Ten Years After.......I'm Going Home (Live at Woodstock)
Saturday, August 10, 2013
A dichotomy................................................
"Smooth shapes are very rare in the wild but extremely important in the ivory tower and the factory."
-Benoit Mandelbrot
Absence of purpose..................?
"The facts of science, by exposing the absence of purpose in the laws governing the universe, force us to take responsibility for the welfare of ourselves, our species, and our planet."
-Steven Pinker
“Science may be described as the art of systematic oversimplification.”
-Karl Popper
photo via
Fifty years ago...............................
Brenda Lee...........................................Losing You
33 Guidelines for investing in real estate.......
Guideline #25: It's an investment, not a tax shelter.
In my early days of commercial real estate, many of my compatriots were selling "tax shelters." That was a fancy term for an investment that will likely lose money. To be fair, back in 1980, the top marginal tax bracket in the U.S. of A. was 70%, which meant that out of each dollar earned over $215,400, the IRS took 70 cents. (For reference sake, 2013's top bite on earned income was 39.6% on each dollar earned over $400,000). A lot of smart, high income people figured that it was better to lose a little money on real estate, i.e. the tax shelter, and maybe build some equity, than just give the money to Uncle Sam. I was never comfortable with that philosophy. To my young and naive eyes, it seemed unnatural that a certain property might be worth more to one investor just because his tax bracket was higher. The question I never got a satisfactory answer to was, "Why would you buy something you knew was going to lose money on a regular basis?" Seemed wasteful. As you might expect, we did not sell a lot of "investment property" back then.
When Congress passed the Economic Recovery Act of 1981, it amended the Tax Code to allow for really, really, really generous tax treatment for real estate. As a result, real estate development went into overdrive and the value of investment real estate was (temporarily) unnaturally inflated. In a successful attempt to curb tax shelters, peel back some of the benefits of owning investment real estate, and to "simplify the Code," Congress then passed the Tax Reform Act of 1986. The 1986 Act both eliminate special incentives, including accelerated depreciation (ACRS), that investment real estate had briefly enjoyed, and expanded the dreaded Alternative Minimum Tax (AMT). These simple changes instantly erased somewhere between 10% and 20% of the market value of investment real estate. This fall in values, combined with some questionable lending practices, contributed to the savings and loan crisis of the late 1980s.
The lesson I learned from all of this was that when the government giveth, it soon finds a way to taketh away. Basing investment decisions on the Tax Code is fraught with risk.
Today the Code appears to be neutral towards investment real estate. Depreciation is still available as a deduction against income, however, the time periods that assets can be depreciated have been stretched to roughly mirror the actual life span of those assets. The days of investing for tax shelter have passed by. If they come again, remember..........be very careful. Invest for value, not because of the Tax Code.
In my early days of commercial real estate, many of my compatriots were selling "tax shelters." That was a fancy term for an investment that will likely lose money. To be fair, back in 1980, the top marginal tax bracket in the U.S. of A. was 70%, which meant that out of each dollar earned over $215,400, the IRS took 70 cents. (For reference sake, 2013's top bite on earned income was 39.6% on each dollar earned over $400,000). A lot of smart, high income people figured that it was better to lose a little money on real estate, i.e. the tax shelter, and maybe build some equity, than just give the money to Uncle Sam. I was never comfortable with that philosophy. To my young and naive eyes, it seemed unnatural that a certain property might be worth more to one investor just because his tax bracket was higher. The question I never got a satisfactory answer to was, "Why would you buy something you knew was going to lose money on a regular basis?" Seemed wasteful. As you might expect, we did not sell a lot of "investment property" back then.
When Congress passed the Economic Recovery Act of 1981, it amended the Tax Code to allow for really, really, really generous tax treatment for real estate. As a result, real estate development went into overdrive and the value of investment real estate was (temporarily) unnaturally inflated. In a successful attempt to curb tax shelters, peel back some of the benefits of owning investment real estate, and to "simplify the Code," Congress then passed the Tax Reform Act of 1986. The 1986 Act both eliminate special incentives, including accelerated depreciation (ACRS), that investment real estate had briefly enjoyed, and expanded the dreaded Alternative Minimum Tax (AMT). These simple changes instantly erased somewhere between 10% and 20% of the market value of investment real estate. This fall in values, combined with some questionable lending practices, contributed to the savings and loan crisis of the late 1980s.
