As another year comes to a close and we look back at 2011, it ends with more questions than answers for all financial markets, including real estate. Back in the 1980's, when the stock market was tumbling, I remember driving to work and seeing that the stores on Olympic Blvd. were all open and things were operating as usual.
However, why does this current downturn feel more like a pending calamity that will have no end, no silver lining and no way out?
I think that instant communication has created a panic society that is reactionary. What do I mean? As news travels at the speed of light over the internet, the general public as well as investors and large money fund managers react to news, rather than take the time to consider what it really means.
Watching Jim Cramer’s stock market analysis for 15 minutes each morning before I go to my workout is a prime example of panic and reaction, and the lack of any credibility of our news and its analysis of why things happen.
For the past months, Greece’s debt and bailouts were the reason that stocks climbed, but recently the market dropped 400 points with the Italian debt crisis as the hot topic. These are distractions that go along with the Penn State crisis, housing numbers, unemployment and the stateside visit of Prince William.
Now for the majority of Americans, this is a frightening reality. Low interest rates are affecting most older retirees as they have a fixed income that is being absorbed as the equity is being used. Market interest rates should be at 7%+ and prime rates should be there as well. But, we are in a time when “too big to fail” economics prevail and the average American is up the creek without a paddle. Medical costs are a disaster and again, the average American is in the difficult position of deciding between food, shelter or medical needs.
This is a real problem that requires hard answers if it is going to be solved. As I watch the republican presidential debates, I see that we are in worse trouble than I could imagine. Which one of these people could I trust to actually do anything, and which could captivate our country and world to make a real impact? I think Newt Gingrich may have a chance, but we’ll see. The other guy is Ron Paul, who is a genius in economics, but the media makes him out to be a nut.
So we have very few choices and they are not too good. This is why people are marching in the streets and this is why so many people I talk to are somewhat depressed. The media is feeding on any bit of tabloid crap they can report, and sensationalizing everything with a negative spin.
Fortunately, when I get in my car and drive to work, I pass millions if not hundreds of millions of dollars worth or real estate. Bernie Madoff can't hide that on a balance sheet, nor can the hedge fund managers pick it up and move it while we sleep. I can rest easy that if I have a good tenant and low debt, and manage my affairs properly, I will be safe from harm’s way. Real estate in Los Angeles is the single safest investment you can make.
We have a few earthquakes, but for the most part, very little property damage when they occur. The risk comes with not being educated and just buying something you do not understand. I can say that although I have been in real estate for over 25 years, I don't understand the office market. When I have that type of request, I usually refer it out to someone with more expertise. I think I understand retail and am an expert in industrial property, so I look for opportunities in those markets.
My goals for 2012 are the following:
1. Buy more industrial buildings in Los Angeles
2. Buy properties that are adjacent to my existing holdings when possible.
3. Grow my brokerage business by continuing to provide honest market insight for my clients.
Every generation has been faced with challenges that cause the majority to sit and wonder what will happen, while the few build their wealth, holdings and real estate portfolios. They buy first notes, invest in notes, buy buildings and reposition them with different uses and tenants. They are conservative yet aggressive. These syndicates, individuals, families and corporations have a business plan and stick to it.
As we are exposed to uneducated and over-educated reporters and experts who tell us what we should think, it is easy to be distracted from your goals. It is easy to be frightened into inaction. The time to buy is when everyone else is selling, when most are frozen and panicking.
As I see the growth in the companies that have planned well and survived the downturn, I see light at the end of the tunnel. I see many opportunities. This is am amazing time to be alive and I choose to live and thrive. 2012 will be a challenging market to navigate, but if you surround yourself with an expert or a team of experts you can realize success.
Have a happy and healthy holiday season and a great New Year!
Thursday, December 15, 2011
Tuesday, November 1, 2011
Tribe of Ants
You probably are like me and have never heard of Yang Lan, Sina nor Tencent before. Yang Lan is a most beautiful woman and also the "Oprah Winfrey" of Mainland China. In a recent presentation, she discussed the current status of China, social media and the potential future for the next generation of young Chinese.
Sina and Tencent are two micro-blog sites that respectively have 140 million and 200 million daily users and are the Chinese equivalent of our Twitter. 80% of the users are less than 30 years old. From 1980 to 2000, the one-child policy was in effect and most people chose to keep the son and abort the daughter. So there are 30 million more boys in this age group than girls. Imagine the problem there.
The education rate is high with this new generation, with only 1% illiteracy. 80% go to college. Here is the tough part: the average starting salary for a college graduate is $400 per month. But, the cost of an apartment due to ramped up growth is $500 per month. So these young grads entering the job market must share a small space with multiple people to save any money and to buy the goods they desire. They call themselves "The Tribe of Ants".
They also desire the best cars, clothes and all the things of status that will give them self worth. Five million people per month in China are purchasing new cell phones. These numbers are insane to comprehend.
There are 1.3 billion people in China. 100 million are in the ruling class (i.e. the government). 300 million are living in high style, better than the average high income earning Americans, while 900 million are living in poverty. When I discuss these numbers and issues with my Chinese friends and local business clients, they say they fear a political and social uprising in their home country.
The young and educated are Tweeting, or Tencent-ing about social misdeeds, corruption and other things that the government is doing that upsets the general population. Social justice and corporate greed are at the top of their list of concerns.
We have 300 million people living in America. 40-45 million are unemployed today. It is very hard to find a job fresh out of college, and even 50% of the MBA's are unable to find work. The Occupy Wall Street movement that is gaining momentum across the country is calling for an end to corporate greed and government mismanagement. Some want to shut down Wall Street, end capitalism and replace it with a redistribution of wealth, and give everyone free medical care and a living wage without working. I don't know what else they are asking for, but it is a little scary. I think things will get way out of control.
The reality is that our work force is shrinking, which means that the average person’s ability to buy goods and services at their local retailers is diminishing. People are cutting back and even those that can afford to buy all items large and small are also holding back. Companies are not hiring, and even government departments like the Post Office are letting people go. They are also going to stop Saturday deliveries.
Meanwhile, Los Angeles real estate continues to be strong and the market is hot. The top selling products are apartment buildings, and they are trading at very low cap rates (meaning the annual return is low), between 3% and 8% except for special foreclosure deals. We had a bankruptcy auction recently and the property sold for 100% over the asking price with three bidders going at it in court. Land for development of apartments is also in high demand. Corporate tenant-leased investment property is also in demand as investors are looking for a higher rate of return on their dollars than a bank can give them.
