Interest Rate Alert

Our quick search of lenders today found interest rates remain at bargain levels.  Fixed rate, 30 year loans are less than 4%.  And, 15 year fixed rates may be found at 3% or less.  This is incredible.  Many are predicting inflation is on the horizon, which will make these rates will look even better (you will be paying off cheap interest with even cheaper dollars).  Smart investors are locking in these low rates today.

Closed Mill Sells at $1 per Square Foot-We started a Bidding War!!!

In our search for undervalued real estate, we recently made an offer to purchase a 218,000 square foot mill. It had been on the market for more than $2 million. We offered $180,000 and started a bidding war. 

The closed mill, located in the Charlotte Metro area, had interesting elements.  Although just off the "main drag", the location was very near shopping, hospital, and interestate exit.  It had 14' plus ceiling heights and extensive hardwood flooring.  The basic structure was sound.

When making the low offer, the Listing Broker had told us that, since the mill was "severely discounted at $2 million", there was "no way" the seller would take close to $180,000.  An hour later, the broker sent an e-mail indicating that they seller would consider "around $200,000" if the deal would close quick (within a week).  We scheduled a tour of the property for the next day.  The broker, being true to his fiduciary responsibility to the Seller, alerted other interested parties.  During our tour, we found more than 5 groups of prospective buyers pouring over the property.  A bidding war ensued, with each buyer giving their "best offer".  The mill sold for $235,000 and closed 10 days later. 

While we were disappointed to miss this incredible opportunity, we were pleased to assist an owner in getting a property sold that was sitting idle.  And, it encouraged us to make more  offers that are "lower than anyone would have the audacity to offer" as we search for more undervalued opportunities.

Has the Real Estate Market stabilized?

I am often asked about the state of the real estate market.  Investors are cautious.  And, they should be.  Since 2006, we have experienced the worst recession since the Great Depression of the 1930's. 

After 5 years of turbulance, turmoil, and uncertainty, what is the state of the Real Estate Market today? 

Here are some interesting facts:

- Interest rates continue to be at historical lows.  In January, 2012, the 30 year fixed rate mortgage dipped below 4%.  Unbelievable.  While interest rates have fluctuated since, you can still find rates below 4%.  Interest rates are now so low that, even with a quarter point change, the change monthly payment is fairly insignificant. 

- Jobs continue to be lost in some areas, and gained in others.  According to the Bureau of Labor Statistics, the national unemployment level has steadily declined each month since June, 2010.  This means the employment rate and, therefore, the number who are gainfully employed, is steadily improving.  Recently, I heard local experts and economists report on the state of the economy for the Charlotte, NC, MSA.  In 2011, more than 55,000 jobs were created. 

- New Home Builders are finding a shortage of available lots.  From 2003 to 2008, there was a voracious apetite for residential subdivisions.  When the market realized that there was a tremendous oversupply, building slowed from more than 2 million new home starts per year to less than 500,000 in 2010.  And, development of new subdivisions all but stopped in 2009.  For almost 4 years, there have been almost no new subdivisions created.  So, builders and opportunists focused on deeply discounted subdivisions that had been foreclosed and owned by lenders.  But, these are "drying up".  And, the lots are being built and absorbed.  It won't be long before builders will need developers to create new lots.  And, this will drive up land prices. But, that is another story.

- In the last 2 weeks, I have been beat out on 12 different deals.  I'm not talking about deals that have been flat out rejected by Sellers (due to our program of offering extremely low prices, our offers to purchase are often rejected).  I'm talking about BEAT OUT BY OTHER BUYERS.  In one case, the seller received 5 offers (mostly due to our offering an extremely low price, but this, too, is another story).  This is the most relevant indicator that capital is coming back into the market.  Capital exiting the market is what drove real estate into disfavor and made the "bottom fall out".  With capital coming back into the market, prices stabilize and, ultimately, increase.

- In certain areas, building is rampant.  Recently, I spent a few hours touring portions of the Charlotte MSA with an investor.  I was amazed at the development that was taking place and the buildings that are being constructed.  In one subdivision, homes are selling at 5 per month, similar to the "good times".  If you were to drive through this area, you would think you were back in 2003/2004.  It's like the recession did not even touch this area. 

Back to the question.  Where is the Real Estate market today?  My opinion is that the market in many metropolitan areas (and the Carolinas in particular) has stabilized and, in some cases, is thriving.

How can this help you?  Here are a few simple guidelines:
- Buy below replacement cost (yes, there are still a few properties that can be purchased at a discount.  You just have to look and be patient).
- Buy in areas where the economy is improving or thriving.
- Buy based on today's fundamentals, not based on "pie in the sky".
- Have a prudent investment plan and exit strategy.

