In today's unsettling financial and real estate markets we are all looking for something to give us confidence. Todays announcement of the bank bailout should be just that.
Real estate values and transactions have been crippled by the lack of credit available to potential buyers. The reason for this credit crunch is due to the banks apprehension to add more loans to their books because of the losses that they have due to loans that are in default. When the banks look at the underlying value of the loan collateral and see that they have loans outstanding that are worth more than the value of the real estate collateral, they need to reserve capital in case of a default. This adds to less liquidity for the bank and therefore less capital to lend. These bad loans are reffered to as illiquid asstes.
Hank Paulson's plan is to have Freddie Mac, Fannie Mae and the Treasury Dept take these illiquid assets off the bank balance sheets. If this plan is structured correctly we could see the credit markets open up and lenders having the opportunity to start over using prudent underwriting to make loans. This should bring the transaction volumes up and we should see a bottom in real estate values. So lets keep our fingers crossed that Washington is able to make a quick decision for a solid rescue plan.
Friday, September 19, 2008
Thursday, June 26, 2008
Buy Up In a Down Market! Gain Equity!
Selling in a down market and buying a more expensive property, assuming both properties have depreciated at about the same rate, can make you money. Waiting for the market to rebound can actually cost the seller more money than buying up in a down market.
When real estate values are down it is the right time to buy a larger property and take advantage of the discount. Consider this; you own a $1,000,000 property that is down 10%. Your property is currently worth $900,000, or down $100,000. A $2,000,000 property that is also down 10% is currently worth $1,800,000 or down $200,000.
If you make the trade and wait for the market to rebound 10% you have created $100,000 in equity.
When real estate values are down it is the right time to buy a larger property and take advantage of the discount. Consider this; you own a $1,000,000 property that is down 10%. Your property is currently worth $900,000, or down $100,000. A $2,000,000 property that is also down 10% is currently worth $1,800,000 or down $200,000.
If you make the trade and wait for the market to rebound 10% you have created $100,000 in equity.
Wednesday, April 30, 2008
I should have bought that property 20 years ago...
How many times do you hear someone say " I wish I had been smart enough to buy that property 20 years ago"? Real estate has appreciated like few other invesmtents over time and I am writing a short idea on why todays market is not much different than the investment market in the early 9os,(almost 20 years ago) when I wish I had been old enough to buy real estate.
Back in the early 90s apartment building were selling near a 9% cap rate. (The cap rate is the first year return on the building, or the yield. It can be computed by dividing the NOI over the Purchase Price) Cap Rates work inversely to property values, so a high cap rate means the property costs less to buy. This was a good time for buyers.
Mortgages for this type of investment had interest rates of 10% or greater. So basically you are buying a property that returned 9%, but financing it with money that costs 10%. How did these people make money?
Well those people did make money. Fast forward to today.
Right now we can buy a building in a premier location for around a 6% cap (you can get buildings at better cap in areas besides Lincoln Park, Lakeview, etc. ) and finance it with money that costs 7%. Sounds like the early 90s if you ask me......
Back in the early 90s apartment building were selling near a 9% cap rate. (The cap rate is the first year return on the building, or the yield. It can be computed by dividing the NOI over the Purchase Price) Cap Rates work inversely to property values, so a high cap rate means the property costs less to buy. This was a good time for buyers.
Mortgages for this type of investment had interest rates of 10% or greater. So basically you are buying a property that returned 9%, but financing it with money that costs 10%. How did these people make money?
Well those people did make money. Fast forward to today.
Right now we can buy a building in a premier location for around a 6% cap (you can get buildings at better cap in areas besides Lincoln Park, Lakeview, etc. ) and finance it with money that costs 7%. Sounds like the early 90s if you ask me......
Thursday, March 27, 2008
The Economic Stimulus Package Helps RE Investors
The new Economic Stimulus package may have some lucrative tax incentives that will benefit investment property owners. Under this bill there is a "bonus depreciation" schedule that allows property owners and leasehold tenants to write off up to half the qualified improvements that are completed in 2008.
Typically, landlords who make an improvement, must capitalize the improvement or write it off on a depreciation schedule over 39 or 27.5 years, but with the change, landlords and commercial tenants can now write off 50 percent of the cost for "qualified leasehold improvements" in the first year alone, as long as the improvements are completed by the end of this year. The rest is wrtten off over 15 years.
The article that I read was referencing how this stimulus package can help commercial property landlords and tenants, but I believe it can also assist the owners of mixed use and multi-family propery who would like to make capital improvements, such as a new roof or installing seperate heat, etc. The benefit to the property owner would be a significant write off at the end of the year resulting in huge tax savings.
Please stay tuned as I will add to this as I get more information.
Read the Washington Business Journal Article.
Typically, landlords who make an improvement, must capitalize the improvement or write it off on a depreciation schedule over 39 or 27.5 years, but with the change, landlords and commercial tenants can now write off 50 percent of the cost for "qualified leasehold improvements" in the first year alone, as long as the improvements are completed by the end of this year. The rest is wrtten off over 15 years.
The article that I read was referencing how this stimulus package can help commercial property landlords and tenants, but I believe it can also assist the owners of mixed use and multi-family propery who would like to make capital improvements, such as a new roof or installing seperate heat, etc. The benefit to the property owner would be a significant write off at the end of the year resulting in huge tax savings.
Please stay tuned as I will add to this as I get more information.
Read the Washington Business Journal Article.
Tuesday, March 4, 2008
This is why you should hire a broker for your commercial space
Today I am working with a landlord who would like us to find a tenant for his retail space. The landlord is concerned about the tenant defaulting early on in the lease. Keep in mind the property we are discussing is not on Michigan Ave and is not on a lighted corner....so we are probably not going to find a tenant with rated credit. WHAT a good broker does for the landlord is negotiate lease terms favorable for the landlord in terms of a tenant default, specifically in this situation we may require the tenant to put up a greater security deposit. Additionally, we screen and identify the tenant. By screening, I mean checking the tenants refernces, credit, and business plans. By identifying the tenant we check out that the tenant actually has equity to lose and is not just a shell llc that would be easy to bankrupt in the event they wanted to default without consequence.
Monday, March 3, 2008
My first blog entry...
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