Real Estate Is Finally A Buy & Hold Investment

As a real estate investor since the late 80s, I’ve lost count of how many times I’ve been asked, “Is now the time to buy a rental?” 

The specifics of the market are constantly changing my answer.  In the late 1990s, my answer was, “Buy as many houses as you can!” To many, this seemed counterintuitive as the real estate market had fallen in the early 90s and remained flat for years.  Nevertheless, I followed my own advice and bought as many houses as I could, and less than five years later I was able to sell the houses and buy an apartment complex.  It’s the classic strategy in the game Monopoly: you trade four small green houses for one red hotel.

There is one fly in the ointment to this seemingly simple strategy: timing.  By the early 2000s, my answer to the big question was, “Hold onto what you have for a couple of years, but don’t buy anything new.”  By 2004 my answer changed to, “Are you crazy?  Why would you want to buy a house for $450,000 that will rent for $1,500 per month?”  Too many people got caught up in the bubble mentality, and the aftermath is now well known.

In 2009 the question started arising once again.  By now, real estate prices had fallen to as low as 75% from the peak (yes, in some neighborhoods they did!) and the rents would actually produce a handsome positive cash flow.  While it would be fine to buy rental property in that climate (especially for a one to two year hold), my answer was still, “Not yet.” Why?  If you followed the market indicators closely, you could see the making of a double-dip far off in the horizon.  The market was at bottom but there were still too many non-performing loans that would later result in foreclosure.  This meant that the market was bound to give you a second chance to buy the same house at the same (or even lower) price in two years or so.  Why hold through that period when you can just buy and flip?  Let your money grow by flipping— investors in buy and flip funds can tell you how good this is—then once the market enters the second correction, jump into the new strategy: four small green houses, one red hotel.

The second market correction is here!  Foreclosures are mounting, prices are falling (about 7% in 2010 and will probably fall another 7% in the first half of 2011), displaced former homeowners are looking for a home to rent, and other segments of the economy are beginning to stabilize.  Builders are barely adding to the supply of homes because homes can be purchased below the cost to build them.

This time single-family home prices will find their natural bottom, become an excellent cash-flow investment, and asset values will be able to climb naturally.  All of this adds up to a good time to accumulate single-family homes and rent them to tenants, and then sell them after the real estate market has fully recovered.

While the economy at large is starting to charge forward, the real estate market has been moving in the opposite direction.  Compare this to pulling back on a slingshot; eventually you have to let go, and you know what happens then!  The slingshot will let go when all of the bad loans have been foreclosed.  The demand for housing will still continue.  Real estate prices must rise due to the increasing demand until the prices exceed the cost to build, allowing builders to once again add to supply.  No one knows exactly when this will happen, but when it does you want to have an interest in as much property as you can to take maximum advantage of the market.

I have mentioned Praxis Capital in previous posts.  They are a limited partnership syndication group that specializes in buy and flip foreclosure properties. In addition to that flipping strategy, they are now launching two new funds to give their investor clients an opportunity to put their money to work in this age-old strategy of wealth accumulation without having to deal with tenants, toilets, and trash.  To find out how, call Sherri, their investor relations manager.  She will tell you about their brand-new buy and hold opportunities for single-family and multi-family properties.  In addition to making good returns on buy and flip properties, you may want to consider also getting involved with some buy and hold properties for cash flow and future appreciation.  Remember, it’s all about timing!

For more information on this investment opportunity, contact Sherri Haskell at (415) 322-2665 or sherri@praxcap.com.

Physician Investing: Vacation Home Rentals - Part 2

In my last post I discussed the pros and cons of vacation home rentals.

By way of example, I will tell you about our experience. We have a guest house on the spectacular Mendocino Coast of Northern California. It is part of our large ocean-view DragonMist Estate property we have for our primary residence. When are son went off to college, he in no uncertain terms informed us that he would not be a "failure to launch" candidate and would not be returning home, other than occasional respites (for some home cooking and laundry).  So we took a long and hard look at our property, our expenses and most important our life style in this empty nest portion of our lives.  It became obvious that there was no reason why the property couldn't start paying for itself.  So we started looking at managing our own vacation home rental.

