there will be far fewer available new home developments for buyers to choose from. Builders who pulled out of options on land for development will start to look at those again. Though they will look at them like stock investors who survived the dot com bust do now.

The West is Holding Strong

The "pending home sales index" shows weakness through most of the country. The South dropped month to month over 7% in activity. This is not the trend typical of the Spring selling season. The West is moving in the right direction at 1.6% higher than last month. We may not be rock solid, though we are at least fairly stable. Please consider that the Bay Area is weighing that average significantly.

Hard Money When Buying a Shopping Center

Remove some, but not all contingencies and pass through money to the seller? Why would someone do this? The answer is when the seller is on the line for an extended period of time with their property off the market. Conduit financing takes 90 or more days. Should a seller take their property off the market for that long with no compensation? What if the market sours? What if the opportunity that they want goes away? Therefore, it is reasonable to compensate the seller for this opportunity loss. And 1 or 2% of the purchase price may be reasonable.

My Perfect Shopping Center - Version 2

What else?
Not too deep depths. Bathrooms in each 1,200 square foot space.
A few kitchens built out.
Adjacent to a Walgreen's or other major drug store.
Newer construction, 1980's or better.
Central in the metro or in the path of growth.
No gas stations on the lot. No grocery anchors.
Mix on mom & pop tenants and some national name recognition, although corporate signatures not required. And most importantly, within a non-stop, relatively short flight of San Jose on Southwest.

The Perfect Shopping Center

My perfect shopping center:
(because if you don't know what you are looking for, you'll rarely find it)
Spaces demised into 1,200 - 2,400 square feet.
A dentist, a bank, a restaurant and another dentist.
No video store. Parking over 4 per thousand. Ideally far more than this.
Leases terminating 3-5 years from now. Increase of property taxes passed through to tenants. Corner location on a 4 lane street. I can go on and I will next time.

East West Bank's Financing Promo

Apartment building loans 6.75% with 1 point, fixed for 10 years and ONLY 5 years prepayment penalty. Good deal? I think not. Conduit lenders are about 100 basis points lower for 10 year fixed rate money. Yes, there are 5 more years of prepayment penalty. Although, that probably is insignificant when you calculate cash flows on a 5.0 cap rate deal. Would you like to cash flow or not? Shop around.

Taco Bell/KFC NNN Investment

I have a soft spot in my heart for Taco Bell. It was my first job when I was a sophomore at Bellarmine. Now I am looking at a single tenant investment in Gas City, Indiana of a Taco Bell/KFC combo location. One of my concerns of single tenant deals is that the business may fail and you are faced with a large vacancy. Yum! Brands is hedging its bets on this location, and many others, with essentially two business models in the same space. This seems good for the landlord too. Hmmm...

Cinco de Mayo

Happy Holidays! Saturday afternoon under the sun at Santana Row. Plenty of tequila flowing. Party goers lining up to fill the lounges along the strip. Weather has a lot to do with success. If it were rainy and cold, the sales would be less robust. Retail tenants go so far with the weather issue as to prefer space on the east side of the street over the west. The afternoon sun being too much. Does the Southwest have advantages over the Northeast? Did Silicon Valley flourish due to great weather, among other things?

Sacramento Strip Center

I was walking a current listing in west Sacramento last week. Modern shopping strip of 12,000sf. Fully occupied. Nice condition. Yet, the neighborhood was rough. Crime statistics were above average and the household income stats were mediocre to low. Does this rule out a property? Should it? The stores were all doing very well. In fact, there was little in the way of retail nearby. Is a trophy asset necessary? Or, does cash flow and stability matter?

Foreclosures in Cupertino

3 months ago, Chicago Title held a foreclosure class in its Cupertino office. There were perhaps 30 agents there learning about the process. Yesterday the class was filled with about 50 eager agents. Does this signify more foreclosures? Or does this show a harder real estate market for Realtors who are looking at different forms of making a living? I suggest the latter. Due to a variety of factors, there are more agents struggling with the economics of the industry.

Cisco and Milpitas

Cisco is expanding in Milpitas to a 5 building campus. Get this, they occupy 50 buildings so far in San Jose and Milpitas. Have Milpitas real estate values increased over the last decade? Have Milpitas school scores increased? I remember when Milpitas was not the sought after address it is now. Should we pay attention to trends outside of real estate? Perhaps, If you want to play more golf in your golden years.

Property Taxes Soft

Sacramento County has lowered property tax assessments on 50,000 homes this year. Owners tend to complain when they are being assessed on values higher than what the market is supporting. Beware though, there are catch up provisions in Prop. 13. 2% increases per year is the maximum. If values are flat for a few years and assessments are flat, that is only temporary. The assessor will add up those 2% increases cumulatively when values rise above the missed increases. This happened earlier this decade.

