Entries Tagged 'Real Estate' ↓

I noticed that a few people were landing on this website based on some variation of the following search: “What questions should I ask when investing in a real estate project?”

Here is the brief answer: It depends on what you mean by project, but this generally implies that there is a start and an end date which are known (or projected… pun intended) in advance. Such short term projects usually involve development of some sort, but the detail of the questions you would ask is significantly different than investing in an asset for the long term. A real estate development project carries significantly more risk than a purchase and hold strategy, so you should also expect a higher return in exchange for the additional possibility of loss incurred.

1. Most importantly; the people (management) involved. What have your past experiences been with them? What type of experience do they have with similar projects? What experience is their team missing and how do they plan to compensate for this lack?
2. What is the investment strategy? One would imagine that the solicitor was attempting to exploit some competitive advantage which they possess. Are there economic circumstances or scenarios which success is dependent upon?
3. More specifically, what is the time frame and what are the investment terms? Hopefully they will have prepared a prospectus; otherwise, I would tread VERY lightly. You will want to see their financial projections, a sensitivity analysis and any key assumptions they’ve made.
4. The last thing I would suggest, is that you speak to everyone you trust and ask for their opinion. Don’t accept what they say at face value, dig deeper until you truly understand why they feel the way they do. Not all opinions were created equally.

There’s much more detail one could go into, but now you know where to start, and knowing is half the battle. Go Joe!

This is the calm before the storm of the next housing crash. As the pendulum continues its down swing, expect more fallout across a broader number of housing markets. For the enterprising investor, the upcoming “double dip” presents an unprecedented opportunity to profit.

Zero Hedge presents the case for a second leg to the housing crisis and a lack of government regulation has provided yet another chance for investors to reap tremendous profits. Remember credit default swaps?

The banks will get hit again, but they’re not dummies. They’ve been building up capital reserves by dramatically reducing lending to small businesses and individuals. As they are preparing for another big hit to their balance sheets, only the supremely credit worthy stand a chance to get approved. The second housing crisis will force many banks to take another big hit against their balance sheets as the value of their mortgage holdings takes another big hit, and they are preparing for this eventuality. You’ll also notice that the spreads on CDS are much tighter than before the downturn; however, there is still room to profit here.

The growing deficit will undoubtedly lift the housing kimono once more before a true recovery can begin. The storm clouds are slowly gathering, so don’t delay. Act now and lock in your profits for episode two of real estate crash!

If you’re not yet convinced, compare the current trajectory of the housing bounce to recent downturns in this Case/Schiller Housing Index chart from an article on alternatives to the huge bank bailout:

For further discussion on this topic, see:

• Home Prices Advance Again In November, But Slowing Sales Suggest Price Weaknesses Ahead (Highly recommended if you like charts and need some good counter points or support [Table 4] to my argument… it’s a much more balanced view, but hey, what do you expect from credit rating agency?)
• http://news.ycombinator.com/item?id=1103750

Here’s one chart from the S&P release that’s a related and updated version of the one above:

The IBM office park built in Westchester, NY during the 1980s is nearly empty. The team members from one particular IBM work group have never even met before… at least in person. Online, they meet everyday.

This isn’t some idealistic vision of a future work place, it’s modern day reality at one of America’s largest corporations. In the PBS Frontline documentary, Digital Nation, Francoise LeGoues, the VP of Innovation at IBM, estimates the savings from holding online meetings amounted to $1mm last year. The online world, Second Life, serves as a virtual office space for various working groups at IBM where they hold daily “sit downs”, gather to discuss strategy and map out the team’s mission ahead.

Are “Big Office” Companies Inefficient?

Technological advance continues to accelerate at break-neck pace while innovation constantly iterates old technologies, re-purposing them for greater efficiency. We all like real estate for different reasons, but the single constant benefit has always been real estate’s inelastic supply. While it’s (mostly) true that they aren’t making any more, it looks like they might start using less of it. This could have significant implications for commercial real estate owners if tenant’s employees start working from home. Clearly, some industries and types of commercial real estate are not as threatened by this trend. Don’t expect your dentist to be remotely cleaning your teeth any time soon and don’t expect Jeff Bezos to keep all that inventory in his backyard (although he probably could) rather than a warehouse. However, much of America’s service driven economy does not require a physical presence to complete their jobs.

Time Left on the Clock

There are certainly obstacles to keep this from becoming the norm, so for the moment, the clock is still ticking. A valid concern for businesses considering a shift to a virtual work place is, can you effectively manage employees from a distance? There are good arguments on both sides of this issue, but as work places become more decentralized, certain skills (self-discipline) will become more valuable. Should the trend continue to gain momentum, demand for office space will also inevitably shrink at a faster rate. We can also be sure that the pace of such changes will certainly not let up as companies continue to look for ways to cut costs amidst a recession and greater competition from overseas.

It would be interesting to hear about other companies implementing remote office policies; especially the kinds of results they are getting. These days, we’re all on call 24/7 anyway, so really, what’s the difference?

Share your thoughts/questions/predictions/criticisms in the comments below.

NB. If you’re interesting in finding out more, as you might expect, you can find tons of extra info on the Digital Nation section of the PBS.org website. You can also watch the entire documentary.

A worthy anecdote from the front lines of distressed real estate deal making by Joshua Kahr at Kahr Real Estate. He discusses the importance of relationships and deal structure in a successful transaction:

[...] if a deal could be structured in a way in which a bank could receive more today for a defaulted note or an asset than they would otherwise receive by the investor by bringing in bank as a partial owner in the purchasing entity, this might help to better align the goals of the investor and the bank. In addition, the lender will often finance the new vehicle as a way to boost the overall sales price and mitigate taking a loss today. This process can be beneficial to both parties, because it allows the investors to reduce the equity commitment while providing the bank with a higher price today on paper. In addition to providing some percentage of the equity, a deal could be structured in which the investor must achieve a targeted rate of return prior to a bank receiving any part of its equity back.

A happy and healthy new year to you!

Adapting the Section 8 housing subsidy model, government might just find a way out of the cascading housing crisis. At the root of the problems in our credit markets and financial institutions are falling home prices nationwide; a phenomenon never before seen in America.

A program which subsidizes rents of homes would do two important things helping to abate the current crisis: (1) guarantee investors a baseline rental income –effectively allowing investors to accurately value a property based on cashflows guaranteed by the government– and (2) help individuals in danger of foreclosure by providing them with a stable place to live.

A subsidy plan could also be used to incentivise investors and financially troubled home owners to take actions which might aid our troubled economy in other areas…and god knows we need the help.

UPDATE [12.15.08]
Robert Maniscalco, my real estate law professor, brought up an interesting point today in class. Years ago, income producing property was depreciated over a twenty year life, rather than the current 39
year schedule. What a great compliment this would be to an expansion of the Section 8 rental subsidy program above. It would effectively result in a doubling of the depreciation write off (increasing investment returns) and a decrease in basis (reducing the incentive to sell). Rather than throw money at insolvent lending institutions, ideas like this would do much more to help the housing market find a bottom and save the U.S. tax payers a few bucks.