The first step was converting part of our primary residence to a rental.  The guest house was originally designed to house friends and family when they came up from Southern California or points beyond for a visit. We wanted that extra space so our guests would feel comfortable and so that we didn't have to give up our living space to accommodate them.  A planning point - when we asked our architect why the closet in one of the guest bedrooms in our main house was so small, he said that if our guests are staying longer than a couple of days, then they should be staying in the guest house.  

Our guest house is connected to the main house by way of our recreation room.  But to provide privacy for our guests and once again, to lessen the impact on us, the guest house has its own private entrance and parking.  We also built in a small kitchen. There are two bedrooms, one and a half baths, fireplace and living and dining areas. Immediately outside is an eight-person ocean-view jacuzzi spa. 

So when we decided to rent the guest house to the public, we felt that we already had a good start.  But it was also obvious that we needed to make some modifications to make it appropriate for public guests versus personal friends and family. The first thing was privacy. To enhance the ocean view, we had originally designed the bedrooms and living space without doors and no window coverings.  After all, the deer didn't mind us looking at them.  So we installed privacy shades on the windows.  We then installed screens for the upstairs loft bedroom and sliding doors for the downstairs bedroom. We also installed a built-in combination lock on the guest house front door.  For each guest, we re-program the combination to the guest's zip code. That way it's easy for them to remember it.  

We would give the guests access to all the outdoor amenities - jacuzzi, firepit, barbecue, tree swing, horseshoes, bocce, basketball, ocean view benches and all the walking trails. And we would go out of our way to stay out of their way, unless they want to contact us.

Now we felt it was time to market our new rental. We knew that the internet was the obvious choice, and after much research agreed upon using the VRBO.com (Vacation Rental By Owner) site.  They are also linked with Home Away.  There are other internet vacation home rental sites that we may soon explore and start using, but we've have tremendous success with VRBO.  Costs per year are several hundred dollars but you'll never find more cost-effective marketing.  You create a description of your property, download digital pictures, and set up your rates and your reservation calendar. You change all the above at any time with a click of the mouse.  The guests make an email inquiry. You can email them a reservation contract and arrange payment.

We have been renting our guest house now for about a year and a half, and it has overwhelmingly been a positive experience.  We have had guests from 18 states and 3 countries.  With very few exceptions, the guests have been delightful and have all appreciated opening our house and property to them. We've had many return guests and they can easily post their comments on our VRBO site.  Check us out at "VRBO.com" and look at Listing # 213704. View our listing here. 

Maybe, we'll even see you on Mendocino Coast as our guests!

Physician Investing: Vacation Home Rentals - Part 1

A very interesting and often overlooked aspect of real estate investments is vacation home rental.

This unique aspect of the property market offers multiple advantages to the owner/investor.  Whether you are looking to purchase such a property or already have a property that could be utilized in this fashion, it may be something worth looking at.

First, by way of clarification, I am not referring to "classic" investment property rentals. In that scenario, you would typically employ the services of a property manager, and the tenants living in the property are there on a hopefully, long term lease basis.  Vacation home rentals are for short-term rentals only - any where from 2 days to 2 weeks (occasionally up to a few weeks).  There are two ways of handling such rentals - you can work with an on-site or off-site rental manager or you can do it yourself.

I have used a rental manager for many of our properties.  These have been in ski resort areas. The most common rental is for a weekend or a week. The manager handles all the marketing, the reservation booking as well as the cleaning and maintenance. For these services, the rental manager charges 30% to 50% of the net rental proceeds.  As compared to long-term leases, these rentals will provide a much higher nightly rental rate. If your property is in a desirable location and you are able to have good occupancy, you can frequently bring in significantly more income by nightly rentals.  For example, a condo in the ski resort of Mammoth Lakes, CA. could lease for $ 1500 per month. Nightly rentals could bring $ 300 per night! So if you want a steady source of income without having to worry about nightly occupancy, then a long-term lease is for you. If you want to try to reap higher income, then nightly rentals are worth a shot. The primary advantage of using such a rental manager is time and effort - they do all the work. The obvious disadvantage is having to give up a large portion of the proceeds.  

The last scenario is doing vacation home rentals yourself. As an example, let me tell you about our vacation rental.  We have a guest house on the spectacular Mendocino Coast of Northern California. It is part of our large ocean-view DragonMist Estate property we have for our primary residence. When are son went off to college, he in no uncertain terms informed us that he would not be a "failure to launch" candidate and would not be returning home, other than occasional respites (for some home cooking and laundry). So we took a long and hard look at our property, our expenses and most important our life style in this empty nest portion of our lies. It became obvious that there was no reason why the property couldn't start paying for itself.  So we started looking at managing our own vacation home rental. More on that in my next post.