Here's to your successful Real Estate investing!!

DISCLAIMER: Please keep in mind that my opinions are just that...opinions. They are based not only on information received from trade organizations and the media, but also on "boots on the ground", current day to day experiences. Also, please remember that Real Estate is very much a local market. While we are bombarded by the national news, national events and averages may or may not have relevance to what is going on in your town nor where you invest. Be aware of what is happening in the areas around your investments.

What is "POSITIVE LEVERAGE"?

Simply put, Positive Leverage occurs when an asset produces more income than the cost of money borrowed to purchase the asset. 

Let's look at an example.  Suppose you invest in a building leased to Dollar General.  Assume the bulding is purchased for $1 million and it produces $85,000 per year in Net Income (rent less expenses).  The income represents a return of 8.5% annually based on the cost of the proeprty.  If you invest 30% down payment ($300,000), you could likely obtain a loan for $700,000 at 6% interest.  So, here is where the positive leverage comes in.  The $700,000 you borrow costs 6%, but it is making 8.5%, which gives you a 2.5% return on money that they bank provided to you. 

Another way to view this is that, with the property earning $85,000 per year and your interest cost at $42,000 per year ($700,000 @ 6% interest), your net investment return is $43,000 per year ($85,000 income less $42,000 interest).  If your investment is $300,000, you would receive 14.3% annual return on investment. 

If you paid cash for the property, your investment would yield 8.5%.  By using Positive Leverage, your return on investment would be 14.3%.  The property is the same.  But, your return increases by 68%.  When was the last time your investments produced a 68% greater return?  Used appropriately, Positive Leverage is a powerful tool that can dramatically increase the rate of return on your investments. 

Of course, this is an oversimplification.  The bank loan would likely be paid as principal plus interest amortized for 20 years or more.  A more accurate analysis is through Internal Rate of Return (IRR) calculations.  But, the prudent investor will use Positive Leverage to supercharge the return on investment, which helps to build wealth faster. 

Please don't confuse Positive Leverage with the leverage that occurred in years past.  Many investors lost some (or all) of their capital by leveraging.  But, they may not have been using Positive Leverage.  As with any investment, you should be aware of the risk, and only invest in programs that are appropriate to you.

For more information on Positive Leverage and how it might help you, feel free to contact us.

How to Consistently Earn 8% on your Investments

While the stock market continues its volatile ups and downs, investors are enjoying predictable, consistent returns of 6%, 8% or more by investing in TRUST DEEDS.

WHAT IS A TRUST DEED?  A “Trust Deed” is the common term for a loan secured by Real Estate.  Normally, a Trust Deed involves a loan made by a private party (Investor)directly to a property owner.  Banks have been making loans for centuries.  They use money from depositors (people like you), pay a nominal interest to the depositor, and then lend it out at a higher rate.  In Private Lending, the “middle man”, the Bank, is removed and the depositor (Investor) makes the loan directly to the borrower, earning a high return.

WHY SHOULD I CONSIDER TRUST DEED INVESTMENTS?   Trust Deeds provide:

·        High Return

·        Consistent Yield

·        Predictable Income (Monthly, Quarterly, Semi-Annually, or Annually)

·        Secured by Tangible assets (Real Estate)

·        Short Term (2 to 5 years)

HOW DOES IT WORK?  It is a similar to a Bank loan, except that the Investor (you) take on the roll of the bank.  The Investor (Lender) and Property Owner (Borrower) agree on the loan amount, interest rate, repayment terms and collateral.  A Promissory Note is signed by the Borrower, which gives written evidence of the loan, and obligates the Borrower to repay the loan to the Lender (you).  When a private loan is backed by Real Estate, the Lender receives a Mortgage or Deed of Trust which gives the Lender a security interest in the Real Estate.  Generally, this is done with the help of an attorney who is experienced with these types of transactions.

