Real Estate and a bad economy..Oportunity! - Posted by Tim Jensen

Real Estate Investing Apartments
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Posted by JT - IN on September 03, 2001 at 17:39:55:

Robert:

In light of your prejudice about what experienced investors know and don’t know, as evidenced by your quote: “It is not meant for the handful of experienced investors like yourself who look at real estate as a “business” and have a clearly established “plan” that enables you to consistently buy at 30% below market.”, I would still like to read the book, when it is released.

Could you notify me as to when and where I can get a copy; and I would prefer an autographed one, if possible. Or just send me one with an invoice, if you prefer. Thanks, and your approach to the analysis sounds very interesting.

JT - IN

JT Brofft
PO Box 97
Milan, IN 47031

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Real Estate and a bad economy…Oportunity! - Posted by Tim Jensen

Posted by Tim Jensen on September 01, 2001 at 07:34:36:

Hi All,

I have read a few posts about what is going to happen when the economy goes “South”. This is my take.

Look back at history and you will always see that whenever we have a big economic boom, it is followed by a reccession(SP?). I am pre-paring for it myself. I am starting to sell off some of my propereties and get to a more liquid position. What I mean by liquid is that I am starting to pay off more buildings. Also, I have cooled off on the buying. I do not plan on buying anything else for the rest of the year.

I think that a reccession will not hurt investors like me, too much. I am invested in the lower end of the market, not war zones, but the lower middle-classs areas. These types of properties can go down in value, but if you buy them right, like 60-70% of value, you will be fine. Investors who are in higher end properties or ones that have high debt to value properties are the ones that may suffer. Here is why:

Lets say that you have a higher end or even middle-class type property. In a slower economy, these people are the ones that are most likely to get laid off. Factories slow down and lay off workers. They get into trouble and can not make your rent payment or even the mortgage. You have to spend money to get them out and may have to wait longer to re-rent the place or even lower your rent. If you are working on a slim margin, that could hurt you. This does not take into account, any kind of repairs needed. I know that your lease may say that the tenant pays repairs, but if they can barely make rent how are they going to make repairs.

The oportunity I see in the coming resseccion is this. I figure that the middle-class areas and higher will be hurt the most. This wold be the time to upgrade. I plan on buying some of these properties at a 60% on the dollar or better. With some cash reserves, you will be able to get these homes and have money to weather the storm. Then once the economy turns around, and it will, you will be sitting very nice.

Now, this is an over simplification of what I think will happen. I would like to get some other peoples comments.

Just my thoughts,

Tim Jensen

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Down Economy? Write Options. - Posted by Ronald * Starr

Posted by Ronald * Starr on September 02, 2001 at 20:37:10:

Tim Jensen-------

When people who invest in financial markets and commodity markets expect an asset to go down in value they sell short or write options.

If the real estate market is going to go down in price, you might well make out well by writing options on the properties you own. Find the optimists and have them pay you, say, 3% or 4% of the value of the property to be able to buy it in 3 or 5 years at the current market value. Or even a percent or two less than the current market value. Point out that you will continue to manage and maintain the properties until they exercise the option. They, if the price of houses goes up, will make a profit with very little cash investment and no work.

If the prices do go down, or probably if they stay flat, the options will not be exercised and you get to keep the option consideration, as well as still have the properties.

You might even take this a step further. Suppose you lease, with an option to purchase, houses from people who want to/need to get out. You know, the classic motivated sellers. Do so with a low option consideration. Do so with a price which is less than or equal to today’s market value. Then you option the properties out to investors/speculators, such as I described in the paragraph above. Get large option consideration than you paid. Try to set the option price at or above today’s market value. This is the same strategy as I outlined in the proceding paragraph, but you don’t even have to own the properties. You just have to have the right to own the properties. This is like “short-selling” with stocks.

If property values drop, your optionors will probably not exercise their options. So you get to keep the option consideration. If the properties drop too much in value, you will not exercise your options.

