I am very lucky to be able to enjoy a career investing in and managing commercial real estate throughout the world.  To boot, a wonderful company in WASH Laundry thought my writings were interesting enough that I have proudly been their Apartment Reporter for several years.  I’ve chosen a career which I love and because of that I don’t really consider anything I do to be work.

That said, because I care deeply about my reputation with investors, clients of our management and you dear readers, I stress the little things.  In fact, this is my second draft for the December Apartment Reporter.  The first was my perspective on the strong Chinese demand for California and Vancouver real estate, respectively and the effects on those markets.  I also wanted to share why I believe we are in the midst a long-term economic shift in the United States whereby the population is going to be renters as opposed to owners.

And then over Thanksgiving Day, I took stock of 2013 and began my annual plotting of goals for the next year.  Four wonderful people who were important in my life (3 of them were in their 50’s) passed away in the second half of 2013.  As I thought about the state of the world and how best to own, manage and write about real estate, I needed to take a moment to reflect about having an attitude of gratitude.

While there are many ups and downs in owning and managing real estate, we do have an opportunity to make a difference in peoples’ lives through providing quality housing.  Done right, we can epitomize the positive results of the “broken window theory” and begin and/or be part of the uplifting of a neighborhood which increases value for us and our neighbors.

I have found that I make the best decisions when I am in an appreciative mood.  When people are anxious, angry or upset, the mind resonates those feelings through the thought process.  For instance, while going through a list regarding residents on a list to being eviction proceedings, I was presented with a long term resident who lost her job because she wasn’t able to continue working while enduring chemotherapy.  They had gone through their savings and had fallen a month behind in paying their rent.  During that month, she was able to secure some steady work with flexible hours.  I took a moment and thought about when my wife was in the midst of her successful fight against cancer and how grateful I was that she survived and is still healthy.  When questioning the costs involved with replacing this many year resident, I was told that the building would need to offer a one month free rent incentive to the next inhabitant after replacing the carpet along with repainting the apartment.  I asked the supervisor if we offered a one month special to the current resident (which would wipe away the delinquency), would she and her family sign a one year lease?  The answer turned out to be yes and the story ended with a happy ending for our resident, the management team and the investors in the property.  My positive energy was flowing from being sincerely happy about my own life and trying to think of the best possible outcome.

Over the years, I look back at my best decisions from asking my wife to marry me to making what turned out to be astute investments and they almost always involved a mindset of gratitude.  When I draft an e-mail in response to something which has upset me, I now take the time to save the missive as a draft and will sleep on it before hitting “send.”  If I don’t significantly change the e-mail then I’ll simply delete it as my frame of mind shapes my responses in a night and day fashion.  It is amazing how different the world seems when your attitude goes from negative to positive.

As we close out 2013, I want to offer that I am thankful to be alive and am looking forward to a happy, healthy and prosperous 2014.  I sincerely wish the same for you!

 

There is a rush when you are told that you have a property under contract to purchase.  I got my first taste in 1991 and have enjoyed that high ever since.

Much of my work is done upfront during my underwriting when my team and I review the trailing 24 – 36 months of financials.  I also like to do a preliminary walk of the property even if it is done quietly by following a resident into the building.  As nearly every seller’s number one goal is to maximize price, I try to offer the amount at which I am prepared to ultimately purchase the property.  That doesn’t include the negotiations as it is rare to land on the final purchase price on the first offer (real estate people love haggling).

Once a property has been put under contract, I bring a physical inspection team with me and every unit is inpsected.  While many times “a sampling” is offered, I have spotted so many interesting issues over time that I insist on a complete viewing.  If I note any structural issues, I engage an engineer.  It should be noted that during the physical inspection, opening dialogue with the residents and the staff can uncover previously undisclosed problems.  I’ve had sink holes (soil issues), shifting buildings, flooding, roof leaks, mold and crime issues raised by people on the site visit which came as a complete surprise to me and ultimately led to more extensive investigations.

