Denver and Dallas

3 04 2009

Denver and Dallas remain the best of the Case-Schiller Index 20 real estate markets.

Regular readers of this blog know that I am not a big fan of the Case-Schiller Index.  I do not believe measuring the 20 largest metropolitan areas of the U. S. gives a valuable indication of real estate values – which are totally local.

As an example, Denver, Colorado’s home values have very little impact on Colorado Springs, Boulder, Fort Collins, or Grand Junction.  Case-Schiller suggests home prices in Denver have dropped about 4.5% in the last year.  First of all, I doubt that and feel the Case-Schiller methodology tends to paint a negative picture.  Even if it were true, wouldn’t it make sense to include Boulder (which is booming), Colorado Springs (which is doing fine), etc.

All that being said, Denver has shown the best picture in the nation in the Case-Schiller for about the last year.  If you asked the average Colorado resident, they would tell you the market in Colorado is horrible when it is simply not.  There is a tremendous gap between perception and reality.

REAL ESTATE IS LOCAL!!!  Beware of the media reporting.  Don’t fall for their trap.

My New Book!

2 04 2009

Last week I agreed to begin writing a new book that will focus on the mortgage and real estate investing market of today and tomorrow.  This is one incredible challenge. 

As I sit here today, I really don’t know with certainty where the mortgage market is right now.  I certainly will be doing an educated guess – at best – when I discuss where it will be tomorrow and going forward. 

Then I get to do the same thing with investment real estate.  Actually, this is a little easier. 

With mortgages, there has been a total change in the industry.  The most popular programs of the past 5-10 years are now all gone.  Interest Only loans are still technically around.  They have been priced out of the marketplace.  The entire sub-prime loan market is gone.  FHA used to require a 550 credit score.  Now it requires a 620.  This has dramatically reduced those who qualify.  Investor loans are almost impossible to get and the loan to value ratios are punitive. 

What is left are 30-year and 15-year fixed rate amortizing mortgages.  Coincidentally, (I am sure) these are the most profitable loans for the banks in America.   

That is pretty much the state of the industry today.  I suspect it will not change much until at least the summer of 2010. 

In the real estate investing world, the biggest factor is the gap between perception and reality in parts of America.  In Colorado, we have outstanding factors that would guide most people into investment real estate.  We have record high rents, lower costs, low vacancy rates, and short time on the market.  Further, our demographics suggest massive population growth in Southern Colorado over the next several years. 

What is weird is most people think things are bad and going to get worse.  This creates an unbelievable opportunity for the wise real estate investor. 

There you have it.  That is the foundation of the next book.

What’s Wrong Here?

1 04 2009

Three years ago I advised a client to take his savings and diversify it.  At that time he was 75% invested in the stock market and 25% invested in gold.  My advice to him included:

1.  Reducing his exposure to gold to 10%.
2.  Creating an emergency fund of the equivalent of six months of his annual income.
3.  Reducing his exposure to the stock market to only his 403(b) and limiting his contribution to the match his employer (Jefferson County, Colorado) provided.
4.  Use the balance to acquire investment real estate.

Here are the results, three years later:

1.  He lost a little by reducing his exposure to gold.
2.  He has been far more secure due to the presence of his emergency fund.  He actually had a need to use part of it (which he replenished) and having it in place avoided significant costs.
3.  Reducing the exposure to the stock market has been an absolute godsend.  He mostly avoided the massive crash that impacted almost everyone.
4.  He acquired three single family homes.  Two are located in Pueblo, Colorado.  One is located in Colorado Springs.  He put 10% down in each case.  All three have been fully rented the entire three years.  The two in Pueblo were each positively cash flowing (before taxes) by about $150.00 a month each.  The one in Colorado Springs was negatively cash flowing about $400.00 (before taxes).  Overall, (before taxes) he has been about $100.00 negative cash flow.  After taxes are considered, he has been about $600.00 per month POSITIVE cash flow.  The two properties in Pueblo have appreciated about 15%.  The Colorado Springs property has appreciated about 10%.

But…  The client is upset!

If he had stayed in the position he was in, we would have lost about 25-30% of his net worth.  Instead, he has been liquid.  His net worth has actually increased slightly.  He has also had a $20,000 tax write-off after just about break even on his investments.

Again, he is very upset with me!

If you’d like to get upset with me too, give me a call or send me an email.

Is Now The Time?

31 03 2009

To consider commercial real estate?

Unless you are going to be an owner occupant in a long-term situation, my advice is NO.

Commercial real estate can be very tricky.  It typically lags the residential market in appreciation by 18 months to 3 years!  The residential market (in Colorado at least) appears to have stabilized.  That would suggest commercial real estate has 2-3 years of instability left. Further, major businesses are shrinking their office space currently and smaller businesses are not briskly expanding.  In short, vacancy is likely to be a problem.