Now, note that I did not encourage you to lease/option to occupant/optionors. I do not mind your taking money from investors/speculators, but I suggest not taking money from people who are hoping to end up owning their dream home.

Good InvestingRon Starr**********

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Re: Real Estate and a bad economy…Oportunity! - Posted by Ronald * Starr

Posted by Ronald * Starr on September 02, 2001 at 20:19:40:

Tim Jensen-------

I tend to agree with you that if you buy at 60-70% of market value, you have some cushion built in. And, usually you can rent out the properties and sit out a recession. I did than in Sacramento, CA, in the mid 1990s. I think my couple of houses there were probably worth less than the loans, but so what? I just kept them rented out at about break-even cashflow. Now they are worth considerably more.

I disagree that the different-priced neighborhoods will go down differing percents. It might happen, I don’t claim foresight. However, I do believe, and all the evidence I have ever seen supports this, that over a longer period of time the different-valued areas will appreciate approximately the same. I call 10-year periods “a longer period of time.” Now, for a few years you can see differents in rates of appreciation in different-level neighborhoods. But I’ll bet you can’t find any evidence that the direction of the difference is as you have stated it. If have anything other than your personal hunch to back up that, I’d love to see it, 'cause I’m a research kind of guy. I love them numbers.

I’m sorry to tell you too, that low-end rentals are not necessarily immune to economic downturns. Now, it is possible that your properties are in fairly attractive neighborhoods, so what I am about to describe will not apply to you and yours (properties).

When the oil-patch crash occured in the late 1980s, the low-end rental properties suffered very badly in Texas and Oklahoma, perhaps elsewhere, too. Lots of people left to go to other areas where jobs were more plentiful. Many to Detroit. When the middle-income properties had high vacancy rates, they dropped their rents. This lured to them renters who had previously been living in the low-end rental properties. Now, they could afford to move on up to a nicer neighborhood. And they did. The properties in the low end were vacated. Lots of foreclosures. In 1990, I even saw sites in the Oklahoma City Area where the low-end apartment complexes had been bulldozed down.

As I said, maybe your properties won’t suffer so.

Good InvestingRon Starr***

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Re: Real Estate and a bad economy…Oportunity! - Posted by JPiper

Posted by JPiper on September 01, 2001 at 18:58:32:

Tim:

Just a few comments.

I doubt that you’ll be proven correct that high and midlevel homes come down more than low end…at least on a percentage basis. They’re all going to come down, just like they all went up. And I expect to see this throughout the country, but especially in high tech areas. I don’t think this time it will be regionalized.

Alot is going to depend on the recession. Some are worse than others. Low end tenants are ALWAYS susceptible to the slightest hiccup…so I think you can rest assurred that not only will these prices come down, but they may well have trouble paying the rent. The unemployment rate goes up in a recession Tim…and that isn’t just executives getting laid off. In fact in terms of numbers there are MORE low level employees than high level, therefore I think you can expect to see your existing properties have more difficulty than in the past.

Further, I see other problems in the low end…namely subprime loans. I think the subprime loans have been used in large quantities in these low end areas…and I expect to see large default rates in those areas, pushing prices down as they work through the system (that takes a while). By the way, the foreclosure rate is already up.

I think you’re wise to “unleverage” yourself. I think “leverage” is going to hurt some of the investors that think “pedal to the metal” is always the way to go.

I think you’re also going to see some of the rehabbers get hurt. After all, what do you do when the buyers don’t show up? And they won’t. Holding periods are going to lenghten out…already happening in my area.

In general, some of the strategies that have worked so well in the immediate past will probably quit working as well…ie rehab/sell for cash and wholesaling for cash.

To the extent that tenants are what Ed Garcia calls “mooches” I’d expect to see a high default rate on rental payments amongst them as the “slow economy” progresses.

And finally, I wouldn’t expect this thing to end too quick either. Real estate has a nasty happen of being VERY slow to change direction, but once it does it keeps going that direction for a while. the point? don’t spend your money too quick.

Now let me end by saying that my crystal ball has been wrong more than I care to remember. So listen to anything I have to say at your own risk.