Additionally, interest rates are at a all time low. I was quoted 5% interest for a land acquisition and an SBA loan. For an owner/user the interest is at 5% or sub-5%. You can be in business and buy a building for your use and get a 20-25 year fully amortized fixed loan at 5% or less, which is amazing. In Los Angeles, industrial real estate vacancies are at 4.5%, but there are still deals to be had.
The desire to be in Los Angeles is great overseas. EB5 is a prime example of a program where a non-US citizen can invest $500,000 in a real estate deal and get a visa/green card. This is what is funding the deal across from LA Live for the new Marriott Hotel. The developer has partnered with equity promoters to raise the money and I heard it has been done. America is the land of opportunity, and many foreigners want to have their children go to school here and live in the safety of America. They watch our movies and TV shows and want to be in Los Angeles. They want to see movie stars and go to Laker's games, shop on Rodeo Drive and visit Las Vegas.
The average Chinese person cannot purchase quality goods and services due to the low economic value of their labor/work force. They cannot freely travel or realize their life ambitions. But the upper class can spend $500,000 and get into the United States. On the other side of the big pond, the average American is closer to falling into the same boat as their Chinese counterparts. People are struggling just to get by and are not being afforded the “American Dream”. Young Americans, welcome to "The Tribe of Ants".
Prediction Watch:
QE3 any day now.
An American bailout of $1-3 Trillion for Europe.
More hidden inflation with low interest rates, so keep buying the best Los Angeles real estate.
$2,000 an oz. gold is next.
Sina and Tencent are two micro-blog sites that respectively have 140 million and 200 million daily users and are the Chinese equivalent of our Twitter. 80% of the users are less than 30 years old. From 1980 to 2000, the one-child policy was in effect and most people chose to keep the son and abort the daughter. So there are 30 million more boys in this age group than girls. Imagine the problem there.
The education rate is high with this new generation, with only 1% illiteracy. 80% go to college. Here is the tough part: the average starting salary for a college graduate is $400 per month. But, the cost of an apartment due to ramped up growth is $500 per month. So these young grads entering the job market must share a small space with multiple people to save any money and to buy the goods they desire. They call themselves "The Tribe of Ants".
They also desire the best cars, clothes and all the things of status that will give them self worth. Five million people per month in China are purchasing new cell phones. These numbers are insane to comprehend.
There are 1.3 billion people in China. 100 million are in the ruling class (i.e. the government). 300 million are living in high style, better than the average high income earning Americans, while 900 million are living in poverty. When I discuss these numbers and issues with my Chinese friends and local business clients, they say they fear a political and social uprising in their home country.
The young and educated are Tweeting, or Tencent-ing about social misdeeds, corruption and other things that the government is doing that upsets the general population. Social justice and corporate greed are at the top of their list of concerns.
We have 300 million people living in America. 40-45 million are unemployed today. It is very hard to find a job fresh out of college, and even 50% of the MBA's are unable to find work. The Occupy Wall Street movement that is gaining momentum across the country is calling for an end to corporate greed and government mismanagement. Some want to shut down Wall Street, end capitalism and replace it with a redistribution of wealth, and give everyone free medical care and a living wage without working. I don't know what else they are asking for, but it is a little scary. I think things will get way out of control.
The reality is that our work force is shrinking, which means that the average person’s ability to buy goods and services at their local retailers is diminishing. People are cutting back and even those that can afford to buy all items large and small are also holding back. Companies are not hiring, and even government departments like the Post Office are letting people go. They are also going to stop Saturday deliveries.
Meanwhile, Los Angeles real estate continues to be strong and the market is hot. The top selling products are apartment buildings, and they are trading at very low cap rates (meaning the annual return is low), between 3% and 8% except for special foreclosure deals. We had a bankruptcy auction recently and the property sold for 100% over the asking price with three bidders going at it in court. Land for development of apartments is also in high demand. Corporate tenant-leased investment property is also in demand as investors are looking for a higher rate of return on their dollars than a bank can give them.
Additionally, interest rates are at a all time low. I was quoted 5% interest for a land acquisition and an SBA loan. For an owner/user the interest is at 5% or sub-5%. You can be in business and buy a building for your use and get a 20-25 year fully amortized fixed loan at 5% or less, which is amazing. In Los Angeles, industrial real estate vacancies are at 4.5%, but there are still deals to be had.
The desire to be in Los Angeles is great overseas. EB5 is a prime example of a program where a non-US citizen can invest $500,000 in a real estate deal and get a visa/green card. This is what is funding the deal across from LA Live for the new Marriott Hotel. The developer has partnered with equity promoters to raise the money and I heard it has been done. America is the land of opportunity, and many foreigners want to have their children go to school here and live in the safety of America. They watch our movies and TV shows and want to be in Los Angeles. They want to see movie stars and go to Laker's games, shop on Rodeo Drive and visit Las Vegas.
The average Chinese person cannot purchase quality goods and services due to the low economic value of their labor/work force. They cannot freely travel or realize their life ambitions. But the upper class can spend $500,000 and get into the United States. On the other side of the big pond, the average American is closer to falling into the same boat as their Chinese counterparts. People are struggling just to get by and are not being afforded the “American Dream”. Young Americans, welcome to "The Tribe of Ants".
Prediction Watch:
QE3 any day now.
An American bailout of $1-3 Trillion for Europe.
More hidden inflation with low interest rates, so keep buying the best Los Angeles real estate.
$2,000 an oz. gold is next.
Tuesday, October 11, 2011
To Serve Man
In the 1960's TV series Twilight Zone by Rod Serling, there was an episode about aliens that brought amazing gifts to mankind and Earth. The cure to cancer, famine and many other gifts. One of those gifts was a book, but no one could translate the literature. Humans by the thousands were being given free trips to the new alien planet. When the code was finally broken, it was discovered that the book; To Serve Man, was a cookbook!
In today's volatile economy, it seems that we are all being cooked, in the soup, so to speak. What is predictable but most troubling is the blame game that is going on by our so called leaders and the media. No one wants to take responsibility for the situation, nor offer real solutions to the problems.