Also, commercial rents are declining and incentives are increasing.

Even though you can probably buy a commercial building at a discount, I would advise caution.  There is one possible exception to this guidance – if you will be owner-occupying the building, it may well make sense.  This is especially true if your occupancy will be 50% or above.

What you may find is after the tax benefits of owning the building, you can buy it for less in a monthly payment than you could rent it.  If that’s the case, the rents you receive on the balance of the space are pure gravy.  Pull that trigger in a heartbeat.

Base your offer of purchase price on the current situation with the building.  Base your analysis of the value on what you are going to do with it.  If you buy accordingly, you likely have a winner.

Now Is The Time…

30 03 2009

Now is the time for all good…

The planets are in alignment. Everyone says I am wrong. I am getting excited!

In the past, we have discussed what I refer to as “the law of too many minds” in these blogs. This is simply a fundamental law that when everyone thinks something is a good idea, it is probably not.

A good example is the “buy and hold” strategy of investing in the Stock Market. Vanguard, Fidelity, etc. all preached this for decades as a way to reap long term rewards in the market. They presented the case that if you hold a portfolio long term, you have to be successful. They argued that the average return you would see would be 10-15% annually using this approach.

Most Americans that invest bought in. Mostly through 401(k) and 403(b) accounts they bought and held. Further, they “dollar cost averaged” into the same investments on a monthly basis. This was the “sure fire” way to succeed.

Well, it hasn’t exactly worked out that way. Instead of 10-15% annual gains over the past decade, these investors have lost as much as half of their principal.

What do their financial advisors tell them? “Hang in there. Everything will be just fine.” That is the same advice they gave the NASDAQ investors when that market dropped 50% earlier this decade. It is still there!

The evil little secret is these investors think (because of the advice of their financial planners) that they have diversified their risk. Reality is they are totally undiversified. What they needed to do and need to do today is what I refer to as “cross asset diversification.” That is the only way to consistently survive and prosper in your investing. You need to be in multiple asset classes – not just the Stock Market. In addition to the Stock Market, look at “alternative investments” like gold, stamps, antiques, hobby items, collectibles. Look at real estate – both personal and rentals. Look at your own home based business.

The more true asset classes you are investing in, the more secure your future is.

What If?

27 03 2009

You are no doubt aware of the latest federal government action that will create, what they call, a public/private partnership to purchase, what they call, “toxic assets.” These so called “toxic assets” are clearly the result of the application of “mark to market” accounting standards in a devastating way that was never really anticipated by the authors of that standard.

These public/private partnerships appear to me to be a total sham. The private contribution is 5% with almost no risk and huge reward. In any case, what would you think if you discovered that major banks were out there buying up these “toxic assets” so they could, in turn, sell them to these public/private partnerships for a huge profit? No way that could happen – RIGHT?

Actually, that is exactly what my research suggests is happening. It appears that some major banks (I don’t want to name them because I don’t want to become a target) are out there gobbling up these “toxic assets” as we speak. The going rate for these has been 20-30% of face value. My understanding is several big banks are buying them at prices well above that level and putting them in their inventory in anticipation of being able to sell them to these public/private partnerships at a huge and quick profit.

Many would say this is being very shrewd in their investing. I wonder if it is not just an orchestrated sham.

I had no trust for the previous Treasury Secretary due to his inherent conflict of interests. The current one is even worse in my opinion. I sincerely believe we are being manipulated by the government to believe great things are taking place when all that is really happening is a shell game to dump huge profits into the major U.S. banks.

Do some research and you will discover that my information is correct. I sit here and, other than the obvious march away from capitalism toward socialism, I wonder what is really going on and how it is going to impact you and me.

What Is A Mortgage Planner?

26 03 2009
A Mortgage Planner is a designation in the mortgage industry that indicates a high level of training as well as a philosophical approach to mortgages that is non-transactional.  The Mortgage Planner looks at the bigger picture to select the proper mortgage for the client’s situation.
By working with Your Personal Mortgage Planner, you will still receive very competitive fees.  You will not have any up-front costs.  You will be assured that a variety of options available from a variety of lenders will be considered for your situation.
When Your Personal Mortgage Planner makes a recomendation to you, you can be confident that it is going to be the best option available for your specific situation.  You can be confident that Your Personal Mortgage Planner has considered the short-term and long-term impact on your financial plan.
The reasons you choose Your Personal Mortgage Planner are the quality of the advice you will receive, the competency of Your Personal Mortgage Planner, the confidence you can have that you are choosing the proper program, the competitiveness of the rate, and the ongoing relationship with a true mortgage expert.

To review your personal situation, give us a call at 574-9500.