Where Housing Goes So Does Retail

10,000 homes will be developed in Roseville, California due to an annexation of 2,200 acres of farmland into the city's borders. Ten Thousand. Roseville, which is a booming town and a wealthy one at that, is continuing. Housing prices are slumping right now. Don't expect that to continue. The Central Valley is expected to grow dramatically in the next few decades, hiccups aside. Buy and hold. Buy and hold.

Weekly Santa Clara Housing Stats

The housing market is showing a slight turn toward more sales and less listings. Think the Titanic and its turning radius. OK, not that bad... Though, think about that. If you could see a trend before the rest of us, would you not benefit? What makes a Jedi Knight so special? He can see things seconds before they happen. Follow the Force young Skywalker.

Investment Magazine to Read

NuWire Investor is a new on-line investment magazine that is worth reading. April was their debut issue. It covers various investment vehicles including investment and commercial real estate. The staff is awesome and has deep resources on a variety of investments. This issue covers the baby boomers and where they are placing their investment dollars. Where the boomers go, we should anticipate and be there first.

Beach House in Mexico

Buyers please beware of the "Americanization" of Mexico's coastline. Recently, the Mexican government allowed the purchase by foreign nationals of property along the coasts via trusts administered by banks. Essentially this is as easy a home purchase in the states with a bit more paperwork. What is concerning is the pricing of homes in these zones when marketed to Americans. Speak to local real estate brokers as well as those catering to English speaking Norteamericanos. Shop around! Value will become apparent once you have seen many listings across a spectrum. Once you are happy with your beach home, send me the keys for a weekend getaway. I promise to blog from there in your honor.

Vacation Rental - 2nd Alternative

Do you have to buy a condo to have a vacation rental? Do most businesses buy their retail space? No. Therefore, could you rent a condo and use it as a vacation rental in San Francisco? Unless the lease says otherwise, this may be a great opportunity. I envision a 10 day per month "free" condo in SF every month. Yes, nothing is free. The other 20 days will be about working the rental. So? Maybe? I think this is worth some consideration. Any ideas?

My Dream House

A picture of my dream house is affixed to my goals binder. Address is 3456 Baker Street 4 bedrooms, 3.5 baths with an incredible view of the Palace of Fine Arts. $3.95M. How do I get there financially? With a 25% downpayment, I will need $15,000 per month to cover the nut. $2,500,000 of a fuly paid off investment property at a 7 cap rate. Possible, absolutely. My how - buy a house rental every year for the next 10 years and I will far surpass that goal. Wanna crunch some numbers?

Hot Spots - Internet Access

I was all set up to add to my blog at the Border's Books Cafe at Santana Row. Yes, my favorite hang out. I had great signal strenghth and my frappuchino by my side in a comfy leather chair. Perfect, right? ARE YOU A MEMBER? What! No. Internet access was available at a daily rate of $9.95. Umm, no. I packed up and walked over to the local Intero office and settled in. Will I possibly buy a book at the Intero office? Umm, no. Sorry Borders.

Vacation Rental in San Francisco?

I was looking for a hotel room in San Francisco yesterday for 4 hours on the web. Offended at the thought of paying $400+ for a boxy, boring room, I migrated to Craig's List. Under vacation rentals are dozens of daily rentals of condos in San Francisco. Some start at $100 per night. This got me thinking. If you could rent a $400,000 1 bedroom condo for $2,000 per month over 20 days, you could break even. Break even is not expected on condos in SF with a normal full time tenant. AND... you could visit your investment property the other 10 days.

Mel's Dinner

Do restaurants in San Francisco have to be avante garde and trendy to make their rent and to be successful? I have 10 team members at Mel's Diner on Lombard who think no. Mel's - been around for decades. Not trendy. Though people want the basics too. Sometimes shaking beef at Xanh is too much. Sometimes the mushroom burger is what makes your mouth water. So what does this have to with real estate? Invest in Burger Kings and Sonic Burgers - people will continue to eat there. And, more importantly, your tenants will pay their rent. Win Win Baby!

Friday, May 4, 2007

Borrow more for better rates

Commercial lenders will either have higher interest rates on smaller loan amounts, lets say under $1,000,000 or they won't lend under that threshold. The lenders who do lend in that arena will charge more for their efforts. Completely opposite from the conforming and jumbo loans for your Sunnyvale ranch house. So my advice is PLAY BIG!!!

Same tenant - different location

Corporate credit is nice - maybe. What is interesting is that a national tenant in Colorado, such as Walgreen's, will sell at a 7.5 cap rate. While the same corporation who has a store in San Diego, will sell at a 6.0 or lower cap rate. The checks come from the same national office. The quality of that ability to pay debts is the same. Then why the difference in value of the investment? Comments?