Whether you are a beginner or a seasoned veteran, I can’t emphasize enough the importance of taking the time and making the effort to be a part of the inspection.  I’ve avoided making purchases which later resulted in big surprises.  I’m not mistake free as I have been stung by overestimating the condition of the roofing and plumbing.  Nothing like an unbudgeted re-plumbing or re-roofing of a property to knock the return on investment for the year…

Another important aspect of the due diligence is a lease audit.  It is vital to make sure the people occupying the property have been properly screened and can actually pay the rent.  Sometimes a desperate or unethical seller will move people in so that the property is full and appears to be running well.  During the physical visit to the apartments, the team counts toothbrushes and makes a note of how many there are.  If there is only one and the qualification for the unit included the income of three people, red flags arise.

I also make a point to compare the bank deposits with the income listed in the profit and losses.  Just because warm bodies and furniture are in an apartment doesn’t mean that money is hitting the bank.  A friend of mine who owns several thousand units made a purchase and later found out that many of the residents were not qualified, couldn’t pay the rent and had to be evicted.  An extremely painful experience for a seasoned owner.

Go with your gut and ask questions.  I suggest putting on a detective’s hat with the mindset that issues are being hidden from you.  There are almost always surprises and sometimes it will include something which the seller knew nothing about.

On the positive side, I have found hardwood floors in pristine shape which were covered by carpet.  In a recent inspection, I was told that the property was master-metered for gas.  When I walked the property, I noted that the property used to have individual gas meters and then my plumbers verified that the building was still individually plumbed.  It may be a simple fix to add immediate value and cash flow to the property.

As your job as a property owner begins when escrow closes, it is vital to gain as much knowledge as possible about your investment BEFORE you own it.  Since it is highly unlikely that you closely observed the being built, a complete check-up is key so that you know the current health.

Some of the most valuable money I’ve ever spent was paid to thorough inspectors and a few of my best purchases were the ones that I didn’t make.

 

In Septembers article, when I said, “the pressure cooker is heating up and something has to give,” something indeed gave; The Federal Reserve.  The Fed unexpectedly left rates unchanged and made clear it would continue asset purchases thus causing the 10 year treasury yield to dramatically fall.

The recent squeeze of rising interest rates and lowered capitalization rates which I described should be a reminder or perhaps a warning that the interest rates are being manipulated.  It showed that treasury investors and their expectations affected interest rates since the players in the market currently have confidence in the Fed’s ability to contain interest rates.

As countries in Europe have demonstrated over the last several years, confidence can disappear over the course of hours and interest rates can skyrocket immediately.  While we real estate investors enjoy a portfolio of bricks and mortar and transactions which take 60 – 90 days after marketing the property for 30 – 60 days, that isn’t the case for bond investors.  They buy and sell with via a key stroke of a computer and thusly the real estate world can be turned upside down abruptly.

The quandary which I struggle with is the Federal Reserve’s asset purchases (money printing) which has worked in lowering interest rates to record lows (we are off a bit from those lows as I write this article) and has pushed real estate prices down relative to their cap rates.  With the rates artificially low then reciprocally the prices are artificially high.  Since I believe that the price the United States will pay for this policy is inflation, does converting greenbacks today to hard assets make sense?  My investment strategy says it does as long at 10 year financing is employed so that inflation has time to dig in once interest rates start to rise.  In other words, I am willing to pay higher interest rates for a 10 year fixed rate instead of lowered payments for a 5 or 7 year fixed rate.  Should rates stay low for 10 years then I will have paid for insurance that I didn’t need but I feel better with a longer runway before I have to refinance.

Further to my concerns is that the federal government is running a deficit approaching $17 Trillion and is benefitting from the artificially low interest rates along with the Federal Reserve’s purchasing of the debt.  When confidence wanes or adjusts and interest rates rise, a sizable portion of the government budget will need to be allocated towards servicing the debt and at some point in our future, austerity will be ushered in or foisted upon us.  Austerity (cuts in spending) usually brings about a drop in GDP and pain throughout the economy.

More immediate concerns are household income levels as that correlates directly on our ability to push rents.  In other words, rising median household income is great for us as apartment owners. In Figures 1 and 2, we see that while median income isn’t rising, it isn’t falling either and appears to have leveled off.

Figure 1

Figure 2

 

I’m hopeful that this income stabilization is a prelude towards a rise past 2007 levels.  Even though much of my concern is directed towards the actions of the Federal Reserve and our politicians in Washington DC who in my view have built a house of cards on debt/money printing, I am confident that the American people will weather the coming storm.  Plus people need a place to live which is the main reason why I predominantly choose multi-family for investment even though it is the most management intensive of the asset classes.

