Ask tommy2 about Real Estate

[tommy2]

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There are so many other ways to get into RE than flipping. Honestly, I think this is one of the most dangerous RE plays out there. Even guys who are professional General Contractors lose more often than they win at this game. If I were just starting out, I'd go the syndication route. Get 10-20 people together who have 10-20K each and buy a small retail or light industrial building through an LLC. Keep your leverage reasonable (less than 75%) and you can make a ton of money if you are cautious and patient. Give your partners back small checks on a regular basis and maintain your integrity at all times. Others will flock to you to repeat.

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could you explain this a bit more? or point me in the direction where i could find out more information.

also to note, your replies are hard to follow since youre not using quotes.

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Ok, I learned how to use the quote function just for you and since you asked nicely. [img]/images/graemlins/smile.gif[/img]

Step 1: Get verbal commitments from 10-20 solid people who are all interested in real estate deals in general and who have enough money that they won't be bugging you to sell the property or buy them out all the time.

Step 2: Become a broker or network with several brokers who are "jobbers"--newer guys or more entrepneurial guys who don't think a $30-40K commission is a joke. Have them show you some inventory. Be assured--everything you see for 6 months will be crap (they want to see if you are the clown who will buy the bad deal that has been hanging around forever).

Step 3: Learn how to underwrite real estate investments. Buy Real Estate Finance by Fabozzi (link: http://www.amazon.com/Real-Estate-Fi...dp/0974451835)

Step 4: Learn the lingo. Know what an NOI, Cap Rate, DSCR, and other key terms are. This stuff isn't rocket science, but you need to know it.

Step 5: Try to hit a single or double on your first deal. Look for a deal that has a 5-7 year IRR of 10-12%, with leverage of no more than 70%. Don't blow yourself up with debt no matter what everybody tells you.

Step 6: Run you property yourself (have an operating agreement with your investors and pay yourself 4-5% of the collected rents each month) to keep control of the deal.

Step 7: Send checks to investors (even small ones) regularly. Do quarterly status reports. Be on the up and up even (especially) when there is bad news.

Step 8: Repeat.

[tommy2]

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As an update to the real estate discussion we had about 3 months ago...

I am now seeing clear signs in the commercial real estate market that the commercial real estate market is showing a clear divergence between A&B product (which the REITs and institutions are still overpaying for) and C&D product which is changing dramatically. The spread between contract price and closing price is growing (meaning that retrading abounds) and the appraisers/lenders have tightened up a bunch.

What does this mean? For those of you thinking of putting your money into commercial real estate (strip centers, office buildings, even 4 flats or duplexs that are for investment purposes), be aware that the market is in a state of flux right now and that sellers are starting to panic. Keep your bids low and hold firm. More to come.

Cross posted in Finance and Investing

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Excellent follow up to your original thread!

Question: I have for a couple of years now sat on some cash waiting for "blood in the streets" with the intention of buying a few properties I have been interested in. I can either go 75% Commercial (office and retail) and 25% residential (condos in desirable locations which have taken a beating are my target) or the other way around. Any suggestions on the best split for my capital?

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I'd go 75 commercial (heavier into retail and light industrial) and 25 residential. I'm biased, but I think even cheap, well located condos will take longer to rebound and have less overall upside. Remember, real estate developers all figure out that a market is underserved at the same time, but it takes 18-36 months to get a project from concept to user and the laggards are still committed even when the overall market tanks. That's why you are reading stories about most residential markets being supply heavy and supply is still coming on line (and will be for a while).

[tommy2]

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what is your advice for someone in college who wants to invest in RE once he gets out? (m taking finance and computer science in college, and will be out in 2 years. While Im in college I have no living expenses and plenty of free time.

When id' get out, id like to invest in some apartments, or flip some houses.

How would I gain experience? How would I gain capital to purchase the house/land.