TRUST DEEDS HAVE OUTPERFORMED

TRADITIONAL INVESTMENTS IN THE PAST 10 YEARS:

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			CERTIFICATE OF DEPOSIT		10 YEAR TREASURY		STOCKS (DJIA)		TRUST DEEDS
Suppose you invested     on 1/1/01			$50,000.00		$50,000.00		$50,000.00		$50,000.00
Average annual yield			5.04%		4.16%				10%
Income or Gains			$25,200.00		$20,800.00		$3,169.50		$50,000.00
NET VALUE ON 12/31/10			$75,200.00		$70,800.00		$53,169.50		$100,000.00
NET RETURN/PROFIT			$25,200.00		$20,800.00		$3,169.50		$50,000.00
% OF ORIGINAL INVESTMENT			50.40%		41.60%		6.34%		100.00%

WHY WOULD A BORROWER PAY INTEREST OF 6%, 8%, OR MORE?  It is true that banks are lending at historically low rates.  If a borrower can go to a bank, they will.  But banks have made it almost impossible for many business people to obtain loans.  They are constrained by regulators and no longer use “Common Sense” lending.  Worse yet, Banks are taking months to approve loans, causing Borrowers to lose out on opportunities where time is critical.  Therefore, Borrowers with solid business plans are seeking alternative financing sources, and are willing to pay higher rates. 

CAN I INVEST WITH FUNDS IN MY RETIREMENT PLAN?  ABSOLUTELY!  You can use your IRA, 401 (k), or SEP IRA to invest in Private Lending.  You also have the option of using the Health Savings Account (HSA) and Coverdale Educational IRA (CESA).  It is a simple process to set up or move your account to a Self Directed Custodian (there are many… contact us if you need recommendations).  By investing at consistently high yields, and paying NO TAX on the earnings (until withdrawal), you can build a fabulous retirement, HSA, and/or Educational account for your future.

IS MY INVESTMENT “GUARANTEED”?  No.  It is illegal to guarantee such investments.  As with any investment, there are risks.  You can reduce the risk and protect your investment by:

-        Secure your Investment with Collateral (Real Estate). 

-        Making sure the value of the collateral is much more than the amount of your loan (this gives you protection in that the property or collateral can be sold to pay off your loan).

-        Documenting the loan with the proper paperwork (promissory note, mortgage or deed of trust, title insurance, etc.).

-        Working with reputable companies.

WHY HAVE I NOT HEARD OF THIS BEFORE?  Private Lending transactions are generally not available through the traditional investment channels.  Investment Brokers and Financial Planners usually want you to invest in their products because they are paid commissions.  CPAs often are not aware of the opportunities in Trust Deeds and Self Directed IRA accounts.  Normally, Private Lending occurs through networking. 

By following simple processes, you can enjoy consistently high returns on your investment.

Here's to your success!!!

Investing in Real Estate today... isn't it High Risk?

In our opinion, well located real estate purchased at below replacement cost is much safer than investments made in 2004 through 2007. Consider the situation just a few years ago. Real Estate was perceived to be a fast way to make a lot of money quickly. Property values were increasing, sometimes faster than buyers and sellers could keep up. Lenders were ready to lend with very little documentation. Everyone wanted to get in the game. And, many who bought in from 2004 to 2007 now own property that is worth much less than they paid for it.

Now let’s look at today’s environment. There are fewer buyers, fewer lenders, and fewer transactions. Foreclosures have been rampant over the past 4 years. Property values have declined. Some properties can be purchased at prices that are substantially below replacement costs. Those with capital are demanding (and receiving) a discount on pricing and a much higher return on investment.
If you purchased a property at a discount of 25% in 2004 through 2007, you may find that today’s value might well be less than the price you paid for it. If you invest in property with a discount of 25% (or more) off TODAY’S low values, it is a far safer investment than a similar purchase just 3 to 4 years ago.

FOLLOW THESE BASIC FUNDAMENTALS TO CREATE A “SAFETY NET” AND PRODUCE WEALTH:
1. Buy Below Replacement Cost
2. Stay with sound metrics
3. Invest where jobs are being, or will be, created
4. Use Low, or NO Leverage

Here's to your success!!

What is a "TRUST DEED"?

A Trust Deed is the common name for an investment in a loan secured by Real Estate.  The legal document that creates the security for the loan is a Trust Deed or Mortgage (depending upon the State in which the property is located). 

Normally, loans secured by Real Estate are made by banks, credit unions, insurance companies and other institutional lenders.  However, private parties can, and do, make these loans, too.  And, your Retirement, Health Savings and/or Educational Savings accounts are all eligible to make these types of loans.  Your accounts can consistently earn high yields by investing in Trust Deeds. 

 Why can Trust Deeds be good investments?  There are substantial benefits to investing in Trust Deeds, including:

1.      Trust Deed investments provide higher yields than a money market or Certificate of Deposit.  Often, yields are 6%, 8%, 10%, or more (depending upon the circumstances).

2.      Trust Deed investments can provide predictable and consistent INCOME (monthly, quarterly, semi-annual, or annual income). 