I’ve noted that the recent rise and fall of interest rates has brought a new urgency to many sellers.  I’m hopeful that I will be in escrow soon on a couple of deals which stalled because of the rise in rates but look more attractive given the recent fall.

 

Three weeks ago I was in the best and final stage of negotiations for purchase of a large apartment complex in Atlanta. The seller had selected three potential buyers (from a pool of over 15) and asked them to sharpen their pencils to make the best offer possible. This was followed by an interview by the sellers and their brokers so they could ask direct questions regarding potential for re-trading (asking for a price reduction / credit during escrow, presumably for capital improvement items found during the inspection).

After a few days, we received the news that the seller had selected one of the other 2 groups because they were in a 1031 exchange and presumably had more motivation than I did since I was bringing new money into the deal. My team had worked really hard in evaluating the opportunity as was understandably disappointed as was I.

One of my frustrations over the last couple of months has been Capitalization Rates (Return on investment when an investment is purchased without debt) continue going lower yet interest rates have been moving up. At the peak of the market in 2007, Cap Rates were lower than the borrowing costs which meant a negative equity scenario and in my book that means were are in seriously bubblicious territory. We are not there as of yet but that is the trend unless interest rates go down, prices of properties are lowered and/or rents rise significantly.

At the same time, while the recovery in housing prices across the United States has roared back causing values to move up significantly, rents haven not come close to keeping pace. Since I essentially valuing real estate as a percentage of the rent it can collect, anytime I see a large difference between the two trends, it catches my attention. Over the last 100 years, rents and values in the US have moved up and down in lockstep so when they separate, it has only been temporarily.

In Figure 1, we see pricing of median single family home prices and average rents in Los Angeles. Las Vegas, Atlanta, Miami, Austin along with most markets around the US show a similar disparity.

Source: Marcus & Millichap Research Services, MPF Research, DataQuick, Los Angeles Times

Nationally, we are not seeing wage growth even though the unemployment rate is dropping. In Figure 2, we see the trend from 1998 in US wages. Many higher paying manufacturing jobs have been taken overseas and have been replaced by lower paying service jobs which likely accounts for the slide. I’m hopeful that we will see that graph move the other way.

I received a call on Friday from the brokers in Atlanta to find out if I would be interested in the large property for which I wasn’t previously selected to purchase. Because of the quick jump in interest rates along with a widening spread from Fannie Mae and Freddie Mac (their mandate has been to do 10% fewer loans this year than in 2012 so their pricing is moving up), the pricing for the winning bidder no longer made sense. The game in this deal now is to find out who will factor in higher interest rates the least. I am crunching numbers…

As QE 3 ends, I see this as the new paradigm throughout our industry. One more thing to be considered is that as interests rate rise, banks will pay more for deposits so return on real estate investments will need to go up too.

The pressure cooker on pricing is heating up and something has to give.

 

 

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As I look for my next distressed opportunity, I want to call attention to some data points for consideration. Remembering that I’ve purchased real estate on three continents, I am always scouring the globe for interesting situations for investment.

A large city is facing $20 billion in debt and unfunded liabilities.  That breaks down to more than $25,000 per resident.

Back in 1960, the city actually had the highest per-capita income in the entire nation.

In 1950, there were about 296,000 manufacturing jobs.  Today, there are less than 27,000.

There are lots of houses available for sale right now for $500 or less.

At this point, there are approximately 78,000 abandoned homes in the city.

About 1/3 of the city’s 140 square miles is either vacant or derelict.

An astounding 47% of the residents of the city are functionally illiterate.

Less than half of the residents over the age of 16 are working at this point.

60% of all children in the city are living in poverty.

It was once the fourth-largest city in its nation, but over the past 60 years the population has fallen by 63%.

There are 70 “Superfund” hazardous waste sites.

40% of the street lights do not work.

Only 1/3 of the ambulances are running.

Some ambulances in the city have been used for so long that they have driven more than 250,000 miles.

2/3 of the parks in the city have been permanently closed down since 2008.

The size of the police force has been cut 40% over the past decade.

When you call the police, it takes them an average of 58 minutes to respond.