Foreclosure Limited Partnerships

Taking advantage of the housing market with forclosure limited partnerships.

In my recent posts, I commented on how buying and selling foreclosures is probably the best way to take advantage of the depressed real estate market, due to the deeply discounted properties that you can purchase at foreclosure auctions. However, I also warned that such auctions are potentially hazardous to the financial and gastric health of the inexperienced investor.  

I believe that for most of us, it makes a lot more sense to become a passive investor in a limited partnership that specializes in these types of properties. The first set of reasons for this is a reflection on us as busy physicians. Between your practice and family obligations, you most likely will not have the time, and possibly energy to do all the research necessary to successfully purchase at a foreclosure auction. Also, many of our investment histories are littered with less than optimal outcomes, especially when we have become involved with investment vehicles that we are not totally familiar and comfortable with.

The second set of reasons focuses on the foreclosure auction process itself. Before even attending such an auction, you have to research public records to find the target properties and check title. Then at least a cursory inspection of the properties you might be interested is a must, which would include an estimation of the cost of any required rehab and fix-up. Also, you must analyze the local market and neighborhood to assess the current market value of the target properties.  Now you're actually at the auction, where you will be bidding against professionals that have a vested interest in you, as a newcomer, not succeeding. Assuming you are able to purchase a property at approximately the price you had in mind, and that you have access to cash funds or accessible lines of credit, you are now a property owner.

If your plan is to flip this property for a relatively quick profit, you must have the necessary rehab work done, which frequently concentrates on cosmetic items.  When completed, you place the property on the market, either as a "for sale by owner", or through a realtor.  Hopefully, you purchased the property at a marked discount to current market value so you can re-list it at a price that is still sufficiently below comparable properties, to allow a quick re-sale.

If this seems like a lot of time and work, it is. There are also a lot of potential mine fields in this scenario, such as: buying a property that has too many hidden rehab costs, paying too much for the property, not having access to lines of credit so you have to spend all your available cash on one property. I'm convinced that this is not a field that I personally feel comfortable playing in. I would rather try to accomplish the same investment goal by investing with groups that literally do this for a living.

After researching this issue, I felt most comfortable with a group out of Northern California - Praxis Capital. I was impressed enough that I become an equity participant in their syndication. They focus on single family residences in Northern California that are primarily bank owned (REO's). They also get involved in short sales, trustee auctions and bankruptcy liquidations. Their average purchase price is $ 219,000 and the average re-sale price is $ 293,000. The average sale price is 34% above the purchase price, which can be as low as 20% of the market peak values. The average time from purchase to sale is 91 days, and they average 12 property purchases per month.

The Praxis principals have successfully managed 26 partnerships, and have purchased over 150 properties since March 2009. They have over 21 years experience in foreclosure auctions. The partnerships have access to several lines of credit, which allows them to leverage multiple properties, which in turn increases the profit margin return to the investors. One of their recently closed funds boasted an average annual return of 34.53% to the investors. 

The limited partnership focuses on foreclosures (which I believe is the property type with the greatest profit potential), concentrates on a buy and sell strategy (which I feel best suits today's real estate market) and works in Northern California (one of the prime markets that will continue to do well in today and tomorrow's market). The Praxis group has extensive experience in foreclosure auctions, property valuations and property re-sales. After a holding period, the investor has the ability to withdraw some or all of their investment. But what I like most about this particular partnership is their transparency. You can speak to the partnership principals - really! In addition to their periodic P & L reports, they hold quarterly conference calls with the entire limited partnership.  

If you would like more information on this partnership, you can contact me, contact their Investor Relations Director - Sherri Haskell (415-722-4849 - sherri@praxcap.com) and check out their website.

Real Estate Investing For Physicians: Part 3 - Foreclosure

Thinking of putting your foot into the real estate investing market with Foreclosures?

Foreclosure! It's a word that strikes fear and loathing (at not just in Las Vegas) to the homeowner, and is music to the ear for the investor.

For the majority of foreclosure properties, the homeowner has already lost title to the home, well before any investor gets involved - essentially the damage is already done. Later in the process, the bank now owns the property and is trying to take it off the bank's liability sheet. That's when the knowledgeable and aggressive investor jumps in.