The blame game is an old political game to maintain power, or not to lose what power is held. The President, with his address to Congress and the nation tries to imply that the Republican Congress is to blame for the lack of jobs and delay in moving the country forward. The liberal media jumps on the bandwagon and tries to sell this to the public. Then when the validity of the plan is broken down to its total sum of parts, and there really is no defense to its chance to be successful, the current administration starts to harp on President Bush.
The problem with the blame game is that it does not help. It looks backward and not forward. It does not take into account the current situation and it does not provide reasonable methods for real solutions. Now, the Republicans are not much better, as they use their media influences to put road blocks into the system and this is not to protect us from the future "socialist policies" of the Obama administration. This is solely to make the President and Democrats look bad.
Real solutions don't have labels of Democrat or Republican, liberal or conservative, good or evil. They don't bash each other on CNBC or Fox. They come from people who want to do the right thing and move forward. Now, understanding the root of a problem is the first step to solving it. Then, having the courage to change the current problem is the real hard part. Why is doing the right thing so hard? Because then you most probably will not get re-elected!
We have been so conditioned in our lives that the person who tells us the "sky is falling" even if it is, will be the messenger. And we all know what happens to the messenger!
So we have hit the double dip turning point. The markets will be going down again, and without solid cooperative initiatives, this drop will be rather significant. So far it has hit us slowly, by attrition. The numbers are so alarming and shocking that they are almost being overlooked:
• Unemployment is at an all time high
• Housing is at an all time low
• Bankruptcies are at an all time high
• Interest rates are at an all time low
• Debt is at an all time high
• Consumer confidence is at an all time low
• Worldwide political turmoil is at an all time high
If the above was in a book given to us by aliens, when we deciphered it we would do our best to defend the world against the invaders and expel them. Rather than get in the blame game, let's discuss some real (maybe radical) solutions to our problems.
The way to build a solid financial foundation is from the bottom up, not trickle-down economics (with all due respect to my favorite President, Ronald Reagan). In September 2008, I had a discussion with our local U.S. Congressman about the financial situation we were heading into. I gave him a grave warning that the commercial real estate market was about to crash. I explained what was happening in the credit and business worlds of real estate, and to my clients. Then I offered the following solutions. And, as I see this double dip hitting the markets again, I offer these same solutions today:
• The federal government should enact an emergency law that all existing residential real estate loans under one million dollars shall become fixed at 2% interest only for the term of the current economic crisis.
• New residential loans under $1M shall be fixed at 4% interest only, as well.
• All credit card debt shall be fixed at 2% interest only. New credit card debt shall be 4% interest only.
What will these few aggressive economic moves do to help us out of this double dip and move toward economic stability?
The ability to pay a reduced interest will provide more net cash for millions of Americans. The reduced interest with the option to pay or not pay the principle until the crisis is over will allow millions to spend that saved money on things that they need or want: Better education for their kids; repairs to their cars and homes; purchases of new homes; rent a better apartment; go out to dinners and take trips.
The above economic changes will reflect in the stabilization of the housing market. It will stimulate buying and stop the massive foreclosures, and millions will see the “light at the end of the tunnel”. They will be able to afford the monthly payments and will want to make the payments because they will reestablish equity as the markets stabilize.
Having the credit card debt reduced to a monthly payment that will be manageable will make the average person also feel that they have more access to money to spend. By doing these simple emergency policies to help everyone, from the bottom up, new businesses will form. People will be hired as demand grows. We will have a vibrant growing economy that can be weaned off the low interest and get back to being productive.
Back in September 2008, the Congressman told me in reply to my ideas that “we are not going to do anything for the people". Where was my tape recorder? But I don't want to hurt anyone, nor blame a good man that did not see business from the views of an insider like me. I just want to share a real story and my ideas with you, my readers.
There are many more things we can do to help our economy. And there are good people that want to do what is right. They just get caught up in the system of the blame game. I suggest they throw out the old cookbook and get a new one, before we all end up in the soup.
In today's volatile economy, it seems that we are all being cooked, in the soup, so to speak. What is predictable but most troubling is the blame game that is going on by our so called leaders and the media. No one wants to take responsibility for the situation, nor offer real solutions to the problems.
The blame game is an old political game to maintain power, or not to lose what power is held. The President, with his address to Congress and the nation tries to imply that the Republican Congress is to blame for the lack of jobs and delay in moving the country forward. The liberal media jumps on the bandwagon and tries to sell this to the public. Then when the validity of the plan is broken down to its total sum of parts, and there really is no defense to its chance to be successful, the current administration starts to harp on President Bush.
The problem with the blame game is that it does not help. It looks backward and not forward. It does not take into account the current situation and it does not provide reasonable methods for real solutions. Now, the Republicans are not much better, as they use their media influences to put road blocks into the system and this is not to protect us from the future "socialist policies" of the Obama administration. This is solely to make the President and Democrats look bad.
Real solutions don't have labels of Democrat or Republican, liberal or conservative, good or evil. They don't bash each other on CNBC or Fox. They come from people who want to do the right thing and move forward. Now, understanding the root of a problem is the first step to solving it. Then, having the courage to change the current problem is the real hard part. Why is doing the right thing so hard? Because then you most probably will not get re-elected!
We have been so conditioned in our lives that the person who tells us the "sky is falling" even if it is, will be the messenger. And we all know what happens to the messenger!
So we have hit the double dip turning point. The markets will be going down again, and without solid cooperative initiatives, this drop will be rather significant. So far it has hit us slowly, by attrition. The numbers are so alarming and shocking that they are almost being overlooked:
• Unemployment is at an all time high
• Housing is at an all time low
• Bankruptcies are at an all time high
• Interest rates are at an all time low
• Debt is at an all time high
• Consumer confidence is at an all time low
• Worldwide political turmoil is at an all time high
If the above was in a book given to us by aliens, when we deciphered it we would do our best to defend the world against the invaders and expel them. Rather than get in the blame game, let's discuss some real (maybe radical) solutions to our problems.
The way to build a solid financial foundation is from the bottom up, not trickle-down economics (with all due respect to my favorite President, Ronald Reagan). In September 2008, I had a discussion with our local U.S. Congressman about the financial situation we were heading into. I gave him a grave warning that the commercial real estate market was about to crash. I explained what was happening in the credit and business worlds of real estate, and to my clients. Then I offered the following solutions. And, as I see this double dip hitting the markets again, I offer these same solutions today:
• The federal government should enact an emergency law that all existing residential real estate loans under one million dollars shall become fixed at 2% interest only for the term of the current economic crisis.