Due to budget cutbacks, most police stations are now closed to the public for 16 hours per day.

The violent crime rate is 5x higher than the national average.

The murder rate is 11x higher than it is in New York City.

Today, police solve less than 10% of the crimes that are committed.

So where is this city? India, China, perhaps sub-Saharan Africa? If I said Japan, Western Europe or the US, you would immediately dismiss that notion, right? The city is Detroit and listed are the current state of affairs.

I haven’t railed against poor governmental fiscal management / deficits in some time and those subjects have largely been out of the media since there are royals having babies, celebrities behaving badly and Congress has other tasks to not tackle first. Seemingly out of nowhere, the 18^th largest city in the United States can no longer pay its bills and declared bankruptcy. While Detroit has some extreme issues which caused the population to decline, the fundamental rise in unfunded liabilities is all too common. More cities and states will someday have to reckon with this issue as will the United States.

As a former school teacher and police officer, at one time I too was excited by the promise of a pension from retirement to the grave. The police pension was particularly enticing since my salary was almost double what I was paid as an educator with more incentive bonuses to count towards the starting amount of my retirement payments. Clearly law enforcement negotiators were more successful than their counterparts were for teachers. Quite frankly, I felt that I was paid fairly during my time in a patrol car and thought a retirement valued at over $100,000 per year starting in my early 50’s was too good to be true. As I ponder this today, I do not believe that these obligations to those tasked with public safety and education (including my brother and many friends) will be met.

While it is easy to dismiss Detroit as a municipality with politicians who overly rewarded their union donors and promised more than they would eventually be able to deliver, the human side of this situation is devastating. Promises of “financial security” will be broken and the trickle down to restaurants, movie theaters, clothing stores, car dealerships and yes, apartments will be felt strongly. As tax revenues declined, Detroit responded by raising taxes and cutting services.

One of the reasons I have only chosen to invest in “cities which have legs” (likely sustained population growth) is because a swelling tax base has a better chance of muscling through hiccups (or Detroit’s case a choke) and withstanding economic downturns. The real estate market in Las Vegas collapsed in 2008 but the city is coming around because the population is growing again.

 

While I target opportunities where I believe the market has fallen further than it should and is likely to rebound, Detroit is not yet on that list. Michigan has protected pensioners and bond holders in its state constitution. This has meant that the city had no leverage against the two biggest obligations, thus far (potentially). If the bankruptcy court slashes the pensions and bonds, it will set a new precedent. Municipalities, counties and states around the country are watching.

We too should be taking note of the fiscal health of the various governments where we are currently invested and are considering for investment. Does your city/state have legs???

 

I love sports and in my spare time enjoy sitting very close to the action. Whether it is basketball, football, baseball, hockey, soccer, water polo or boxing, there is nothing like seeing top athletes competing to win. Perhaps it is because I was an athlete through college or that I appreciate a true meritocracy which draws me to it.

In sports, when your team is on a winning streak and enjoying the momentum of good fortune through hard work, there is a feeling of invincibility. There have been times where one of my teams is rolling and I can’t imagine how we would lose; until we do. This can be translated into business and other aspects of life and I want to share that analogy to purchases of apartments.

In the last few months, precious metals like gold have been battered and are well off their highs. Bonds are getting hammered and one of the most successful funds (The New York Yankees of the bond funds if you will) in that market (Pimco’s Total Return Fund) has faced losses and large redemptions as bond yields have jumped. In Figure 1, we see the downward momentum that the price of gold is enduring.

 

In Figure 2, we see that gold had a very nice multi-year run and enjoyed positive tailwinds. In fact, I remember articles stating that this precious metal’s price would soar past $2,000 and that this would be the new hard deck (low price) for its value.

 

What about apartment values? Just about every market across the US has enjoyed appreciation over the last few years. In other words, there is plenty of momentum behind the strong market and it can be easy to forget that we as apartment owners are in a cyclical business which thrives and suffers due to forces that are outside of our control. Bond yields moving up which gave the whacking to bond investors are one such force which are a negative for apartment owners.

While a number of industry economists (shockingly the most that I read about or watch on the varied financial networks are employed by brokerage houses that benefit from upward momentum of a bull market) are still quite bullish about apartments, please allow me to refer you to last month’s Apartment Reporter as a reminder to remain cautious.