The lesson I learned from all of this was that when the government giveth, it soon finds a way to taketh away. Basing investment decisions on the Tax Code is fraught with risk.
Today the Code appears to be neutral towards investment real estate. Depreciation is still available as a deduction against income, however, the time periods that assets can be depreciated have been stretched to roughly mirror the actual life span of those assets. The days of investing for tax shelter have passed by. If they come again, remember..........be very careful. Invest for value, not because of the Tax Code.
Friday, August 9, 2013
Crystal visions....................................................
Fleetwood Mac.........................................................Dreams
Opening paragraphs.....................................
Charybdis herself must have spat them into the sea. They committed "a Crime so odious and horrid in all it Circumstances, that those who have treated on the Subject have been at a loss for Words and Terms to stamp a sufficient Ignominy upon it." Their contemporaries called them "Sea-monsters," "Hell-Hounds," and "Robbers, Opposers and Violators of all Laws, Humane and Divine." some believed they were "Devils incarnate." Others suspected they were "Children of the Wicked One" himself. "Danger lurked in their very Smiles."
-Peter T. Leeson, The Invisible Hook: The Hidden Economics of Pirates
-Peter T. Leeson, The Invisible Hook: The Hidden Economics of Pirates
Trivia question of the day................
Who, or what, is Charybdis........................................?
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Quiz time..............................................
Think you know your fears? Can you match these ten phobias with the correct description below? Happy guessing.....................
- ANUPTAPHOBIA
- ATHAZAGORAPHOBIA
- BLENNOPHOBIA
- GELOTOPHOBIA
- GERASCOPHOBIA
- GLOSSOPHOBIA
- HELLENOLOGOPHOBIA
- KAKORRHAPHIOPHOBIA
- LOCKIOPHOBIA
- MACROPHOBIA
a) The fear of being or staying single.
b) A fear of long waits.
c) The fear of speaking in public.
d) A fear of slime.
e) The fear of childbirth.
f) The fear of failure or defeat.
g) The fear of being forgotten, ignored, or abandoned.
h) The fear of being laughed at.
i) The fear of growing old.
k) The fear of Greek terms or complex scientific terminology.
Fifty years ago..................................................
Smokey Robinson & the Miracles/You've Really Got A Hold On Me
This song was recorded in October of 1962 and released the next month. Smokey was writer, lead singer, and producer. It peaked at number 8 on the Billboard Top 100 in February of 1963.
This song was recorded in October of 1962 and released the next month. Smokey was writer, lead singer, and producer. It peaked at number 8 on the Billboard Top 100 in February of 1963.
33 Guidelines to investing in real estate........................
Guideline #24: Pay attention to your financing.
A few examples are in order:
In the late 1970's a group of local investors were buying small apartment complexes with the assistance of "owner financing." They would make a small down payment, borrow some from the bank, and then borrow the rest from the seller on a five year note. Their plan was to have built up some equity by the end of the fifth year, which would allow them to refinance with a bank to pay off their loan to the Seller in a timely fashion. They thought of "five years" as being a long time. Add five years to 1978 and your end up in 1983. The history majors amongst us will remember that interest rates spiked in the early 1980s. In 1983, rates for commercial loans were in the 15% range. It is hard to make real estate investments profitable paying 15% interest. It made for some interesting times and real scrambling for those investors.
In 2002 a local investment group refinanced a 250 unit apartment complex. Times were good, values were appreciating, they had significant equity, lenders were eager, interest rates seemed reasonable, and the appraisers were all optimistic. Our investor friends decided to free up as much equity as possible by borrowing as much as they could, which was a lot. Flash forward nine years. The note is coming due in January of 2013. It had to be either paid off or refinanced. Paying it off was not an option. Times were difficult, values had fallen, their equity had disappeared, lenders were scarce, interest rates were very low, and the appraisers were all pessimistic. Failure to secure new financing would have had catastrophic implications for the partners. While the mortgage was non-recourse, the tax consequences of a forced sale was in the seven figure range. It was a bit tense for them for awhile, but this story has a happy ending. Because the investors were paying attention, they consulted early on with a trusted mortgage broker, on his advice they took the necessary steps of spending many hundreds of thousands of dollars to upgrade units. It did not hurt that the market for commercial loans also improved quite a bit in 2012, As a result, the partners were able to secure new financing for another ten years, at a very interest rate.