• New residential loans under $1M shall be fixed at 4% interest only, as well.
• All credit card debt shall be fixed at 2% interest only. New credit card debt shall be 4% interest only.
What will these few aggressive economic moves do to help us out of this double dip and move toward economic stability?
The ability to pay a reduced interest will provide more net cash for millions of Americans. The reduced interest with the option to pay or not pay the principle until the crisis is over will allow millions to spend that saved money on things that they need or want: Better education for their kids; repairs to their cars and homes; purchases of new homes; rent a better apartment; go out to dinners and take trips.
The above economic changes will reflect in the stabilization of the housing market. It will stimulate buying and stop the massive foreclosures, and millions will see the “light at the end of the tunnel”. They will be able to afford the monthly payments and will want to make the payments because they will reestablish equity as the markets stabilize.
Having the credit card debt reduced to a monthly payment that will be manageable will make the average person also feel that they have more access to money to spend. By doing these simple emergency policies to help everyone, from the bottom up, new businesses will form. People will be hired as demand grows. We will have a vibrant growing economy that can be weaned off the low interest and get back to being productive.
Back in September 2008, the Congressman told me in reply to my ideas that “we are not going to do anything for the people". Where was my tape recorder? But I don't want to hurt anyone, nor blame a good man that did not see business from the views of an insider like me. I just want to share a real story and my ideas with you, my readers.
There are many more things we can do to help our economy. And there are good people that want to do what is right. They just get caught up in the system of the blame game. I suggest they throw out the old cookbook and get a new one, before we all end up in the soup.
Thursday, September 1, 2011
Through the Wormhole
In the cable TV series Through the Wormhole narrated by Morgan Freeman, the amazing questions of life and the future of life are asked:
Can we travel faster than the speed of light?
Will man live to be immortal?
Is there life on other planets in the universe?
These and many more questions are asked, and more often than not when the show is over, there seems to be more questions than answers.
I just returned from a short camping trip with my son Sam, my nephews Jeremy and Jesse, their father Steve and Larry Musgrove (my boxing coach). We spent a few days at Jeffrey's campground just outside of Bishop, California. As I lay in my sleeping bag at an altitude of 8,000 feet under the stars, I saw untold stars in a pitch black sky. It was magical and mysterious, breath taking and inspiring. I was instantly transported from a world of hustle and bustle to the tranquility and solitude of the wilderness. All work, real estate and the deals in progress were forgotten for the time and true relaxation set in.
During these times of uncertainty and volatile stock markets, doom and gloom prognosticators abound. They thrive on the discussion of political unrest, economic turmoil and financial swings that can shatter your nerves.
These are the times to understand what is really important in life and spend time doing those things. Understanding the up and down cycles of the real estate business can prepare you for those crazy times when the world seems to be out of control. Your financial survival depends on understanding these cycles and preparing for them.
Here is a list of the basic skills and rules that I have lived by to succeed:
1. Understand and control the use of leverage.
2. Bulls get rich, bears get rich, but pigs get slaughtered.
3. Buy when the masses are selling and sell when the masses are buying.
4. Don't put all of your eggs in one basket.
In 1999, I bought my first condo to live in for $220,000 with $20,000 down. I flipped it in three months for $300,000 and bought a house for $540,000. I sold the house two years later for $1,000,000 and bought a house that I live in today for $1,400,000. I started with $20,000 and turned it into $1,400,000. Three years ago, the house would have sold for $2,600,000, but I intend to live there quite some time as I am content. I have a $700,000 mortgage so I still have great equity.
This is an example of leverage that can turn $20,000 into $1,400,000+ within a short time. I could sell and get $700,000 profit, but then where would I live?
The same types of deals have been made for years in all types of investment properties. However, using strategy and being conservative can be very helpful when markets change direction. Therefore, understanding leverage, risk and reward, and knowing when to sell or to pay down those loans as the cash flow is coming in, can make the average investor look like a pro. The building of equity will pay off in the long run.
I have had many clients that continued to take risk and leverage up and up without any consideration for a down market. Those clients lost properties and millions of dollars. Others that were prepared, lowered their debt even in the high times and moved forward but with caution. They are now the buyers of lost properties.
Some real estate pros, who amassed huge portfolios of all types of real estate, got greedy and leveraged their entire life's work and put the money into one deal. But delays in construction, market upheavals, the lending and finance crisis, and actual housing declines caused a crash and a loss of a life's work. Bankruptcy, default, legal lawsuits and disruptions of family dynamics are the repercussions of greed. Don’t gamble recklessly in markets that always have up and down cycles .
I am asked (especially in times like these): "What will happen to the market?". If you have been following my blog posts, you know my answer. But I feel like I’m in a "wormhole" myself, as any “answer” is only based upon an educated guess. But this time the situation is much different than anything we have seen in our history.
Real estate values will act in accordance to the basic principles of supply and demand, and depend as always on “location, location, location”. Some properties will rebound and thrive, while other properties will not. Predicting good and bad markets can seem risky for the investor. For the end user, not so much. Predicting the end user’s needs and their ability to thrive in a given economic environment is essential to every real estate transaction.
As a user, the owner of a business can predict the general trends of his market. As an investor, this can be tricky to follow. Today, location must be a priority to determine if a real estate deal is good or not. Buying a 100,000 sq.ft. warehouse for $20 per sq.ft. in Kentucky with a major corporate tenant is not a good deal if you have no chance to replace the tenant should they move or close up. The same warehouse that is $100 per sq.ft. in Vernon, CA might provide a better opportunity to re-lease should you lose your tenant. The same goes for an apartment complex in a suburb of Dallas vs. the San Fernando Valley or West Los Angeles.
At the end of the day, long term success depends on understanding location and value and predicting future needs and markets. The population of Los Angeles and Southern California continues to grow and the future requirements for housing, services, etc. will expand also. Get educated before making a plunge into a market that you don’t understand. Stay leverage safe, as if the property you just leased might go vacant for a year or longer. Can you still maintain it and hold it? If so, you can take the risk and absorb the potential downside.
Equally, but more important to me, live life as if there is no tomorrow. Enjoy family and friends as they are the most important things in life. Give of yourself generously to the next generation and to those less fortunate. After all, you cannot take it with you. Life can be a journey through a wormhole, as the next day may bring something we never anticipated. That is what makes each day a blessing and fun.