Most of this jumping takes place at foreclosure and bankruptcy auctions. Speaking of a place that is NOT suited for the uninitiated and uninformed! But I'm getting ahead of myself.

The first step in acquiring foreclosure properties is to research all the available houses in your target market and price range. This research takes the form of public records search, title search, neighborhood analysis, "down and dirty" property inspection, rehab and cosmetic improvement costs estimates and comparable property value pricing. Armed with this information, the experience investor comes to an auction knowing which properties he is interested in bidding on, what will be his opening bid and most importantly, what will be his maximum bid. The investor must also have a significant portion of the accepted bid price in cash at the time of purchase and the ability to get the rest immediately.

Some auctions require full price at auction. The auction serves as a somewhat orderly market to move these deeply discounted properties. But even if you have all the afore-mentioned information in your briefcase, unless you are VERY experienced, you will be outbid, or purposely bid up, or pressured in one form or another to not stick with your pre-conceived game plan.

A typical scenario for disaster is being a new-comer at an auction where all the other attendees know each other. These veterans don't want the newcomer to succeed as that will just increase the competition. It's very hard to succeed in a face-paced selling enviroment where everyone else in the room doesn't want you to ever come back. Assuming you escape from this scene with a newly-purchased foreclosure property in your pocket and a few remaining dollars in your bank account, now the real work of property management begins. But before you figure that out, you have to have a clear plan and focus for what you're going to do with the property. Hopefully, you have that plan and exit strategy firmed up before you even get to the auction. The big decision is "buy and hold" or "buy and sell".

In the first case, you are planning on holding the property for medium to long term, i.e. 3 to 7 plus years. The goal is future appreciation and possibly some cash flow. The action plan would then be: clean up and fix up what the property needs, enlist a property manager and get a tenant, and keep it and maintain it as a rental property. This whole process not only would take another blog post to describe in detail, but more likely another hour of instruction.

The second case is a bet on the fact that you purchased at a price so far below current market value, that you can clean up the property and sell it quickly to an owner-occupant buyer by selling it still below current market value. This of course requires that you did your pre-auction homework correctly and didn't overpay during the auction. There's an oft-told saying in real estate investing - you don't make your profit when you sell, you make it when you buy.

This is a thumbnail sketch of the steps needed to take advantage of these bargain properties, some at 20% of peak values. If you can do this all, and do it repeatedly, you can do very, very well. But this whole process requires lots of time, in addition to access to cash, experience and knowledge of local markets.

I have been involved in just a few of these transactions and they were indeed quite profitable. But I no longer have the time, and still lack the adequate expertise to play the foreclosure game consistently well. I believe a more user-friendly approach to the foreclosure opportunity is to invest cash and not your time, efforts and gastric lining. You can do this by buying into R.E.I.T.s (Real Estate Investment Trusts) that specialize in foreclosures, which essentially is buying shares in a publicly-traded entity, not unlike buying a mutual fund. Another way is to become a limited partner in a private syndication. Next time, we can talk more about these two investment vehicles, as well as thoughts on the buy and hold-or-sell decision.

Real Estate Investing For Physicians: Part 2 - Real Estate Auctions

Forclosure properties may be the place you want to be for bottom line ROI.

In my last post, I commented on the importance of timing when it comes to investing in real estate.  In my not-so-humble opinion, I believe that timing can be more important than the oft-quoted mantra of real estate gospel, i.e. location, location, location.

For example, when the market is experiencing red-hot acceleration, even mediocre locations can do extremely well. On the other hand, when national real estate trends are doing their best imitation of Jacques Cousteau diving to new depths, even the most attractive locations may not be able to weather the down-draft.

Timing to me is not just figuring out the best time to buy or sell, but more practically, the true significance of timing is concerned with figuring out what is actually working at that moment in time. To help assess this all-important issue, I'd like to review the Five Stages of the Real Estate Cycle. These are:

1) flat to minimal growth
2) starting appreciation
3) accelerating appreciation
4) topping, and
5) depreciation.

This cycle historically repeats itself ad infinitum (and occasionally ad nauseum), with a general tendency towards upward growth - namely, the trough of the next cycle typically is higher than the trough of the cycle you're currently in.