JPiper

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Re: Real Estate and a bad economy…Oportunity! - Posted by Jim FL

Posted by Jim FL on September 01, 2001 at 18:24:52:

Tim,
While I too am being cautious, due to some things I’m seeing happen in the market, nationwide, the newspapers here are touting something completely different.
There was an article in the business section the other day here that said, “Central Florida Home sales up 15% in July.”
I read it, and do think this is the case.
But, I also noted that the majority of the sales were for new construction.
The older homes are basically at a stand still, and the upper priced homes are not moving well at all.
What this means to me, quite frankly, I’m not sure.
I’ve only been at this for a few short years, and the market has been VERY strong in that time.
I do think there will be more homes for the taking here shortly, and I’ll probably buy quite a few.
But, I do so selectively.
I know I’ll have to account for longer holding times, and perhaps not get as much upfront as I’m used to.

With the loan rates low a the moment, I see several buyers out there getting into homes for very little down, low interest rates, and not a dime in equity after one year or so.
I’m thinking that maybe I can buy some of the middle ranged homes like this from folks when things go south, and create some nice rentals.
I looked at rent rates here over the last 20 years, and NOT ONCE has market rent decreased.
So, we can get these rented, and will just have to make up the higher profits thru volume.

I’m also looking more into L/O’s again, and simply doing cooperative assignments.
Negotiate some good deals, pass them on and get out with some cash.
After more of that is built up, I can then buy for cash, at SEVERE discounts, and have some to back me up.

Then again, I’m new still, and this is all subject to change.

We shall see what happens.

I do appreciate your insight Tim.
I know you’ve been at this many times longer than I have, so your words are surely ones I pay attention to.

Take care,
Jim FL

P.S. How are things there in good ol Illinois anyway?

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Don’t throw Baby out with Bath Water. - Posted by JT - IN

Posted by JT - IN on September 01, 2001 at 16:02:10:

Isn’t that rule #1 in RE investing. Oh,it isn’t, then maybe it should be.

Yes, I too am concerned about the ability to sustain the great times, that the RE market and overall economy have seen. However, I for one, will continue buying properties, for the purpose of re-selling, until I see better signs of this slow down, that I suspicioned. Instead of buying 6 or 8 proeprties, between now and the end of the year, I may only buy 4, but I will insist on the numbers being a little bit better, than when I was less concerned. I think shutting the “buying spigot” off completely, is not warranted, in what I am seeing. Maybe my area is different.

Just in Tuesday’s Cincinati Enquirer, front page lead headline: " Homes Selling at Record Pace". It does say that “local residents were more confident about buying, than were consumers nationwide”. It also sights lower interest rates, as the reason for the sustained sales level.

Do we think rates are going to rise? I don’t… so with relatively low mtg. rates, people will keep on buying. I do hear of layoffs, and closings, and recognize that this will impact the marketplace, if continued in great volume, but the bottom line is, the average american, is still in chase of the american dream; Owning/Upgrading their own Home! I will simply do everything within my power to facilitate this persuit, and stick some dough in my pocket, as I usually do, when I successfully assist a nice family in reaching their dreams.

Just the way that I view things…

JT - IN

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The Myth about Good and Bad Real Estate Markets - Posted by Robert M. Campbell

Posted by Robert M. Campbell on September 01, 2001 at 14:38:58:

While most people will tell you a rising real estate is good and a falling real estate market is bad, this is not true.

Sure, real estate markets - and prices - do rise and fall in long-term trends. However, the key is not to judge these trends as good or bad, but to be able to spot major market turns before they strike and then capitalize on them as they unfold.

As they say in golf, “Every shot makes someone happy.”

Robert M. Campbell

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Re: Real Estate and a bad economy…Oportunity! - Posted by Chuck (AZ)

Posted by Chuck (AZ) on September 01, 2001 at 10:44:46:

Sounds very much like a chapter from CashFlow Quadrant.

