Remember during the height of the housing bubble, when some real estate investors vowed to jump in like vultures and scoop up properties when the market turned south?  The Wall Street Journal (”WSJ”) recently chronicled this bottom-feeding in “Florida Bust Spawns Vulture Culture” by Jeff P. Opdyke.  Home buyers and investors have flocked to Florida sifting through the glut of housing properties looking for a deal.  In Miami-Dade county alone, there are 25,000 condos available for sale.

With those numbers, you would think that a good deal is a no-brainer.  Prices indeed have dropped drastically.  According to the WSJ, prices in Miami have falled as much as 40 percent.  However, reading another article in today’s WSJ (”Open Season for Bargain Hunters”), I noticed an interesting statistic.  In spite of the large drop in prices, housing prices in Miami still remain about 64 percent higher than they were in December 2002.  Is the 40 percent off condo still considered cheap?  It’s like going to what you think is a fabulous sale at your favorite clothing store and snapping up an outfit at 40 percent off that was marked up four times by the retailer.

Price drops by themselves don’t mean that a property is a good deal.  My husband’s company stock reached an all-time high of $160.00 during the tech boom.  A 40 percent drop in the stock would yield a price of $96.00 per share.  Guess what the stock ended up trading at, when the smoke cleared?  A $1.50 per share.  Ouch!

So, as an investor, how do you narrow the field to determine what might be a good deal?  My rule of thumb - can you rent it out at a monthly rent of at least one percent of the purchase price?  This rent would need to cover your mortgage, real estate taxes, insurance, homeowners’ fees, maintenance and repairs, as well as tenant vacancies.  This rule eliminates a lot of potential deals, but it saves you a lot of pain, particularly when you have to hold on to a property for a long time, perhaps several years before seeing an appreciable gain in the price.  After you have weeded out the overpriced deals, ask the following questions.

• Is the rental market strong in the area?  If it is Miami-Dade county, probably not.  Ideally, you’d like to buy a property with a tenant lined up already, unless the price is rock-bottom, or you have sufficient cash reserves to carry the property for several months.
• What is your financing cost going to be?  If your mortgage payment is at least 90 percent of your expected monthly rent, it’s probably too close for comfort.
• What is the price history of the property and surrounding properties? 
• How much intrinsic value does the property have?  Is it located in an area with limited housing stock or in an area like Miami-Dade, where housing stock is virtually unlimited.  This question goes to how much appreciation you might see in the property’s value.

Obviously, I’ve only skimmed the surface of questions that you should answer before entering into a deal.  Buying real estate is not a transaction that should be done on a whim.  The key to investing success is doing your research, knowing your market, and looking at everything with a healthy dose of skepticism.

I was reading the January 7, 2008 post of “I will teach you to be rich.”  I agree with Ramit that buying your first home is a huge step and should not be taken lightly, especially in high-cost areas like San Francisco, where buying an average residence can run over a million dollars.  However, there is a distinction drawn between your personal residence and investment real estate.  Purchasing a home has many benefits: it puts a roof over your head, you can deduct mortgage interest, and you are building home equity (hopefully with a traditional mortgage).  However, too many people view a personal residence as an investment property, when it really is for personal consumption.  Bankers, when reviewing a person’s net worth, typically exclude the value of the primary residence.  Why?  Because your home is the roof over your head; it is not a liquid investment or a cash-generating investment property. 

Unfortunately, a lot of people failed to take this into account in the recent real estate bubble.  Several of my friends made very costly renovations to their homes.  One older couple sunk over $200,000 drawn from their home equity line of credit to expand their living room and add another bedroom.  They didn’t need the space, but wanted to make the home improvements in order to sell their home for a premium amount when they retired.  Of course, the real estate agent that they invited over convinced them that they could command such a high selling price with the renovations.  Needless to say, since that time, the market has softened considerably, and it is highly doubtful that they will reach that desired selling price before retiring in the next 3 years.  Another friend, with her then-husband, spent large sums of money, partially financed by credit cards and a home equity line of credit, to convert their townhouse into a “smart house” complete with an array of electronic voices that greet you upon entry.  Basically, they overimproved the property for the neighborhood.  Although my friend is getting the home in the divorce settlement, she is “house poor,” with a lot of equity but little liquid savings.

 Contrast a personal residence home with investment real estate.  Although many of the so-called real estate gurus on those endless infomercials (e,g, Carlton Sheets), oversimplify matters, investing in real estate can be very profitable IF you choose the right deal, i.e., you buy a property with a high rate of return, positive cash flow to you and a steady tenant.  Real estate markets are regional: buying commercial property in most parts of California will yield far less in return than properties in parts of the South or Midwest.  However, with the help of commercial real estate websites like www.loopnet.com and national real estate brokerage firms like Marcus and Millchap, an investor in California can find a nice strip mall in Tennessee or a warehouse in North Carolina yielding 8 to 10 percent.  I do not live in the South but have had good luck with several commercial properties in Tennessee and Alabama, not only with the positive cash flow but also the ultimate selling price.  In future posts, I will talk more about commercial real estate investing. 

President Bush’s recent plan to bail out hundreds of thousands of subprime borrowers facing steep upward adjustments in their mortgage interest rates raised blood-boiling ire across the country.  Many responsible homeowners who exercised fiscal restraint during the recent real estate bubble felt that the government’s plan was an unfair handout to reckless homeowners.  Since the plan was announced, print and television media has aired all kinds of stories about subprime borrowers that tug at the heartstrings, especially around this holiday time.  Now I have to say upfront that any subprime transaction that involved outright fraud should not be tolerated.  But that is not the situation for a lot of these subprime borrowers.  Instead, their problems arise from dumb decisions.