Can we travel faster than the speed of light?
Will man live to be immortal?
Is there life on other planets in the universe?
These and many more questions are asked, and more often than not when the show is over, there seems to be more questions than answers.
I just returned from a short camping trip with my son Sam, my nephews Jeremy and Jesse, their father Steve and Larry Musgrove (my boxing coach). We spent a few days at Jeffrey's campground just outside of Bishop, California. As I lay in my sleeping bag at an altitude of 8,000 feet under the stars, I saw untold stars in a pitch black sky. It was magical and mysterious, breath taking and inspiring. I was instantly transported from a world of hustle and bustle to the tranquility and solitude of the wilderness. All work, real estate and the deals in progress were forgotten for the time and true relaxation set in.
During these times of uncertainty and volatile stock markets, doom and gloom prognosticators abound. They thrive on the discussion of political unrest, economic turmoil and financial swings that can shatter your nerves.
These are the times to understand what is really important in life and spend time doing those things. Understanding the up and down cycles of the real estate business can prepare you for those crazy times when the world seems to be out of control. Your financial survival depends on understanding these cycles and preparing for them.
Here is a list of the basic skills and rules that I have lived by to succeed:
1. Understand and control the use of leverage.
2. Bulls get rich, bears get rich, but pigs get slaughtered.
3. Buy when the masses are selling and sell when the masses are buying.
4. Don't put all of your eggs in one basket.
In 1999, I bought my first condo to live in for $220,000 with $20,000 down. I flipped it in three months for $300,000 and bought a house for $540,000. I sold the house two years later for $1,000,000 and bought a house that I live in today for $1,400,000. I started with $20,000 and turned it into $1,400,000. Three years ago, the house would have sold for $2,600,000, but I intend to live there quite some time as I am content. I have a $700,000 mortgage so I still have great equity.
This is an example of leverage that can turn $20,000 into $1,400,000+ within a short time. I could sell and get $700,000 profit, but then where would I live?
The same types of deals have been made for years in all types of investment properties. However, using strategy and being conservative can be very helpful when markets change direction. Therefore, understanding leverage, risk and reward, and knowing when to sell or to pay down those loans as the cash flow is coming in, can make the average investor look like a pro. The building of equity will pay off in the long run.
I have had many clients that continued to take risk and leverage up and up without any consideration for a down market. Those clients lost properties and millions of dollars. Others that were prepared, lowered their debt even in the high times and moved forward but with caution. They are now the buyers of lost properties.
Some real estate pros, who amassed huge portfolios of all types of real estate, got greedy and leveraged their entire life's work and put the money into one deal. But delays in construction, market upheavals, the lending and finance crisis, and actual housing declines caused a crash and a loss of a life's work. Bankruptcy, default, legal lawsuits and disruptions of family dynamics are the repercussions of greed. Don’t gamble recklessly in markets that always have up and down cycles .
I am asked (especially in times like these): "What will happen to the market?". If you have been following my blog posts, you know my answer. But I feel like I’m in a "wormhole" myself, as any “answer” is only based upon an educated guess. But this time the situation is much different than anything we have seen in our history.
Real estate values will act in accordance to the basic principles of supply and demand, and depend as always on “location, location, location”. Some properties will rebound and thrive, while other properties will not. Predicting good and bad markets can seem risky for the investor. For the end user, not so much. Predicting the end user’s needs and their ability to thrive in a given economic environment is essential to every real estate transaction.
As a user, the owner of a business can predict the general trends of his market. As an investor, this can be tricky to follow. Today, location must be a priority to determine if a real estate deal is good or not. Buying a 100,000 sq.ft. warehouse for $20 per sq.ft. in Kentucky with a major corporate tenant is not a good deal if you have no chance to replace the tenant should they move or close up. The same warehouse that is $100 per sq.ft. in Vernon, CA might provide a better opportunity to re-lease should you lose your tenant. The same goes for an apartment complex in a suburb of Dallas vs. the San Fernando Valley or West Los Angeles.
At the end of the day, long term success depends on understanding location and value and predicting future needs and markets. The population of Los Angeles and Southern California continues to grow and the future requirements for housing, services, etc. will expand also. Get educated before making a plunge into a market that you don’t understand. Stay leverage safe, as if the property you just leased might go vacant for a year or longer. Can you still maintain it and hold it? If so, you can take the risk and absorb the potential downside.
Equally, but more important to me, live life as if there is no tomorrow. Enjoy family and friends as they are the most important things in life. Give of yourself generously to the next generation and to those less fortunate. After all, you cannot take it with you. Life can be a journey through a wormhole, as the next day may bring something we never anticipated. That is what makes each day a blessing and fun.
Wednesday, August 17, 2011
A Changing of the Guard
Each year we take on interns at Major Properties. These young men and women are usually college students looking to learn about the inner workings of the real estate brokerage business, and about what is going on in the exciting world of Downtown Los Angeles.
Our office is located one block from LA Live, Staples Center, Nokia Theater and the rest of what is happening in the new Downtown. The excitement has grown and the demand to intern here has has taken on new meaning for these young minds.
Many of our interns come as undergraduates from USC, but others have come from as far away as Michigan. Over the years, we have had 100 or so young people intern here, and I think most left us much better off than when they arrived.
It has been our company policy to build from the ground up. We like to bring in people while they are young and teach them our system of success in the brokerage world. It’s much like baseball’s farm system or the Lakers bringing in the next Kobe.
One of the signature things I like to do with my interns is to expose them to real opportunities where they can actually make a difference in the business world right away. For example, I had a new intern named Arash. He had been here a few days and I asked him to cold call potential buyers from a list I had compiled. His job was to call and ask if they had any interest to purchase what was then the Moustache Cafe building in Westwood. If an intern actually found a buyer (or seller, depending on the assignment), they would get a finder’s fee of 10% of the gross commission upon closure of the deal. Well, you can just imagine the motivation. On his 4th phone call Arash found a buyer and made a few thousand dollars. The deal had also gone smoothly and he got addicted to the real estate business.