So what stage are we in now?  In most instances, I would respond that it would depend on your geographic location. However, as you can read in any newspaper, regardless of where you look on the map, we are decidedly firmly mired in the fifth and scariest stage—that of depreciation and falling property values.

Real estate transactions that were uniformly successful in stage 3 could be doomed to failure in stage 5. For example, in the mid-2000's, I had great success with condo conversions as well as buying multiple properties from a developer and selling the individual units. Other time periods called for buying and holding homes for cash flow.

About now, I'm sure you're asking, "Well genius, what's working now?"  The answer in a word - foreclosures. I know that's not some unheard of news but the simple truth is that foreclosure properties represent not only the best value for your purchasing dollar but also offer the best protection against continued depreciation of property values.  And the highest profit margins on foreclosed properties are found in foreclosure and bankruptcy auctions.

But such auctions are not for the uninitiated - for the inexperienced investor, it can be costly place to get an education. Also, you like most doctors probably don't have the time, patience or knowledge to play in this extremely lucrative  but equally hostile arena. Is there a way to take advantage of this unique opportunity to access dramatically discounted properties and still keep your day job, your sanity and your bank account intact? I believe the answer is getting involved with limited partnership syndications that specialize in buying and selling these foreclosure properties.

In my next post, I'll give you more details on this type of investment, that even though it is passive in nature, can be extremely dynamic in terms of the bottom-line return-on-investment.

Real Estate Investing For Physicians: Part 1

Real estate investing for physicians; The worst of times... The best of times.

With apologies to Charles Dickens and A Tale of Two Cities, when it comes to real estate investing, this is truly the worst of times and the best of times. I’m sure you’ve heard the adage of real estate investing – “location, location, location.” Well I’m here to say that just as important is “timing, timing, timing!”

To explain, let me wind the clock back to the wild and wooly 1980’s. That is when I made my first foray into real estate investing. At the time, I was the director of multiple hospital emergency departments and was flush with the success of our multi-site outpatient urgent care/occupational medicine/multi-specialty centers. With the hubris that only a physician can muster, I assumed that my successes with medical entrepreneurship would easily translate into other business ventures.

So I started investing in real estate. 

One of the first markets we entered was a wine-growing, newly burgeoning bedroom community about an hour from the Orange County/Los Angeles hub of Southern California – Temecula. The area was red-hot! – land values were skyrocketing, businesses were flocking to the area, and the rental market was alive and well. As my wife and I were driving to Temecula, we saw a mile-long line of traffic backed up on to the highway, waiting to exit to the downtown area.  I excitedly commented, “Look honey, there’s so many people wanting to live and work here, they can’t even get off the freeway!” My wife just said, “Hmm, that could be a problem.”  But I pushed ahead and quickly purchased over a million dollars worth of vacant land parcels, a small rental house and a five acre mini-estate home.

Now, let’s fast forward two years. The red hot market continued to appreciate, then topped and quickly became an ice age of falling house and land values coupled with an oversaturated rental market. Opportunities to sell the properties at top dollar evaporated, refinancing dried up and it was a challenge to keep rentals occupied.

So what did I learn from this humbling experience? First, listen to my wife. Second, my previous medical business triumphs did not automatically endow me with the abilities to succeed in other arenas – I needed mentoring, more education and a lot more research. Third, timing was everything – the backed up freeway exit should have told me that the town had not created a sufficient infra-structure to handle the population growth.

So let’s come back to the present day. Over the past two to three years, real estate investing has gone from the darling of cocktail party banter to the subject of head-shaking and hand-wringing.  In many ways, this is the worst of times. Values continue to drop, rental rates are staggering, and the lending environment is stifling –sound familiar?

But it’s also the best of times. Properties can be purchased at very low percentages of true market value, credit is available if you know where to look, and if structured correctly re-sales can be expedited to willing buyers.

The current trend becomes easier to understand if you step back and look at real estate as a cyclical phenomenon – typically repeating five discrete stages: flat market, initial appreciation, accelerating appreciation, topping, and depreciation. We are obviously currently in the final stage – depreciation, i.e. decreasing house and land values.

So in this scariest of times, what can you do? Learn the lesson of timing and put your money to work in the one property type that is working well now – foreclosures.  A lot more on that in my next post.

Read Part 2: Real Estate Investing For Physicians - Real Estate Auctions >