Take the recent article in the Wall Street Journal, “Mortgage-Relief Divides Neighbors,” December 17, 2007.  The article discusses the plight facing a community in California, where numerous houses on a local street are in foreclosure.  The story profiles the Oropezas, a dual-income family with two kids.  After buying a home in 2004, the Oropezas refinanced several times, pushing their mortgage obligation up to over $800,000, even though the initial purchase price was only $550,000.  They used the money to pay off credit card debt and to finance home improvements like a backyard waterfall.  The family tried to sell in 2006 for a price that would pay off their mortgage, but to no avail.  With mortgage payments mounting, the family lived off of credit cards, but eventually stopped paying altogether.  They moved to Texas, abandoning the California home, but not before taking a Caribbean vacation and buying a Lexus and Suburban SUV with no money down.  The article quotes Mrs. Oropeza as saying that “we are sad because people think we are a bunch of flakes who walked away from this house and tried to make money.”  It also notes that Mr. Oropeza called the toll-free number for the government mortgage relief plan and left a message.  What is telling here is that the Oropezas didn’t face a medical emergency, loss of a job or spouse, or even a reset in their mortgage interest rate.  The Oropezas’ situation unfortunately embodies the attitude of entitlement that our consumer-driven culture fuels.  For entrepreneurs, this kind of attitude in the busines world is a death wish, but not as rare as you might think.  I’ve seen business owners who have insisted on handmade teak furniture for their offices and country club memberships, even as the business is bleeding red ink.  One business owner that I knew some years ago readily took money from her 70 year old mother when she ran out of cash to operate her law practice, even while she squandered office funds on a Mercedes and several assistants that did non-office tasks such as taking her clothes to the dry cleaners.   Homeowners like the Oropezas who mismanaged their finances would be lucky to get any financial relief from the government.  In the business world, however, it is truly sink or swim.  So, before you decide to stretch the business line of credit to lease a new car or buy brand-new furniture for the office, remember that the calvary will likely not be coming to rescue you.

A recent article in the New York Times (Nov. 19, 2007 NYTimes.com, “Goldman Sachs Rakes in Profits in Credit Crisis”) discussed Goldman Sachs’ uncanny ability to foresee doom and adjust investments accordingly to profit off of the panic.  The article noted the power of the risk controllers within the firm, which constantly reevaluate the firm’s investments.  This paranoic devotion to managing risk paid off handsomely in the early summer, when the firm decided to reduce its exposure to mortgage-related investments months before the bottom fell out of the subprime market in late summer.  As a result, Goldman protected its profits and increased them while others hemorrhaged red ink and heads rolled at firms like Citibank, Merrill Lynch, and Morgan Stanley.  This constant reassessment of risk/reward should be applied to any entrepreneur’s investments and business interests.  Capital is critical in starting and maintaining a successful venture.  Learning to cut your losses and walk away may be painful, but could ensure your business survival for the future.   A friend recently closed a retail store that he had invested in some years ago.  Sales were down precipitously and expenses were high and rising.  The 3 or 4 managers who had managed the store over the last several years were unable or unwilling to focus on the bottom line, i.e., increasing sales and gross margins, cutting costs, and turning inventory.  The general manager pleaded with the investor to keep the store open, contending that he could turn things around in 6-8 months.  However, the investor prudently decided to recoup his capital by liquidating assets and closing the business.  One, there was a high level of pricy inventory, high costs, and declining sales.  Also, because the investor lived six hours away, he was unable to gauge the daily operations of the store.  The store had positive attributes - it was one of two luxury retail stores in town and was a local institution for nearly 50 years.  However, the risk/reward balance was simply too high.  So, just like this investor and Goldman Sachs, constantly reevaluating business interests and capital allocation is not a bad way to go.   

We were having dinner with friends last night at a Japanese place. The conversation soon turned towards the topic of real estate investing. We have done some investing in commercial properties and are always on the lookout for new opportunities. Our friends also were interested in getting into real estate investing, but complained about how tough it was. They recounted a recent visit to the local courthouse to observe a real estate auction. However, they were intimidated by the cash upfront requirement and the dozens of people at the auction that were aggressively bidding on the properties.

We then talked about residential verses commercial real estate investing. Our friends told us that they were getting some leads from relatives on residential real estate. They felt that they wanted to focus on commercial real estate because of the hassle of residential units. However, they also lamented the fact that most commercial properties were over $1 million, out of their price range. They also commented about the lack of time they had to look for potential properties.

The message that I took from this conversation was ROADBLOCKS. How many obstacles are there to investing and starting your own business or purchasing your own assets? If we let ourselves get stopped by roadblocks all the time, no one would ever move in any direction. As I grow older (and. hopefully, a little wiser), I realize that things are not as easy as going to school, passing tests, and moving from grade to grade. Particularly for your own projects, away from your jobs and other guided processes, there is no roadmap. There certainly will be obstacles, and the thing that will separate you from your non-entrepreneurial peers is that you will define the roadmap and LEARN to get around those obstacles. That is what this website is about. It is designed to give that little kick in the behind and that little bit of inspiration when you are feeling frustrated or discouraged. It is also a bit of community in an endeavor where everyone needs some support.