I have certainly opined that I believe interest rates will not remain at record low levels forever and that investors will eventually demand higher interest rates to continue buying US government debt. As that happens and interest rates rise for debt to purchase apartments, capitalization rates (Cap Rates = unleveraged rate of return on an investment) will rise as well. Unless the property income increases at the same rate, values of the properties will drop.

Therefore, as interest rates have roughly risen about 50 basis points (1/2%) from the low, one would assume that Cap rates have moved up by that same amount. That has not happened.

The big question that all potential buyers should be asking themselves is whether momentum will turn negative. My answer is that of course it will but who knows when that will happen. As mentioned, there are forces outside of our control that will affect valuations in our industry.

Therefore, it is vital that we use the Warren Buffett’s standard when making a purchase. His buying principle is that we must be willing to own and never sell an asset that we decide to buy.

Regarding interest rates, I do not believe for one second that the Eurozone has solved their debt problems and think we will see many more ugly announcements coming from across the ocean. China has its debt and transparency issues as well. Japan is printing Yen faster than we are printing dollars while seeing their population decline. Unemployment in most places across the planet is also high. In other words, cans have been (and are still being) kicked everywhere. All the while, governments from Washington DC to nearly every capital around the globe desperately want low interest rates to finance their deficits and will do almost anything to keep them low for as long as possible.

In other words, I think we will see low interest rates in the United States for the foreseeable future which is how I am basing short-term decisions. At the same time, I am paying higher rates for 10 year debt on my purchases now so that when our Federal Reserve and governments around the world run out of powder, I don’t find myself in a squeeze as quickly as I would with five or seven year debt.

Lastly, I am typically borrowing at a lower loan to value so that I have some breathing room should that squeeze come in a decade. I sleep better knowing that I have built in some theoretical cushion for the future.

For those of you who are selling right now, I hope you are enjoying this momentum. It is great while it lasts!

“I have money to invest, please find me a deal now!”  Those sentiments are echoed weekly if not daily by friends, clients, investors and family.  My searching for the right property stretches across four states in which I’m targeting and includes 3 different asset classes.  In other words, I have thrown a wide net out there to buy a deal.

Investors are paying up for properties and in the last couple of months, I have seen prices rise as bidding wars erupted.  Last week, I was presented an opportunity to purchase a distressed apartment building through recapitalizing it with the lender.

I underwrote the deal including capital improvements to fix a flooding problem and to upgrade the interior of apartments.  As has been my mode of operation since the early 1990’s, I use the highest current rents of comparable properties in the area and make that my high water mark for market rents at the subject building.  While this pushed the income up in the underwriting, my valuation was below the bank’s by more than 10%.

When I shared my numbers, I was asked about rent raises over the next few years and I said that my crystal ball didn’t know.  The lender told me that the other buyers are using between 4-6% annually for the next few years and that my price wouldn’t be competitive if I didn’t do the same.

To be more aggressive on pricing, there needs to be justification on how a decent return on investment will be made.  Guesstimating proforma rents is exactly what was done during the bubble years.  While we all may be able to guess correctly and have our proforma validated, there is also a chance that the rents will stay flat or go negative.  In other words, it is simply a guess.

Rents are tied to occupancy and household income, both of which had been battered over the last 7 years.  As can be seen in Figure 1, occupancy is rising (vacancy is falling) nationally.

 

In Figure 2, we see that household income is just starting to tick up.  Both measures are certainly positive and rents in some markets have begun to rise.  That said, I passed on the recapitalization opportunity since we were at loggerheads on the pricing.

 

Since the last month’s Apartment Reporter, I wrote offers on 6 properties and was unsuccessful on every one of them.  If the pricing doesn’t fit into my conservative model then I will pass and move-on.  As there is risk in any purchase, my advice is to find the equation that works for you and stick to it.  Remember to be cautious as you are competing with the emotions of others and you don’t want to later regret the property you bought today.

Deals are like streetcars, if you miss one, another will be coming along.

 

On Sunday, June 28th, 1914, Archduke Ferdinand was shot and killed in Sarajevo.  That assassination sparked a chain of events that directly lead to the “war to end all wars,” a description for World War I.  Clearly very few people anticipated that the many treaties between countries would eventually plunge much of the world into war and cost millions of people their lives.  It is always so much easier looking at history and giving 20/20 hindsight commentary as opposed to looking out in front of the ship to predict where we are going.

