Gas Prices and Investment Real Estate

I've always believed that transportation influences real estate. The house in Tracy may be far cheaper or more beautiful than the house in Sunnyvale near your job. Yet, the 3 hours in the car commuting will tip the scale to the Sunnyvale location. This makes Sunnyvale more expensive. Will much higher gas prices further this imbalance? Core location real estate is always more expensive. It is also the asset that holds the best value especially in rougher times.

Bay Area Trends by WaMu

Kari Noomen, goddess of multi-family lending in the Bay Area, held her bi-annual investors forum this evening. The talk in San Mateo was about rent growth, cap rate growth (slightly) and strength in the diversity of the market. Still odd phenomena with an inverted yield curve, although most people are not talking about that being a precursor to the R word anymore. This is a wonderfully strong, and therefore expensive, market. Great place to own and slowly, over-time build equity. Definitely put the next forum on your social-business calendar for sometime in December.

Trash in San Jose

Garbage collection costs are expected to rise 20% or more for household collections. San Jose's multi-family building owners will only feel a 4% increase. Why the difference? Thank a young Chuck Reed, attorney representing the apartment association some 20 years ago. He led the push to separate the billing and servicing of the two trash collection services. Now, decades later, it is one win the landlords can relish. It is some compensation for a group that tends to lose most of the expense battles.

Do you bet on real estate or businesses?

I suggest you buy real estate and bet on the business. Will Blockbuster video survive, thrive or dive? It's less important some of the intrinsics such as price per square foot, traffic counts, ingress/egress, than will the business model be here next year. I'm villified for this and I still stand behind my position - Starbucks is a fad. Should you really pay a 5% cap rate for that tenant? Will people tire of coffee or will another vendor do it better in the future? I suggest yes, perhaps on both counts. Then what, Mr. Landlord? Re-tenant a 1,200 square foot coffee shop with a DRIVE-THRU? Point of clarification - I love my grande lattes.

Condo Towers in San Jose or a House

Someone has to have the vision of a changed landscape, vibrant lifestyle, robust businesses for the skyline to change. People like Donald Trump, who may be despised by many, change the face of cities all the time. San Jose is being redeveloped and will be drastically different in the decade to come. Condos will be more the norm for first time buyers and the 1,400 square foot ranch house on a 6,000 square foot lot will be more up-scale. What will increase in value more? It's a timing issue. The first condos that hit the market must be sold at attractive prices to get the projects underway. Then values will go up as the market matures and as people get more accustomed to the condos. Then the market will flatten as more inventory hits. This rapid rise in prices and flattening will differ from the stable rise of the single family home prices.

Auburn, Grass Valley & Nevada City

Very nice communities that have benefited hugely from Bay Area retirement dollars. The baby boomers have purchased many houses in the area at prices less than what they sold their Bay Area homes. The communities have boomed in value and population, yet the retail is a significant missing factor. Diversity of restaurants and shopping tend to be sorely missed. New retail in these areas will do very well. Also upgrading shopping centers with nationally recognized tenants is a good move. I would rather invest there than the more open Central Valley.

Flexible 1031 Exchange Intermediaries

Can you get away with a closing on an exchange past 180 days? NO. That is not a debate. Can you fudge the 45 day rule? Some do and some get away with it. Don't expect your national exchange company to do it. By the way, this is illegal. And just fixing that document does not put you in the clear. Do purchase contracts have dates on them? Do lender docs have dates? This is a very risky strategy that I cannot stand behind. It's best to be very clear on what is available to replace your property with before your 45 days is anywhere near up.

What to buy?

Buy the perfect house, it will make your life much easier in the future. There will be many temptations to buy a less than perfect house for the savings of some money. Take my word for it, remodels take more time and money that you initially plan for. You cannot move a busy street or noisy overpass. You will have to heavily incentivise a future buyer to buy your castle. Also, is time not money? Do you enjoy or just tolerate weekends at Home Depot? Do you like the beach, the mountains, Disneyland or Yosemite? Does you boss like you rested on Monday's and most importantly, what does your significant other really think?

Google, Yahoo & Apple

These three and other large, well-capitalized tech companies are buying large tracts of land in Silicon Valley for future expansion. This is a great sign for the long term health of the Valley. With large investments, these companies will be more apt to stay than ship off their workforce to cheaper locales such as Austin. That was a boondoggle that Apple went through in the mid 1990s. Many dissappointed Apple families moved back to the Bay Area only to find a costlier transition. Silicon Valley is here to stay. That's why most tech giants are betting long.