3.      Real Estate is pledged as collateral, which provides an asset with intrinsic value to back your investment.

4.      If the borrower does not pay as agreed, the Trust Deed investor can foreclose on the property, often owning the property for much less than its value.

5.      Investments are normally short term (1 to 5 years).  Your investment is not “tied up” for long periods of time.

Frequently Asked Questions (FAQ):

1.      Why would a borrower pay an investor such a high rate of return? 

There are a variety of situations that create this type of investment opportunity.  Here are just a few:

A.      The owner has an existing property with equity and a legitimate need for capital, but the project and/or the borrower does not qualify for traditional lending (In today’s lending environment, many good borrowers simply do not qualify for the strict bank lending requirements).

B.     A developer has an opportunity to purchase the property at a significant discount, then reposition it and sell at a short term profit.  To receive such a discount, the transaction must be closed quickly (often in a matter of days or weeks rather than months).  Because the Developer is making a significant profit through buying at below current market value, the Developer may be willing to “share the profits” with an Investor by paying the Investor a high return. 

C.  A bank wants to remove a loan from its books because the loan does not fit the bank's lending criteria.  The bank is willing to sell at a substantial discount if the loan can be sold quickly.  Purchasing the loan provides an opportunity for profit to a savvy real estate operator/developer.  Using private lending, the operator/developer can acquire the loan, restructure it, and sell at a profit.

2.      What happens if the loan is not repaid?

This is a valid concern.  The transactions should be structured so that the Investor is protected through immediate and substantial equity in the property.  If the owner does not repay the loan, the owner loses all equity and/or profits to the Trust Deed Investor.  Therefore, the owner has strong motivation to re-pay the loan.  If the Owner does not repay the loan, then the Trust Deed Investor can foreclose and often sell the property at a price that is higher than the loan, thereby making an additional profit.

3.      Why don’t the Owners or Developers go to the bank to borrow the money?

Just a few years ago, the banks were a viable business partner for real estate investors and developers.  Interest rates are low, and bank financing is the most preferred source.  Today, Banks are not only severely restricted, they also have burdensome requirements and move slowly.  To transact business today, Owners and Developers need alternate sources of capital.  And, they can often get significant discounts for being in a position to act quickly.  This creates the opportunity for Investors who want to earn a high return while protecting their investment.

4.      What are the tax ramifications of this type of transaction?  Normally, the interest is characterized and taxed as ordinary income.  Please consult your tax adviser to confirm your particular situation. 

5.      Can I use my Retirement, Health Savings Account, or Educational Savings Account?  ABSOLUTELY!!!  In fact, we ENCOURAGE it!!  Trust Deed Investments are excellent vehicles for your Retirement account, HSA (Health Savings Account), and ESA (Educational Savings Account).  The earnings grow tax free.  If you compound tax free earnings at high yields, your money grows much faster (earning a consistent 10% annual yield will double your money in 7 years, and triple your investment in 11 ½ years!!!).

For more information on the benefits of Trust Deed investments, please feel free to contact me directly.

MARKET UPDATE

The Wall Street Journal recently reported "bidding wars" for homes in certain markets.  Declining inventory coupled with historically low interest rates are contributing to the current market conditions.  The upward trends in home sales as well as slight price increases are causing some analysts to believe that we have "passed the bottom".  Inflation concerns are prompting many investors to move capital to hard assets such as Real Estate.  And, with Real Estate at bargain prices, many believe that profits are almost certain as the market recovers.

Town leaders have been pleased to see the transformation of a failed townhome project into a thriving community.  And, investors will enjoy an excellent return on their investment.  

What is "Group Investing"?

For Investors who want to take advantage of bargain real estate prices but may not have the time or inclination to locate, reposition, and manage the asset, Group Investing may be an appropriate alternative.  Investors join a "group", generally by acquiring shares in a Limited Liabilitiy Company (LLC).  The LLC is formed for a specific venture and is professionally managed for the investors.  The manager generally receives a fee plus percentage of profits.  Investors normally receive a "preferred return" plus percentage of profits.  Depending on the property type, profits may be taxed at Capital Gain rates and investors could enjoy tax benefits through depreciation.  By joining with others in a "group", your investments can produce income, growth, or both.  First Federal Properties has formed Group Investments to acquire distressed properties and loans.  The asset is repositioned, then held for long-term income and growth, or sold for short-term profits.  Investors have enjoyed annual overall returns of 15% to 30% or more (returns are not guaranteed) with very little risk.  If you would like more information, please contact us.

Brad Bowman, CCIM

Brad@FirstFederalProperties.com