Six years ago, Brad Ross, just 22 years old at the time, came to Major Properties after driving to Los Angeles from Michigan with his girlfriend (now wife). He had no idea what an escrow was, or a lease for that matter. However, after our training program, Brad went on to become Salesman of the Year in 2010, and sold or leased millions of dollars of Downtown Los Angeles real estate. In order to improve himself further, Brad recently left us to pursue an MBA degree at UCLA.
This year, we have Sara, Jesse, Jeremy and Sam (my son). They are all learning about the various ins and outs of industrial real estate. But, as much as they learn from the program, my salespeople and I are also learning from them. For example, they are web savvy and know sites that can help us find information or people. They also know about modern likes and dislikes that might identify a potential buyer or tenant that we, older and more stuck in our ways, might not consider.
This summer, my interns have been instrumental in finding various potential buyers for a variety of different projects and properties. They are full of life and dreams, and eager to show they can make their mark. Their atitudes energize our office and clients really enjoy meeting and working with them.
As I ponder the future of the real estate business and my company, I am confident that the young talent of today will provide a great and everlasting continuation of what my father Arnold started: a business built on honesty, integrity and loyalty. I have no doubt that Major Properties will be a force in Downtown Los Angeles for many years to come.
Our office is located one block from LA Live, Staples Center, Nokia Theater and the rest of what is happening in the new Downtown. The excitement has grown and the demand to intern here has has taken on new meaning for these young minds.
Many of our interns come as undergraduates from USC, but others have come from as far away as Michigan. Over the years, we have had 100 or so young people intern here, and I think most left us much better off than when they arrived.
It has been our company policy to build from the ground up. We like to bring in people while they are young and teach them our system of success in the brokerage world. It’s much like baseball’s farm system or the Lakers bringing in the next Kobe.
One of the signature things I like to do with my interns is to expose them to real opportunities where they can actually make a difference in the business world right away. For example, I had a new intern named Arash. He had been here a few days and I asked him to cold call potential buyers from a list I had compiled. His job was to call and ask if they had any interest to purchase what was then the Moustache Cafe building in Westwood. If an intern actually found a buyer (or seller, depending on the assignment), they would get a finder’s fee of 10% of the gross commission upon closure of the deal. Well, you can just imagine the motivation. On his 4th phone call Arash found a buyer and made a few thousand dollars. The deal had also gone smoothly and he got addicted to the real estate business.
Six years ago, Brad Ross, just 22 years old at the time, came to Major Properties after driving to Los Angeles from Michigan with his girlfriend (now wife). He had no idea what an escrow was, or a lease for that matter. However, after our training program, Brad went on to become Salesman of the Year in 2010, and sold or leased millions of dollars of Downtown Los Angeles real estate. In order to improve himself further, Brad recently left us to pursue an MBA degree at UCLA.
This year, we have Sara, Jesse, Jeremy and Sam (my son). They are all learning about the various ins and outs of industrial real estate. But, as much as they learn from the program, my salespeople and I are also learning from them. For example, they are web savvy and know sites that can help us find information or people. They also know about modern likes and dislikes that might identify a potential buyer or tenant that we, older and more stuck in our ways, might not consider.
This summer, my interns have been instrumental in finding various potential buyers for a variety of different projects and properties. They are full of life and dreams, and eager to show they can make their mark. Their atitudes energize our office and clients really enjoy meeting and working with them.
As I ponder the future of the real estate business and my company, I am confident that the young talent of today will provide a great and everlasting continuation of what my father Arnold started: a business built on honesty, integrity and loyalty. I have no doubt that Major Properties will be a force in Downtown Los Angeles for many years to come.
Wednesday, May 4, 2011
The King Has No Clothes
Back in 2007, I helped Adel sell her house near Beverly Center. It had been a second home for over 40 years, and was bringing in $1,000 a month in rent. To increase the rent she would have had to spend $50,000-$100,000 remodeling, as it had been worn by various tenancies over the years. Instead, she decided to sell the house. We sold the home for around a million dollars and the next step was to execute a 1031 tax-deferred exchange.
We investigated and found numerous types of investment property. Many were at crazy prices and cap rates. Adel settled on a property located in Kearney, Nebraska, which consisted of an approx. 20,000 sq.ft. lot with a new Starbucks on it. The deal was great, with a 20 year lease, annual increases and a 5% cap rate. The escrow closed without a glitch. However, six months into the deal, Starbucks decided to close hundreds of stores nationwide, and this was one of them. They offered Adel one year’s rent or a law suit. She took the year’s rent and put the empty store on the market. I guess Starbucks made a mistake, because the store leased up at an increased rent and she came out okay.
I would venture an educated guess that most of the owners of Starbucks Coffee locations that were closed did not have the lady luck of Adel. They are probably sitting vacant today or leased at a much lower rate to a not so credit-worthy tenant. Another lesson learned is that a triple net lease (guaranteed by a national credit worthy tenant) is not worth much if they don't want to stay open and pay the lease. The cost to enforce the lease was probably calculated into their offer of a year’s rent as the legal fees would be a major burden on a small time property owner vs. a big corporation.
With the changes the Internet has brought we have seen various prominent corporations disappear overnight. The most outstanding story is that of Blockbuster video. Can you find one? Of course not, as it is now a Netflix world. What an amazing deal. I go online, create an account and I can stream movies on my home computer or TV. They will also mail DVDs within 24 hours with no late fees, and I can hold it for as long as I want. Unlimited movies for $10 a month. Goodbye Blockbuster, goodbye Hollywood Video.
The real estate story is that there are no more Blockbusters. I have seen the ones in my neighborhood turned into a small market, a bank or a variety of other retail uses. How many people and companies executed a 1031 exchange into Blockbuster and Hollywood Videos thinking they had a golden goose tenant for the next 20 years?
In most cases, the buyers of these $500,000-$2,000,000 properties are small investors that hit the jackpot on their up-leg only to exchange into a dream that quickly turned into a nightmare. Most of these small investors put their life savings into the deal. Much of the time it was their only property aside from their home.
So, the big question is: who's next? Who will be the next victim of the Internet and web shopping? I think this is a bigger problem for the retail property owner and office building owner than might be considered. Have you seen your local Barnes & Noble lately? How about Borders? They will be the next casualties of the Internet boom. I was a member of the Barnes & Noble book club and went online to buy a book. Even with all of the B&N discounts, I found it for 50% less on Amazon. Goodbye Barnes & Noble. I will never shop there again. Don't you hate when you are price gouged as a customer? I do.