Cookie Cutter America

Every city in this country has a Starbucks (or dozens of them), a Quizno's, a Walgreen's, a McDonald's, a Cheesecake Factory, etc. What's a foreign visitor going to say when he visits all the major cities in this country and sees the same things? OK, I'm being cynical, yet it is true. Companies are expanding rapidly due to a variety of factors: franchising, investors buying coupon clipper investments, distribution channels, large volume purchasing discounts, etc. Every American wants the cheap goods Wal-Mart or Target can offer. This the trend my fellow investors. Make decisions with that in mind.

Banking Relationships

When buying a house or any other real estate, consider the deep relationships you may already have. Banks want to vertically integrate their existing customers. It cost less for them to prospect their current clients than advertise for new ones. Therefore they can be more competitive to them. And existing customers have more for the bank to go on than just a FICO score. Finally, existing bank customers tend to have savings or at least healthy checking accounts to verify. This why one of my current buyers acheived a 1/4 point better interest rate from a certain large bank than what my super loan broker could acheive.

Scratch That, Buy a Fourplex

Never mind what I said about the condo purchase over the land deal. There is still 100% financing possible on fourplexes as long as your FICO scores are healthy. This give you leveage of rents and on appreciation value. If your $300,000 condo goes up 5%, that's a $15,000 gain. If the $1,000,000 fourplex does the same, that's $50,000. I also bet that the fourplex on an after tax basis is the cheaper ownership.

Newbie Investor's Land Speculation Goals

Let me buy a $15,000 single family lot in the desert above Los Angeles. The goal is that the lot will sell for $30,000 in a few years. Small $5,000 downpayment (feel free to extrapolate for ye with bigger budgets) and small monthly negative. Is this a good investment? Will the effort be worth the possible $15,000 gain less the cost of ownership? That same small downpayment will cover the closing costs on a zero down condo for our investor to live in. Then she benefits from tax sheltering and better financing. In this case, go for the condo.

Deep Data from PropertyShark

Do you want to know everything about a property from your desktop? PropertyShark does just this and in a way no one else ever has. Property Shark will give you: comparable sales, property details, ownership info, maps, photographs, listings, foreclosures, pre-foreclosures, mailing lists and more, directly from the web. This information, as per their website, will "level the playing field." What is this fluidness of the real estate market going to do for prices? Illiquid assets tend to get lower valuations. Therefore....?

Housing Incentives Fleeting

No more flat screen TVs, Home Depot gift cards, tens of thousands of dollars in upgrades for your new K&B home. Sorry, the market is strengthening and builders are adjusting their prices. The glut of new homes coming on line is also short. Soon, there will be far fewer available new home developments for buyers to choose from. Builders who pulled out of options on land for development will start to look at those again. Though they will look at them like stock investors who survived the dot com bust do now.

The West is Holding Strong

The "pending home sales index" shows weakness through most of the country. The South dropped month to month over 7% in activity. This is not the trend typical of the Spring selling season. The West is moving in the right direction at 1.6% higher than last month. We may not be rock solid, though we are at least fairly stable. Please consider that the Bay Area is weighing that average significantly.

Hard Money When Buying a Shopping Center

Remove some, but not all contingencies and pass through money to the seller? Why would someone do this? The answer is when the seller is on the line for an extended period of time with their property off the market. Conduit financing takes 90 or more days. Should a seller take their property off the market for that long with no compensation? What if the market sours? What if the opportunity that they want goes away? Therefore, it is reasonable to compensate the seller for this opportunity loss. And 1 or 2% of the purchase price may be reasonable.

My Perfect Shopping Center - Version 2

What else?
Not too deep depths. Bathrooms in each 1,200 square foot space.
A few kitchens built out.
Adjacent to a Walgreen's or other major drug store.
Newer construction, 1980's or better.
Central in the metro or in the path of growth.
No gas stations on the lot. No grocery anchors.
Mix on mom & pop tenants and some national name recognition, although corporate signatures not required. And most importantly, within a non-stop, relatively short flight of San Jose on Southwest.

The Perfect Shopping Center

My perfect shopping center:
(because if you don't know what you are looking for, you'll rarely find it)
Spaces demised into 1,200 - 2,400 square feet.
A dentist, a bank, a restaurant and another dentist.
No video store. Parking over 4 per thousand. Ideally far more than this.
Leases terminating 3-5 years from now. Increase of property taxes passed through to tenants. Corner location on a 4 lane street. I can go on and I will next time.

East West Bank's Financing Promo

Apartment building loans 6.75% with 1 point, fixed for 10 years and ONLY 5 years prepayment penalty. Good deal? I think not. Conduit lenders are about 100 basis points lower for 10 year fixed rate money. Yes, there are 5 more years of prepayment penalty. Although, that probably is insignificant when you calculate cash flows on a 5.0 cap rate deal. Would you like to cash flow or not? Shop around.