Just as the economy runs in cycles, so does financing. Between 2002-2006 you could borrow money if you could "fog a mirror." Between 2008-2009, heaven help you if you needed to borrow money. It should be noted that in the 30 some odd years we have been doing this investment real estate thing, financing has only been problematic in four or five of those years. The other 25 or 26 years , borrowing money varied between a reasonable business proposition and way too easy. The important thing is to be prepared for the problematic years.
It should be noted that, if you invest with a plan similar to these guidelines, most business cycles will not be an issue for you. You just weather the storm, and maybe even take advantage of it. A lot of money gets made when markets are in turmoil. This last-go round was no different.
Every investment is different. There are no hard and fast rules, other than "pay attention."
A few examples are in order:
In the late 1970's a group of local investors were buying small apartment complexes with the assistance of "owner financing." They would make a small down payment, borrow some from the bank, and then borrow the rest from the seller on a five year note. Their plan was to have built up some equity by the end of the fifth year, which would allow them to refinance with a bank to pay off their loan to the Seller in a timely fashion. They thought of "five years" as being a long time. Add five years to 1978 and your end up in 1983. The history majors amongst us will remember that interest rates spiked in the early 1980s. In 1983, rates for commercial loans were in the 15% range. It is hard to make real estate investments profitable paying 15% interest. It made for some interesting times and real scrambling for those investors.
In 2002 a local investment group refinanced a 250 unit apartment complex. Times were good, values were appreciating, they had significant equity, lenders were eager, interest rates seemed reasonable, and the appraisers were all optimistic. Our investor friends decided to free up as much equity as possible by borrowing as much as they could, which was a lot. Flash forward nine years. The note is coming due in January of 2013. It had to be either paid off or refinanced. Paying it off was not an option. Times were difficult, values had fallen, their equity had disappeared, lenders were scarce, interest rates were very low, and the appraisers were all pessimistic. Failure to secure new financing would have had catastrophic implications for the partners. While the mortgage was non-recourse, the tax consequences of a forced sale was in the seven figure range. It was a bit tense for them for awhile, but this story has a happy ending. Because the investors were paying attention, they consulted early on with a trusted mortgage broker, on his advice they took the necessary steps of spending many hundreds of thousands of dollars to upgrade units. It did not hurt that the market for commercial loans also improved quite a bit in 2012, As a result, the partners were able to secure new financing for another ten years, at a very interest rate.
Just as the economy runs in cycles, so does financing. Between 2002-2006 you could borrow money if you could "fog a mirror." Between 2008-2009, heaven help you if you needed to borrow money. It should be noted that in the 30 some odd years we have been doing this investment real estate thing, financing has only been problematic in four or five of those years. The other 25 or 26 years , borrowing money varied between a reasonable business proposition and way too easy. The important thing is to be prepared for the problematic years.
It should be noted that, if you invest with a plan similar to these guidelines, most business cycles will not be an issue for you. You just weather the storm, and maybe even take advantage of it. A lot of money gets made when markets are in turmoil. This last-go round was no different.
Every investment is different. There are no hard and fast rules, other than "pay attention."
Thursday, August 8, 2013
An abundance of talent......................
Eric, Ringo, Paul, Billie, Dhani, etc./While My Guitar Gently Weeps
About that budget....................................
The infographic above can be more easily read and better used
by going here. Once there, allow your cursor to roam over the
graphic. Magically, stuff will be enlarged. Enjoy. Let me know
if you figure out what it all means, other than government in the
2014 era is very expensive.
thanks Seth
opening chart via/cartoon via
Opening two paragraphs........................
Robert Moses was born on December 18, 1888. He was not given a middle name - because his mother saw no reason for one.