Similarly, a few of us saw the housing bubble as unsustainable and publicly predicted a crash.  I knew it would end badly but foreseeing the exact timing and trigger is almost impossible.  Therefore, I made my financial bets on the trends that seemed obvious.

The housing bubble was caused by rampant speculation and lenders willing to finance anyone with loans larger than the value of the properties at rates that were artificially low.  In other words, the math did not work and greed replaced rational thought on all levels (government, lenders, builders, investors).

I confess that the government’s reaction to the housing and subsequent economic crash took me by surprise.  Historically, our regulators have forced companies into insolvency and let the market clean the carcasses.  In this downturn, new phraseology was born, “too big to fail” and “ quantitative easing.”  The housing crisis did not go to the depths that it would have had the market been left untethered.

Dear reader, before you shoot me an e-mail or letter complaining about my supposed political stance, I am not advocating or criticizing the policies of the past or the present.  I am looking at the facts as I see them and am gazing out at the horizon ahead of us so that I may predict the most likely scenarios.  This allows me to gauge my investment decisions accordingly.

How many times have you heard someone say that if they could go back in time, they would pick the winning lotto ticket and be set for life?  With proper foresight, some of those numbers ahead of us might reveal themselves.

Compass reading

Almost every country in the world is spending more than it is receiving in taxes.  In other words, borrowing against future tax receipts:

•  Almost all governments are raising taxes and are cutting spending.

•   Interest rates worldwide are far lower than the historical average and in some countries as record lows.

•   Many countries are buying their own debt (printing money).

•   Unemployment worldwide is higher than the historical average and thusly real wages are stagnant.

•   “Austerity” and “Sequestration” are becoming kryptonite to politicians everywhere.

Focusing on the United States for a moment, sovereign debt was expanded to soften the blow, particularly for banks and Wall Street investors.  Austerity isn’t punishment and instead is a consequence since the almost $17 trillion borrowed is actual and not notional debt.  While I wish this were a bill that would never need to be paid and was of no consequence, I am planning for that Archduke Ferdinand moment and the likely ramifications.

I can’t predict in what form or when the camel backbreaking straw will come but let’s look at some likely outcomes:

• Economic shocks do not come in the form of a slow trend and instead manifest themselves in crisis’s.

• Higher taxes (through increases and less deductions).

• Less government spending and services.

• Higher interest rates.

• Technological innovations which will lead to lessened need for labor.

• A severe economic downturn

• Inflation

• The next big thing (the internet was the last one and the next one may be energy related)

Since almost none of the talking heads who are arguing about the economic events of the day have correctly predicted anything previously, I would encourage you to picture the world in the lens of the outcomes I just listed.  While it may be emotionally painful, it is vital that you see an apartment purchase in this light so that you avoid real financial discomfort.

As stated in recent articles, there are attractive apartment opportunities out there and as someone who has several offers pending right now, I wish you happy hunting!

Unbelievable #1: A nation and a couple of its banks are about to default on their obligations and are in need of a bailout so the solution is to take up to 60% of individual depositors’ money?  I can not even label it a tax as the banks / nation simply plundered the money from those who had trusted them with their money.  Oh and to boot, all accounts are frozen to stop the sure run on their banks so each depositor’s withdrawals are capped at 300 Euros per day.

Clearly the EU did not want to set a precedent in bailing out the banks in Cyprus without a concession even though they are large holders of Greek bonds which did not go bust because of a bailout.  Presumably the thinking is that France, Spain, Italy, etc… were watching and would also want to be bailed out without any concession.

Can you imagine how you would feel if your bank accounts were frozen and raided?  What precedent does that set for savers in any country around the world?

Unbelievable #2: Your tenant fails to pay their rent and among your options is to serve a 10 day notice for “failure to vacate.”  If the resident wants to fight it in court, they must post the entire amount of rent owed.  Should the resident not leave in that 10 day period, a prosecuting attorney will take up the case and may charge them with a misdemeanor.

The long arm of the law is now on the side of the landlord at least in Arkansas.  Given the games people play to delay evictions in many states, I think it fair to say that this would be a welcome tool for property owners everywhere.  Human Rights Watch labeled this law “abusive.”