In times of economic chaos, even wealthy people look for deals. Groupon is selling discounts on everything from exercise classes to restaurants. A few months ago, Groupon turned down $1 billion from Google. Open Table is a new online marketing service for restaurants. I have made many dinner reservations at Los Angeles and Beverly Hills top restaurants, and then they offer flowers delivered to your table and discounts on limousine service for the night. A one stop shop that will turn any guy into an instant Romeo.
What will be the next innovation in the technology revolution? If I were to guess, Fry's and Best Buy are going to be under pressure. Go online and shop for a TV, computer or any other electronic device. The deals are amazing.
What is surprising is that companies like UPS and FedEx are having a tough time with the economy. I would think that with more commerce being shipped direct to the consumer that those type of companies would flourish. But so far it’s not the case. I think that with some management and logistic modifications i.e "cost cutting", those two companies will be okay and become more efficient. We shall see.
For the record, as email, texting and twitter continue to be the method of choice for communication, letters and mail has declined and the U.S. Post office has suffered greatly. Printers have suffered too as you can make an invitation online and email it to your guests. It will be interesting to see if there are economic effects for companies like Kinko's.
As you ponder the effects of the Internet on your properties and tenants, it can become frightening! But if you prepare for possible outcomes and have a plan to be diverse, the damage can be minimized and you may even come out ahead of the game.
We investigated and found numerous types of investment property. Many were at crazy prices and cap rates. Adel settled on a property located in Kearney, Nebraska, which consisted of an approx. 20,000 sq.ft. lot with a new Starbucks on it. The deal was great, with a 20 year lease, annual increases and a 5% cap rate. The escrow closed without a glitch. However, six months into the deal, Starbucks decided to close hundreds of stores nationwide, and this was one of them. They offered Adel one year’s rent or a law suit. She took the year’s rent and put the empty store on the market. I guess Starbucks made a mistake, because the store leased up at an increased rent and she came out okay.
I would venture an educated guess that most of the owners of Starbucks Coffee locations that were closed did not have the lady luck of Adel. They are probably sitting vacant today or leased at a much lower rate to a not so credit-worthy tenant. Another lesson learned is that a triple net lease (guaranteed by a national credit worthy tenant) is not worth much if they don't want to stay open and pay the lease. The cost to enforce the lease was probably calculated into their offer of a year’s rent as the legal fees would be a major burden on a small time property owner vs. a big corporation.
With the changes the Internet has brought we have seen various prominent corporations disappear overnight. The most outstanding story is that of Blockbuster video. Can you find one? Of course not, as it is now a Netflix world. What an amazing deal. I go online, create an account and I can stream movies on my home computer or TV. They will also mail DVDs within 24 hours with no late fees, and I can hold it for as long as I want. Unlimited movies for $10 a month. Goodbye Blockbuster, goodbye Hollywood Video.
The real estate story is that there are no more Blockbusters. I have seen the ones in my neighborhood turned into a small market, a bank or a variety of other retail uses. How many people and companies executed a 1031 exchange into Blockbuster and Hollywood Videos thinking they had a golden goose tenant for the next 20 years?
In most cases, the buyers of these $500,000-$2,000,000 properties are small investors that hit the jackpot on their up-leg only to exchange into a dream that quickly turned into a nightmare. Most of these small investors put their life savings into the deal. Much of the time it was their only property aside from their home.
So, the big question is: who's next? Who will be the next victim of the Internet and web shopping? I think this is a bigger problem for the retail property owner and office building owner than might be considered. Have you seen your local Barnes & Noble lately? How about Borders? They will be the next casualties of the Internet boom. I was a member of the Barnes & Noble book club and went online to buy a book. Even with all of the B&N discounts, I found it for 50% less on Amazon. Goodbye Barnes & Noble. I will never shop there again. Don't you hate when you are price gouged as a customer? I do.
In times of economic chaos, even wealthy people look for deals. Groupon is selling discounts on everything from exercise classes to restaurants. A few months ago, Groupon turned down $1 billion from Google. Open Table is a new online marketing service for restaurants. I have made many dinner reservations at Los Angeles and Beverly Hills top restaurants, and then they offer flowers delivered to your table and discounts on limousine service for the night. A one stop shop that will turn any guy into an instant Romeo.
What will be the next innovation in the technology revolution? If I were to guess, Fry's and Best Buy are going to be under pressure. Go online and shop for a TV, computer or any other electronic device. The deals are amazing.
What is surprising is that companies like UPS and FedEx are having a tough time with the economy. I would think that with more commerce being shipped direct to the consumer that those type of companies would flourish. But so far it’s not the case. I think that with some management and logistic modifications i.e "cost cutting", those two companies will be okay and become more efficient. We shall see.
For the record, as email, texting and twitter continue to be the method of choice for communication, letters and mail has declined and the U.S. Post office has suffered greatly. Printers have suffered too as you can make an invitation online and email it to your guests. It will be interesting to see if there are economic effects for companies like Kinko's.
As you ponder the effects of the Internet on your properties and tenants, it can become frightening! But if you prepare for possible outcomes and have a plan to be diverse, the damage can be minimized and you may even come out ahead of the game.
Friday, April 8, 2011
Industrial Real Estate Takes Off!
In Downtown Los Angeles, on Jefferson Blvd. near San Pedro Street, is an approx. 40,000 sq.ft. industrial building. The building is a Class B+ concrete tilt-up warehouse built in 1974. The property is in very good condition and has an excellent location.
Last year, Major Properties marketed the property for $5.5 million, which is $130 per sq.ft. There had been maybe 2 showings a month during the past year, but no real offers. This was a sign of a static real estate market, as properties all over Los Angeles had sat with no buyers. Late January, I met with the ownership and discussed a price reduction. The ownership agreed as they wanted to sell. They lowered the price to $5 million, or $117 per sq.ft. During the past 45 days we had approximately 20 showings, and now we are going into escrow within 3% of the asking price.
For students of brokerage and trends in the industrial market, what is the meaning of this transaction? First, there are at least 20 businesses that are looking for properties that are 40,000 sq.ft. Second, they are looking to buy a property in the $5 million price range. Third, access to money and the ease of completing this type of transaction has become available almost overnight.
The current availability of quality space in and around the Downtown market is low. I have heard vacancy factor numbers as low as 3%. The fact is, if we did a search for a similar space for sale within Downtown, we would find nothing. This tells me to contact owners with similar sized buildings, as there are 19 other potential buyers that need to purchase a building.