Bella Moses was a strong-willed woman, so strong-willed, in fact, that some of her relatives said she was too much like her mother - and not enough like her father. Bella's parents, Robert's grandparents, were first cousins. Both had been born - Bernhard Cohen in 1821, Rosalie Silverman five years later - in the small Bavarian village of Reckendorf to struggling merchant families, two of the tens of thousands of German-Jewish families made highly susceptible to "America fever" by laws that segregated them in crowded Judengassen and forced them to pay the humiliating "Jew toll" whenever they made a trip away from the ghetto. The statutes also prohibited Jews from owning any land except that on which their houses stood or from dealing in any goods that could not be carried with them. Bavaria, where German anti-Semitism was most virulent, had even set a limit on the number of Jewish marriages in an attempt to keep the Jewish population down. The Silvermans left Reckendorf for New York while Rosalie was in her teens. Bernhard Cohen had been taken to Frankfurt am Main as a child by parents who hoped that life for Jews in Germany would be better outside Bavaria; when this hope was dashed, they waited until Bernhard was twenty-one, and then sent him and a younger brother, Samuel, to America, where the brothers opened a small dry-goods store in Mobile, Alabama. In 1848, they moved to New York, rented a small office and became dry-goods importers. Bernhard met his cousin and in 1849 they were married.
-Robert A. Caro, The Power Broker: Robert Moses and the Fall of New York
Bella Moses was a strong-willed woman, so strong-willed, in fact, that some of her relatives said she was too much like her mother - and not enough like her father. Bella's parents, Robert's grandparents, were first cousins. Both had been born - Bernhard Cohen in 1821, Rosalie Silverman five years later - in the small Bavarian village of Reckendorf to struggling merchant families, two of the tens of thousands of German-Jewish families made highly susceptible to "America fever" by laws that segregated them in crowded Judengassen and forced them to pay the humiliating "Jew toll" whenever they made a trip away from the ghetto. The statutes also prohibited Jews from owning any land except that on which their houses stood or from dealing in any goods that could not be carried with them. Bavaria, where German anti-Semitism was most virulent, had even set a limit on the number of Jewish marriages in an attempt to keep the Jewish population down. The Silvermans left Reckendorf for New York while Rosalie was in her teens. Bernhard Cohen had been taken to Frankfurt am Main as a child by parents who hoped that life for Jews in Germany would be better outside Bavaria; when this hope was dashed, they waited until Bernhard was twenty-one, and then sent him and a younger brother, Samuel, to America, where the brothers opened a small dry-goods store in Mobile, Alabama. In 1848, they moved to New York, rented a small office and became dry-goods importers. Bernhard met his cousin and in 1849 they were married.
-Robert A. Caro, The Power Broker: Robert Moses and the Fall of New York
Fifty years ago.............................................
Kyu Sakamoto..........................................................Sukiyaki
(as always, please click on through to YouTube)
(as always, please click on through to YouTube)
33 Guidelines for investing in real estate......
Guideline #23: There is a lot of land.
Some lessons are learned harder than others. Value is derived from use (Guideline #4), location (Guideline #5), and difficulty of replacement. Look at Google Earth sometime. Vacant land suitable for development is anything but scarce in this part of the world. If you invest in land, be prepared to be very patient.
Wednesday, August 7, 2013
Because you need to experience Bagrock & Roll.....
Red Hot Chili Pipers......Smoke On The Water/Thunderstruck
Happy anniversary...............................
......................to Kurt Harden's Cultural Offering, the blog and blogger that got me started. Thanks for being there. More of same would just be perfect.
image via
image via
Touch of your hand........................
Roy Orbison...............................................Crying
Fifty years ago...............................................
The Jetsons................................................................TV Intro
The original Jetsons was an ABC show. 24 episodes ran on Sunday evenings from September of 1962 into the fall of 1963. It is considered to be the first color TV show aired on ABC. Now there is a trivia question for you.
The original Jetsons was an ABC show. 24 episodes ran on Sunday evenings from September of 1962 into the fall of 1963. It is considered to be the first color TV show aired on ABC. Now there is a trivia question for you.
Flashback City......................
The wonder of it all. We must have been in third grade. The special alarm would go off and the whole class would "duck and cover," crawling under our desks and covering our heads with our hands. Of course this was a drill to protect us from a nuclear explosion initiated by those pesky Russians, but what where the adults thinking? "Duck and Cover"? One can see the danger shattered windows and flying glass, but still..................
thanks gerard
Simplify, simplify, simplify................................