No, neither of these unbelievables are April Fools jokes; they are indeed real.

As I always enjoy meeting with economists who see the world differently than I do, I recently met with a fine writer and economist named Liaquat Ahamed whose book Lords of Finance won the Pulitzer Prize for History in 2010.  The book discusses the personal histories of the four heads of the Central Banks of the United States, Great Britain, France, and Germany and their efforts to steer the world economy from the period during the First World War until the Great Depression. The book also discusses at length the career of the British economist John Maynard Keynes who criticized many of the policies of the heads of the Central Banks during this time.

Mr. Ahamed is an economist and is a hedge fund manager, a Brookings Institution trustee and graduate of both Harvard and Cambridge.  He shared his thoughts on the parallels between the financial crisis of 2008 and the Great Depression.

In short, Mr. Ahamed admired how after the 2008 financial crisis, the United States pumped liquidity into the system and raised the currency supply.  He was far less concerned with Debt to GDP and gave an example of England in the early 1800’s who successfully paid off a national debt that was 300% to GDP.  Unfortunately, when I asked for any other example in history where a nation was able to recover after borrowing so much, he didn’t have one.

While I respect Mr. Ahamed’s Keynesian point of view and am hopeful that “the next big thing” as he put it (which drives an economy) is centered in the United States, I remain comfortable hedging inflation with commercial real estate.  I expect more crisis’s in Europe as the “can kicking” slowly comes home to roost along with continued Quantitative Easing in the US.

While Mr. Ahamed didn’t offer any investment tips, my next big thing is more properties.  Last month I closed 2 commercial purchases and have one more apartment building in escrow so I’m betting my money on real estate.  That said, given my concerns about our economy, two of the three properties were purchased without any bank debt since I want to be careful about any future shocks.

 

After determining that the United States was the best place in the world to invest my money, I began a search for my first acquisitions of 2013.  In February, I received a call from a broker who said there was a 12 unit building for sale in a “C” area of Orange County, California.  The property had been purchased in 2004 for $1,780,000 and the owner was suffering from some serious health problems.  His family decided to dump the building and because of the operational issues (5 current evictions), there was no way to finance the purchase.

To boot, the roof and decks were shot and in need of replacement and there was a shrine at the corner of the property for a gang member who was shot and killed nearby.  The price was over $500,000 less than it sold for 9 years ago (not the peak of the market) at $1,275,000.

The author in front of a shrine to a gang member who was killed in a nearby shooting

The sellers wanted to unload righ away and we were able to buy the property because we could close the purchase in 14 days.  We made an “all cash offer” which was very attractive since there were no hurdles from a bank and they had far more certainty that by choosing us, they had a done deal.

While this building is certainly not for everyone given the difficulties with cleaning up the management and dealing with the local gangs, there is a tremendous amount of upside when the property is put back on track.  In fact, we should be able to refinance it and take a large percentage of our cash off the table in about 1 year (for the best rates, most lenders want the deal to “season” and be owned for 12 months before loaning to a formerly troubled asset).

In the Inland Empire of California, many would be buyers are making offer after offer (all at full price or higher) to buy homes but are being continually rejected.  The reason they are losing out is because they are competing with investor groups who are buying “all cash” and can close quickly.  A lot of these deals are in need of repairs so there is upside for a buyer who can rehab the property in a cost effective way.

If you are like me and want to buy distressed assets, my suggestion is to line up cash prior to making an offer on a property for sale.  If you do not have the funds available, some banks will allow you to cross collateralize (pledge other assets) for a line of credit and there are hard money lenders who have money at the ready albeit at rates usually above 10%.  Lastly, you can find some partners who share your appetite for this type of risk / reward investing.

Currently I have two “all cash deals” in escrow and have cash ready along with partners who want to participate.  By choosing this option instead of borrowing the money myself, I am sharing the profits and the risks with others instead of keeping it all for myself.

Given the strength of the rental market in certain areas around the country, properties are trading at seemingly low cap rates so I favor the deals with hair and in need repositioning.  If you have the appetite and team to turn lemons into lemonade, I have found this type of investing to be very rewarding.  My advice is to have your money lined up before the opportunity comes knocking since cash is king.