This is also a sign that prices will eventually go up as demand continues and supply shrinks. Right now, I see that prices have hit a plateau; either the market is in pause on the down cycle, or recovering and heading up. The real estate owner/user market is signaling a stabilization period and pointing to a steady upward trend. For everyone's future, let's hope the historical tea leaves are predicting the latter.
In other news, the other event that is on the mind of many Angelenos is the Laker's current run to defend their championship and three-peat. I will say that barring any major injury, Phil Jackson is going out with one more ring. That being said, maybe Donald Sterling can hire Phil out of retirement and help the Clippers make a run for a title. Blake Griffin is an amazing player and with the right coach and role players the Clippers could be great.
It is important to acknowledge that when our city is united through sports, there is an energy that carries over into business. I think that most business people I meet enjoy discussing topics related to sports. When the home teams are winning, they are more likely to feel good about their city and do more productive business. See what your associates, clients, partners and friends think about this. I am curious and I invite you to email me your thoughts.
The other factor is that there have been many deals around student housing, acquisition of existing properties and speculation in development of new product. These deals are related to Westwood (UCLA) and Downtown adjacent (USC). Additionally, there are deals going down now on land acquisition for new hotel developments and apartments in downtown.
There are a few large sites still available that are not really on the market. They are a minimum of 5 acres and up to 25 acres. These are sites that can support large warehouses for distribution or manufacturing. The next 3-5 years are important for the City of Los Angeles and our business to find the most modern and labor intensive uses for these sites to attract job opportunities. The higher paying the jobs the better, but the creation of quality long term employment opportunities is crucial for the continued growth and viability of Los Angeles.
Properties in the San Fernando Valley, South Central Los Angeles, East Los Angeles and other areas need to be developed as well to successfully spread the wealth and enhance growth. As much as I love Downtown, I see the need to protect the needs of everyone and not lose focus on the entire city.
The months ahead are going to be interesting in Los Angeles as we have mayoral election coming up and the hopeful continuation of this recovery. I remain bullish on Los Angeles and will keep you informed as the year progresses.
Wednesday, April 6, 2011
Doom and Gloomer
DOOM AND GLOOMER, maybe you should not read this!
I look forward to Sunday with the TV news shows. The one show that I really liked, which is no longer on TV, was the McLaughlin Group. There were 4 political pundants and John McLaughlin debating the issues of the day. What I liked most about the show were the commercials. GE (General Electric) would show a professor expounding "This is the greatest time to be alive!" and I love their little jingle: "GE, we bring good things to life."
They hit the nail on the head! Life, life and more life. What is happening around the world today with uprisings, marching in the streets, people demanding freedom, quality food and water? Basic necessities to have liberty and enjoy life. Believing in what their government is telling and offering them is no longer acceptable to those in dictator led countries.
Those of us whom have comfortable consistency already in our lives want more and better everything. We want a better living environment or job that pays a little more. We want to enjoy our jobs and have less stress. We want the better car, computer, cell phone, iPad, etc.
There is a big difference between what we want and what we need. Much will be written about the Japanese earthquake and the tsunami's effects. Watching the Japanese and their response and reactions to their tragedy is heartwarming. Actually caring for one another in a time of crisis is so foreign to us. If that type of calamity hit Los Angeles, there would be looting, rioting and outright panic with no regards for others, their property or right to life. This city would turn into total chaos! I hope I’m wrong, but what do you think? What would happen here if Malibu and Marina Del Ray were gone overnight by a tsunami?
James Clavell wrote two books I would recommend, King Rat and Shogun. Both give amazing insight as to the unique treasure of the Japanese culture and unique prospective into their world. Both are stories about survival, greed and loneliness. They touch on the basic components of our own emotional character. They also share triumph, success and survival.
I recently saw the documentary I Am by Tom Shadyac (the director of the Nutty Professor, Ace Ventura, Bruce Almighty, etc.) Tom had a terrible accident while out on a dirt bike. He fell, broke his arm and hit his head. He was in a coma and awoke to a new world of trauma where he could not return to normal life for quite some time. During this tragedy, he found that he needed to discover the meaning of his life. He asked the question “What is wrong with the world? Am I helping or hurting the world with what I do?" The movie is his journey to find the answers for himself and to share his discoveries. His web site is
http://www.iamthedoc.com/. Highly recommended.I work with all kinds of people. My clients are some of the wealthiest people in Los Angeles. Some are very charitable and others are far from it. Some give millions anonymously and others are in the newspaper glorifying their name. What I find is that you do not have to be rich to make a difference. A kind word, a note of recognition or an email of sympathy to someone who is going through a loss and hard times is more valuable than money. A sandwich to the homeless guy, or a pair of old jeans can be more valuable to someone in need. Helping someone get a job that you don't really know or putting your reputation on the line for someone else to help them move forward with their aspirations. Using your assets to help others.
I try to do this daily. I just do it out of habit now. I don't really think about the effort, it just flows. I see a need and try to help. I can tell you that without question, this effort has given me returns that are not accountable on any balance sheet. The pleasure and reward from the act come first and later from the changes that were made to benefit the lives of others. Some recipients may take advantage of the opportunity and not take the time to say thank you. While others may not understand the gesture at all as it is foreign to their character. I learned to give without the concept of expecting anything in return. It is amazing what happens from that.
I have been the recipient of amazing success and opportunities because of my attitude about business and life. By sharing, I think my business has done much much more in dollar volume than if I was a different person.
I just opened escrow on a 10,000 sq.ft. industrial property. I represent the seller and the buyer has his own broker. After a long negotiation, the contract went out to the buyer and it was signed and came back right away. Prior to having the seller sign it, I noticed that we made a typo. The price was $1,212,500 but the contract read $1,122,500. I made the change and we resent the contract to the buyer, who of course signed it. Now my question is, did the buyer see the mistake and try to let it get by the seller? Was it his responsibility to recognize the mistake and correct it? Is it all fair in business? What do you think and if you’re the buyer what would you do?
This is an amazing time to be alive. We can sit by the TV and listen to experts tell us how bad we have it, or we can go outside and sing about how wonderful life really is. We can make a difference and still make a deal. We can have both, and we can share and help others enjoy the fruits of our labor.
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