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Exactly What I’m Doing - Posted by Frank Chin

Posted by Frank Chin on September 01, 2001 at 09:02:01:

Hi Tim:

You got it exactly right.

The recession has NOT hit my area yet, New York City. But I already unloaded my oldest property - and using some of the cash to rehab the remaining ones - one of which I’m also be selling. If it doesn’t sell - then I’ll have a spanking new place that I can rent for much more to better tenants.

I found that during good times, owners are able to rent out even the crummiest places. I’m rather surprised to hear tenants renting my place thought they found “heaven”. Simply put, the appliances all work, the place is cleaned, and painted. The thing that makes their day is that “the oven was cleaned”

Not much to ask for.

I just got new windows installed, electrical systems upgraded. I’ll have the lobbies retiled, install modern lighting, paint and install new front doors.

The lobby will even have new furniture.

Buildings built 50 or more years ago has inadequate power. Tenants are really annoyed when they have two air conditioners on, use the micro wave, and the power blows.

So isntead of spending money on 3 A/C’s for a 2BR rental, which I used to do, I spend $750 upgrading from 30 amps to 60 amps to each apt., and let tenants buy their own A/C’s.

With this,they even take the A/C’s out of the windows themselves during the winter instead of bothering me when it was the “landlords’s A/C”.

I’m always amazed when visitng MF rentals and see broken light fixtures with the bare bulb fixture hanging crooked in the hallways. Hi-hat fixtures in Home Depot cost less than $40.00 to $50.00 each. I use an electrician helper working off the books for $35.00/hour on weekends putting a “set of three” in the ceilings with 3 hours work.

So I spent $300.00. Everyone is “wowed” with these fixtures. But, for me, there’s no more “broken covers” and “crooked” light bulbs. The place even looks up to date, and each apartment is now worth $100/month more. With three apartments the pay back is ONE MONTH.

So this is what I’m doing lately.

Frank Chin

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Jeeeesh; Could you give this speech… - Posted by JT - IN

Posted by JT - IN on September 01, 2001 at 23:52:27:

Jim:

Could you come to Cincy, and give this speech to my competitors, just prior to the Sheriff Sale, on Thursday morning?? I think that I could buy more property, after you hit them with both barrels about the looming drop in prices and default on rents. I will pay expenses, and fee. LOL

I, for one, am no forecaster of the future. I merely try to analyse what is happening, and hedge conservatively, when I think that I smell a trend about to arrive. Frankly, the market needs a bit of shaking out, just as the stock market did. When individuals begin thinking it is a can’t miss opportunity, then too much $$$ enters the market, and prices are driven to an unsustainable level. This may be where we are, but not sure. I am sure we have reached a point where just about anyone that is “98.6” can buy a house, with some financing gimmick that is available. The lending institutions have “dumbed-down” the requirements, in an attempt to sustain the volume levels that they desire, to compensate for much financail irresponsibility that is commonplace. They will get what they deserve, should your crystal ball, be anywhere close to accurate.

I agree, that leverge will be a nasty bed-fellow, should the downturn occur. However, buying at conservative prices, I think, will continue to yield profits, for some time. My rationale is, that buying at 70% of FMV today, will still allow for an exit strategy, even if the market deteriorates. It may just reduce expected profits, as you lower prices to liquidate inventory, provided you don’t have too much of it to liquidate.

JPiper, as always, we enjoy hearing about your crystal ball. It possesses much wisdom and experience, even with the less than perfect record, that you described. Considering that a Hall of Famer, in major league baseball, only needs to get a hit, 3 out of 10 times, over a sustained period, I think that you have nothing to apologize for here.

Just the way that I view things…

JT - IN

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Re: Real Estate and a bad economy…Oportunity! - Posted by JohnBoy

Posted by JohnBoy on September 02, 2001 at 02:07:22:

Jim,

I’m just curious. Have you heard anything about a lot of people that are relocating to Florida this year? I’m wondering if more people from the colder climate areas are relocating this year due to the big increase with natural gas costs? If so, I wonder if this could be part of the reason Florida is still showing stronger home sales? Just a thought I was curious on.

