Jan published a new article on Seeking Alpha last week, entitled "Apartments‚ÄîA Contrarian View." The article analyzes a recent prediction by Moody's Investor Services that apartment values will increase substantially in the next few years. While Jan is not bearish on apartment values, he believes that the projections reveal a substantial misunderstanding of the market and that the projections are very unlikely to prove accurate. To read the article, please click here.
Nine years ago I began working full time in the real estate investment field. While I use an HP 12C calculator and I like it a lot, I find it cumbersome to use for common real estate calculations. With a little help from Google, I found the attached spreadsheet online which I have adapted for my own use. Perhaps you will find it useful, too. Please click here to download the excel file.
What is it good for? This spreadsheet comes into play when you are interested in determining the cash flow you will receive from buying income property and financing that purchase with a loan. To do this, it is really helpful to know the mortgage constant for the loan given the interest rate and amortization period. This spreadsheet gives you that information, and it shows you exactly where all the money goes (unlike the HP 12C which just gives you the amount of the payment, if you are able to remember the sequence of buttons to press correctly).
How it works On the tab entitled, "Worksheet," you enter the items in red. Specifically, you need the interest rate on the loan that you can obtain; and the amortization period. You can enter the actual loan amount, although I usually don't bother because I am interested in the mortgage constant, not the actual monthly payment.
Why does the mortgage constant matter so much? As a buyer of income property, investors should be very interested in the relationship between the capitalization rate and the mortgage constant on the loan they can obtain for the acquisition. We like situations where the cap rate is higher than the mortgage constant, because this means our cash-on-cash return will be higher than the cap rate. This situation is known as "positive leverage" in the world of income property investment.
If you are interested in learning more, please contact us and we would be happy to go into more detail on this subject. The topic is addressed in some detail in my book, which is available on Amazon (click here if interested).
In a recent article on Seeking Alpha, Jan explains how investors are buying homes from banks, rehabilitating them, and either re-selling them or renting them. In doing so, they are both earning tidy profits and also performing a crucial service for the recovery of the housing market, by repairing homes that have been through the foreclosure process and have substantial deferred maintenance. To access the article, click here.
This podcast explains why we do not make loans secured by owner-occupied homes but instead focus exclusively on lending to professional real estate investors. Lending to homeowners who have poor credit is a separate business and we have no interest in this business for a variety of reasons, some of which are explained in the podcast.
This podcast explains the pricing and terms private lenders can expect when lending to established, high volume single family residential rehabilitation specialists. It also explains the loan-to-cost and loan-to-value underwriting criteria that are typical in our market as of mid-2011. The current market is profitable for both lender and borrower, and provides an appealing opportunity for real estate investors looking for high current yields with a solid margin of safety.
In late 2010, Jan Brzeski of Arixa Capital Advisors, LLC, (formerly known as Standard Capital, LLC) was a featured speaker in Pensco Trust's webinar series for self-directed IRA investors. Using the links below, you can access the audio file of that webinar as well as the presentation that was distributed to the more than 250 participants in the webinar. As of the time of this posting, Standard Capital has invested successfully in dozens of new loans beyond those that were held at the time of the webinar. In addition, all of the loans we held at the time of the webinar have paid off profitably. To listen to the audio of the webinar, please click here. Please click here to download the webinar's power point and follow along.
To access the article Jan discusses below, please click here: A Bull Market in Rental Housing - WSJ This article from the Wall Street Journal makes the case that buying apartments should yield attractive returns today. It is true that prices are down from their peak and the outlook for future increases in rental income is positive. However, the article sidesteps the single largest challenge for apartment investors--the market is overheated. In Los Angeles, there are hundreds of wealthy individuals and families searching for small properties to buy for all cash. They have pushed down capitalization rates, defined as initial cash flow from operations divided by purchase price, to the 5% to 6% range. Even though interest rates are low, the initial cash-on-cash return for apartment investors in California, defined as cash flow after debt service divided by the buyer's down payment, is in the low single digits.
For a very long term investor who has lots of extra cash to invest, buying apartments does indeed represent a valid investment investment strategy. However, for professional investors and others with limited resources to invest, buying apartments in Southern California at full retail value should be considered with skepticism. At the moment we prefer to make short-term loans to opportunistic investors who are buying assets from banks. By taking a strategy that is far off the main beaten path, and focusing on loans that are too small for real estate private equity funds, we cut the competition by 80 to 90% vs. the competition to buy apartment deals. With less competition comes better risk-adjusted returns, in our view. This is not to say that we won't buy any apartments...only that there needs to be a very unusual situation in order to entice us to spend time chasing an apartment acquisition, given today's high prices relative to cash flow.
Please see the following article: Mega-Banks and the Next Financial Crisis In the article, fund manager Paul Singer argues that we may be headed for substantial inflation. The Fed "is treating confidence in fiat money--paper money--as inexhaustible." Loose monetary policy is being used as "virtually a complete substitute for sound fiscal, regulatory and taxing policy."
Mr. Singer has a point. Listening to the discussion and debate in Washington D.C. and Sacramento, one can't help but notice how far removed our elected officials are from the rules that govern a typical family's finances. Worse still, there seems to be very little resolve to tackle the tough issues, such as bloated pension promises, ever-rising government health care costs and raising the retirement age.
If Mr. Singer is correct, what does that mean for real estate investors? Here are a few observations about investing in an inflationary world:
* Owning real estate is a pretty good inflation hedge. Like gold, it is a hard asset and the supply is fixed. * Borrowing money for a long period of time at a low fixed rate is a good idea. The real value of the debt and the interest payments will shrink over time. * Lending money for long periods at fixed rates is a terrible idea. Avoid investing in long-maturity bonds because their real value will plummet if inflation comes back strongly. * In addition, any investment that is premised on the unlimited good credit of the U.S. or state governments, or on the credit of giant financial institutions, is risky.
What does all this mean for our program of making short-term real estate loans? Inflation would reduce the real return of these investments. However, because they are typically due in 6 to 24 months, they will fare much better than long-dated debt investments.
Alternative Investment Seminar
Instructor: Jan B. Brzeski
Date: Thursday April 21, 2011
Time: 5:00 - 7:00 p.m.
April 21st Alternative Investment Class
For those of you who were unable to attend our February 2nd panel discussion, or would simply like to listen to the discussion again, the UCLA Ziman Center was kind enough to record the event this year. Download the file here to view on your computer's media player: The New Normal Panel Discussion, February 2nd, 2011
or watch the video online at http://www.anderson.ucla.edu/x25943.xml
If you have suggestions for making the event even better next year, or would like to reach us for any other reason, we would love to hear from you. Please email Kari Burns at email@example.com.
The article appeared in the Daily Journal on October 27, 2010. The Daily Journal is California's leading publication for legal professionals. The article focuses on the investment niche of making loans secured by trust deeds, as opposed to the more usual type of loan secured by real property. To receive a copy, please email Kari Burns at firstname.lastname@example.org.
What we saw: A newly-built "Class A" apartment community was temporarily under performing due to the opening of other new apartments nearby. We provided a mezzanine loan, providing the developer with financing until the property stabilized and delivering an attractive return to our capital source.