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Real Estate Investing at this time. June 26, 2008

Posted by shaferfinancial in Uncategorized.
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Recently had some interesting conversations with some folks who I am working with regarding the current real estate situation.  Here is a quick overview of what I think is happening.  Remember, that all real estate is local, so what is good or bad about a particular market is not the same for all markets.

There are generally three levels of real estate investing.  The first is what I call institutional investing.  Currently there is a tremendous amount of capital running around the globe looking for a place to park.  Over the last couple decades the favorite place is real estate for this capital.  What that means is that it has driven up the price of large scale real estate investments, driving down the rate of return to single digits.  This is fine as large scale capital is only concerned with getting a return that is a few points above the inflation rate.  Mostly these projects are bought on a cash basis, as the whole point is to preserve capital and put it to work in an environment that will give moderate returns that will beat the inflation rate.  For the individual investor, they can gain access to these investments through large REIT’s.  A few of the REIT’s will leverage in order to increase return.  For the most part, though these large scale institutional investments are off limits to the small individual investor.  Players in this section of real estate are largely immune from any pain, other than the pain of having to find new places to park their ever increasing capital.

Working at the sub-institutional level are hundreds of thousands of real estate developers.  This area is feeling the largest amount of pain.  Most, say 99%, of these folks are undercapitalized, therefore dependent on two groups for the large amount of capital needed for them to do business; banks and private placements.  The banks have largely withdrawn from this market and private placement money have grown reticient to fund real estate.  Perhaps, this is needed to decrease supply????  However, many areas that don’t have a large supply are going to suffer along with the areas that have excess supply.  Being from Florida I have observed this boom and bust mentality and have learned to live with it.  But in general it is really an unhealthy environment to have to deal with.  Those of us that play in that environment, assume the risk along with the serious double digit return possibilities.  Amateurs get eaten alive in this area as it is the bastion of market capitalism and its dog eat dog ethos.

Finally, is the lowest level of real estate investment.  Before this last decade this was generally a local market with individual investors working in a single area, usually the area they resided in.  However, now with the new comminication realities, individual investors can have access to the entire globe for small scale real estate investing.  The individual who understands this new reality can now search and find excellent investment opportunities regardless on where one lives at the current time.  All that is needed is the basic knowledge of metrics to analyze the investment property and the credit scores and capital (down payment, reserves) to satisfy the lenders.  The truth is if you can save $40,000 you can start your real estate investing and create an abundant future for your self and your family.  Working at this level is available to all, just find a mentor and build a purposeful plan like Jeff at Brown and Brown  (www.bawldguy.com).  Here there is only a moderate amount of risk, most of the which can be accounted for, with the leverage and cash flow doing the heavy investment lifting.  Add in the tax adavantges and you have a excellent middle class investment environment.

PS  I took advantage of an opportunity presented to me at a family reunion and spent the last few days on Martha’s Vineyard relaxing.  Now am back to work.  Hope my readers didn’t miss me too much!!:-)

     

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Comments»

1. BawldGuy Talking - June 27, 2008

That hammock looks so dang inviting, I’m turnin’ greener by the minute. 🙂

What you point out best is how the average investor looking to retire well can best get the ‘heavy lifting’ done. Readers would do well to reread the post so as to get the import of that principle.

As always David, your hammer always hits the nail dead center on the head. Great stuff.

2. homebuyerfirst - June 27, 2008

I agree with BawldGuy, the hammock does look inviting. I enjoyed your post and also found it to be very useful. My husband and I both are looking into getting into more real estate just finding the time and the captial has been really difficult for us. Thank you so much for your time in this.

FTHB

http://first-time-home-buyer-s.com

3. Jay - June 28, 2008

Hey, you have a great blog here! I’m definitely going to bookmark you!

I have a **Real Estate site/blog. It pretty much covers Real Estate related stuff.

Come and check it out if you get time 🙂

4. shaferfinancial - June 28, 2008

Thanks Jay!

5. jrrivera - July 1, 2008

I think it’s great that you pointed out on the individual level people can start with as little as $40k. So many people get tricked by the “Guru” mentality thinking they can become millionaires with “No Money Down.”

I’ve been a full time investor since 2004 and I’ve seen so many people come and go. In order to be a successful investor you need to have some money and keep up with the current trends in real estate.

The time couldn’t be better for investing in real estate. All of the “passive investors” from the past few years have dropped out and the opportunities are endless.

To see what we’re doing to keep up with the current trends in real estate read my blog, by clicking here: http://jonthansblog.wordpress.com/

6. shaferfinancial - July 1, 2008

Thanks Jonthan,

Real Estate really is a great place to be. Although I don’t advise folks to go your route (foreclosures, short sales, etc.), the fact you are making it work only reinforces the fact that people can really run a real estate business that allows them to create the life they want. Congratulations!


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