If the process of simplification is the striping away of the non-essential, we best know what is essential. Fortunately for us folks here in the Heartland, John E. Smith has been doing some of the heavy lifting. His full post is here.
33 Guidelines to investing in real estate....................
Guideline #22: Don't borrow just because they will lend you money.
Just because there is a willing lender doesn't mean you should become a willing borrower. While this certainly applies to investment property, it is doubly applies to single-family, owner-occupied houses.
While this quote is now "dated," it offers some insight into what I would call a faulty philosophy held by many very smart people:
"Many commentators have noted the effect of home mortgage refinancing and equity extraction on economic growth, particularly consumer spending, over the period 2000-2006. For example, former Federal Reserve Chairman Alan Greenspan (2002) stated:
'Especially important in the United States have been the
flexibility and the size of the secondary mortgage market.
Since early 2000, this market has facilitated the large debt
financed extraction of home equity, that, in turn, has been
critical in supporting consumer outlays in the United States
throughout the recent period of economic stress.' "
(source of quote, and erudite paper on the subject, is here)
How "extracting" equity to pay for "consumer spending" can be considered economic growth is a mystery to me. What did they think was going to happen when all the equity was gone? How did they think the newly acquired debt was going to be repaid? While the trend line of real estate values over time is upwards, we often forget to remember that is a "trend," not a constant. If you are going to buy something with borrowed money, make sure that something has enduring value. Jet skis, boats, hot tubs, fancy cars, super large screen TVs, and the like do not have enduring value.
There have been a few times that our favorite bank has denied us financing. In one particular case, our loan officer said, "We know you can buy it, we just don't believe you can afford to own it." A classic line that proved to be true. Since we were not able to secure financing, we sold our contract to purchase this particular investment to another group of investors. The new buyers owned the investment for about a month when a particularly nasty cold snap swept through Ohio. Somehow, part of the sprinkler system froze and broke, flooding the basement, including the boiler. While this group of buyers could afford to solve the problem, we would not have been able to. We were thankful for the denial and appreciate those particular lenders who know that sometimes saying "no" is the path to successful investing.
There have been a few times we wish the lenders had said no when they said yes. Banks are in the business of lending money. Wealth accumulation is easier if you don't make a lot of mistakes, or one big mistake. Eager lenders sometimes contribute to our ability to make mistakes. Don't borrow just because the bank will lend. Make sure borrowed money gets put to a safe and productive use. Some independent thinking and a little discipline goes a long way.
Just because there is a willing lender doesn't mean you should become a willing borrower. While this certainly applies to investment property, it is doubly applies to single-family, owner-occupied houses.
While this quote is now "dated," it offers some insight into what I would call a faulty philosophy held by many very smart people:
"Many commentators have noted the effect of home mortgage refinancing and equity extraction on economic growth, particularly consumer spending, over the period 2000-2006. For example, former Federal Reserve Chairman Alan Greenspan (2002) stated:
'Especially important in the United States have been the
flexibility and the size of the secondary mortgage market.
Since early 2000, this market has facilitated the large debt
financed extraction of home equity, that, in turn, has been
critical in supporting consumer outlays in the United States
throughout the recent period of economic stress.' "
(source of quote, and erudite paper on the subject, is here)
How "extracting" equity to pay for "consumer spending" can be considered economic growth is a mystery to me. What did they think was going to happen when all the equity was gone? How did they think the newly acquired debt was going to be repaid? While the trend line of real estate values over time is upwards, we often forget to remember that is a "trend," not a constant. If you are going to buy something with borrowed money, make sure that something has enduring value. Jet skis, boats, hot tubs, fancy cars, super large screen TVs, and the like do not have enduring value.
There have been a few times that our favorite bank has denied us financing. In one particular case, our loan officer said, "We know you can buy it, we just don't believe you can afford to own it." A classic line that proved to be true. Since we were not able to secure financing, we sold our contract to purchase this particular investment to another group of investors. The new buyers owned the investment for about a month when a particularly nasty cold snap swept through Ohio. Somehow, part of the sprinkler system froze and broke, flooding the basement, including the boiler. While this group of buyers could afford to solve the problem, we would not have been able to. We were thankful for the denial and appreciate those particular lenders who know that sometimes saying "no" is the path to successful investing.