Any other info I should know? I live in bay area btw. And dont plan investing in cali (in near future)

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Is this a vocation or extra dough? Very different answers. Go be a gopher for a real estate developer or investor--offer your services for free if they let you learn from them. Nobody ever does this but a good, solid entrepneur will teach you how to make money in exchange for exploiting your "extra time".

[bwana devil]

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Step 1:...

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great stuff. thanks for the info and thanks for the thread.

bwana

[tommy2]

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Step 1:...

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great stuff. thanks for the info and thanks for the thread.

bwana

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You are welcome. I forgot one step, though. Hire a very solid and experienced attorney (ideally one who is also a CPA) to help you put together your legal documents. Network with other developers and syndicators to get some names. Make sure your equity raise includes enough $ to cover the down payment of the property, all associated fees to put the deal together (these alone may add 5-15% of a load to your deal depending upon the size of the deal) and a fee for yourself for putting the deal together (4-8% of the equity raised is normal).

Hope that helps. Feel free to PM me if you have more questions.

[tommy2]

Going to rehit this again since the papers have been full of bad RE news. Here is my take on the current environment:

This bubble had to burst and this subprime issue was well known within the industry. Just like "everybody" knew that many of the dotcom stocks 6-7 years ago were priced irrationally, so to did the bankers, appraisers, developers, and investors know that the RE market was going to crash. Nobody knew when, though.

I'll take questions, but here is the bottom line: things haven't bottomed out yet. As bad as it is now, its going to get worse. One of three scenarios is likely to play out: a soft landing on the bottom (12-18 months of things slowly getting worse), a hard crash (within 6 months and this could easily drive us into recession with the gas price issue and the instability in the Middle East making an assist), or a government bailout (this could easily happen to avoid situation #2).

Fire away. I will cross post in Finance and OOT (since that's what I did the last two times).

[Luisgallo]

Tommy how difficult is for a foreigner invest in RE in USA?

[bwana devil]

i always dig your posts. glad youre back.

i may be selling my house and staying in the same town. due to some unique development changes in austin, my neighborhood has garnered a lot of positive attention lately. my house has doubled in value in the four years ive had it.

-if i choose to sell, what timing makes the most sense based on your predictions and what you know about markets? can one reasonably sell a house for max profit and at the same time take advantage of a soft market by finding desperate sellers?

[tommy2]

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Tommy how difficult is for a foreigner invest in RE in USA?

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As far as I know, America is the easiest country in the world for a non-citizen to buy real estate. In fact, except for a brief period of Japanese xenophobia in the late 80's, we welcome it. The Germans, Australians, and Chinese have been very active in the US market as of late.

[tommy2]

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i always dig your posts. glad youre back.

i may be selling my house and staying in the same town. due to some unique development changes in austin, my neighborhood has garnered a lot of positive attention lately. my house has doubled in value in the four years ive had it.

-if i choose to sell, what timing makes the most sense based on your predictions and what you know about markets? can one reasonably sell a house for max profit and at the same time take advantage of a soft market by finding desperate sellers?

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First off, thanks for your kind words. On to your question: as I said, things are going to get worse before they get better. I'm no expert on Austin, but in general here are some of the things I would be thinking about if I were you:

1. How many buyers are out there for your property at your price range? The recent subprime bubble crash is going to pull a bunch of buyers out of the market. All of the people who make good $, but have poor credit or no $ for a down payment are going to find it much much tougher to get a loan. Texas (although I base this on what I know about Dallas and Houston, not Austin) has usually been (like California) a state that has bounced higher and fallen faster than the "average" in times of boom or bust.

2. Why do you want to sell? Is it just the $--if so, this might be a good time to make an arbitrage move. The banks are still lending, the market is still semi-liquid, and if you can wait and don't have to sell you could make out like a bandit (i.e. get your price as a seller and then turn around and steal a house due to market conditions). I'd take a hard look at this option.

3. Do you like your current home? Does it suit your current needs? If so, maybe refi out a bunch of $ and buy a smaller house that is a real steal and rent it out? The rental markets should greatly improve as a bunch of marginal players are going to be shut out of the housing market for a few years.