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Re: Don’t throw Baby out with Bath Water. - Posted by Tim Jensen

Posted by Tim Jensen on September 01, 2001 at 18:07:57:

JT,

Let me explain myself further. The reason I do not plna on buying anymore homes is that I have a full plate. I would buy more if I was sure that the market was going to stay strong. However, I am not sure and do not want to hold properties long at all.

Finally, I had an old real estate instrctor tell me thatr the RE market usually lags the economy by 6 months or so.

THanks for the input,

Tim Jensen

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Re: The Myth about Real Estate Markets - Posted by Ed

Posted by Ed on September 01, 2001 at 15:36:00:

Robert. Assuming you are correct and I believe you are, and that we are now reaching that point, how would you capitalize on a downturn?

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Re: Real Estate and a bad economy…Oportunity! - Posted by Tim Jensen

Posted by Tim Jensen on September 01, 2001 at 11:04:57:

Really?

I have not read the book. Let me know what chapter, I would like to check it out.

Thanks,

Tim

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Re: Exactly What I’m Doing - Posted by Ronald * Starr

Posted by Ronald * Starr on September 02, 2001 at 19:56:08:

Frank Chin-----

I nominate you for sensible property owner of the year award.

Good Investing and Good PostingRon Starr

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Re: Jeeeesh; Could you give this speech… - Posted by JPiper

Posted by JPiper on September 02, 2001 at 01:27:11:

LOL. Not a bad idea. Spread enough negativity and maybe we can drive out what’s becoming an overcrowded field. Works for me. LOL

JPiper

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Re: Real Estate and a bad economy…Oportunity! - Posted by Jim FL

Posted by Jim FL on September 02, 2001 at 02:17:29:

John,
Actually, yes…but I’m told this happens every year.
The newspaper here did mention a large influx of people moving here from “Up north”, but that just told me, “What else is new”.
That is what Florida is all about.
20% of the people were born here, 50% moved here in the last 10 years, and the other 30% are too slow in answering me to figure where or what they came from.

This is certainly something to think about.
Hmmmmmm…perhaps an ad in my old hometown local paper this winter…
“Escape the cold and HIGH GAS bills”
Florida-rent to own, low down, no bank qualifying
3 bedroom, 1 bath home, $3,000/month
1-800-ulpayit

Anyway, I am actually looking for some vacation rentals near the mouse.
Almost got one already, but the seller was a little greedy, so we let her get away on us.

Take care,
Jim FL

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What to do in a real estate downturn? - Posted by Robert M. Campbell

Posted by Robert M. Campbell on September 02, 2001 at 21:07:47:

First, let me tell you that my area of expertise in real estate - where I give myself an advantage over everyone else - is knowing how to identify the peaks and valleys of real estate market cycles.

Then, armed with this knowledge, I believe the vast majority of people - including the part-time real estate investor - should follow this K.I.S.S. formula:

(1) Be invested in real estate during the uptrends;
(2) Be in CASH during the real estate downtrends.

Nothing fancy . . . the key is in being able to identify trend changes and then buying and selling accordingly.

Therefore, my K.I.S.S. anwser to your question is this:

During real estate downturns, stay invested in cash until the market “signals” you the next real estate upturn is ready to start . . . and then BUY. You then ride the trend higher until the market “signals” you a peak is approaching . . . and SELL.

In other words, you play the real estate market like a skilled sailor plays with the wind . . . always using it to your advantage.

Personally, unless you can consistently buy property at 30% below market value - which only the best real estate investors can do - the easiest and SAFEST way for “the average Joe” to make big money in real estate is to buy and sell according to market trends.

Robert M. Campbell

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Re: Real Estate and a bad economy…Oportunity! - Posted by JohnBoy

Posted by JohnBoy on September 02, 2001 at 02:41:06:

Hey, I like that!

3 bedroom, 1 bath home, $3000/month
1-800-ulpayit

LOL, That’s a good one! Is that a real number of yours?