There have been a few times we wish the lenders had said no when they said yes. Banks are in the business of lending money. Wealth accumulation is easier if you don't make a lot of mistakes, or one big mistake. Eager lenders sometimes contribute to our ability to make mistakes. Don't borrow just because the bank will lend. Make sure borrowed money gets put to a safe and productive use. Some independent thinking and a little discipline goes a long way.
Karl Lagerfeld...........................................
Karl Lagerfeld is a German born designer, photographer and artist. He also has said some neat stuff:
“Clear thinking at the wrong moment can stifle creativity.”
“Don't look to the approval of others for your mental stability”
“Books are a hard-bound drug with no danger of an overdose. I am the happy victim of books.”
"I like the idea of craziness with discipline."
“Youthfulness is about how you live not when you were born.”
“People who say that yesterday was better than today are ultimately devaluing their own existence.”
“I’m very much down to earth, just not this earth.”
“In a meat-eating world, wearing leather for shoes and even clothes, the discussion of fur is childish.”
"I am like a TV antenna. I catch everything that is in the air, and then I do it my way."
Tuesday, August 6, 2013
Making me laugh.........................
Just caught the end of the newest episode of Whose Line Is It Anyway? Ryan, Colin, and Wayne are back and in fine form. Might be missing Drew, but still.... good fun!
Russ Freeman and friends................................
The Rippingtons.............................................Sahara
Opening paragraphs.........................
George Phydias Mitchell was born in 1919 in Galveston, Texas. His parents were first-generation immigrants from Greece. His father could neither read nor write. He first worked as a laborer on a railroad gang. One day the foreman told him that his Greek name, Savvas Paraskevopoulos, was too difficult. He named him Mike Mitchell.
-Jurgen Schmandt, George Mitchell and the Idea of Sustainability
-Jurgen Schmandt, George Mitchell and the Idea of Sustainability
What a great country we live in...................
Monday is a "looked forward to" kind of day, mostly because that is the day our friendly mail man kindly drops off at the house the latest issue of The Economist. Picking up the magazine after dinner, I quickly discover - actually I already knew because of the Intertunnel - that George Mitchell is featured in the Schumpeter essay. (One of the first things one does when reading The Economist is look for the Schumpeter essay.)
George Mitchell is one of those people that makes one glad to be a part of the human race. What an interesting man! I thought to myself, while reading the essay, that I would certainly buy a biography of Mitchell. Then the thought...........I wonder if one has already been published? The Amazon Book Store was quickly consulted. No biography as such, but there was a book, George P. Mitchell and The Idea of Sustainability. Through the magic of Kindle (Sorry Jeff. I only kindlize books when the immediate gratification itch needs scratched.), I now have a copy of said writing. If someone does choose to publish a biography of George P. Mitchell, consider me a buyer for your book.
You may read the whole Schumpeter essay on Mitchell here. I hope you will not content yourself with this wee excerpt:
Mr Mitchell was also the embodiment of the entrepreneurial spirit. He did not discover shale gas and oil: geological surveys had revealed them decades before he started. He did not even invent fracking: it had been in use since the 1940s. But few great entrepreneurs invent something entirely new. His greatness lay in a combination of vision and grit: he was convinced that technology could unlock the vast reserves of energy in the Barnett Shale beneath Dallas and Fort Worth, and he kept grappling with the unforgiving rock until it eventually surrendered its riches.
George Mitchell is one of those people that makes one glad to be a part of the human race. What an interesting man! I thought to myself, while reading the essay, that I would certainly buy a biography of Mitchell. Then the thought...........I wonder if one has already been published? The Amazon Book Store was quickly consulted. No biography as such, but there was a book, George P. Mitchell and The Idea of Sustainability. Through the magic of Kindle (Sorry Jeff. I only kindlize books when the immediate gratification itch needs scratched.), I now have a copy of said writing. If someone does choose to publish a biography of George P. Mitchell, consider me a buyer for your book.
You may read the whole Schumpeter essay on Mitchell here. I hope you will not content yourself with this wee excerpt:
Mr Mitchell was also the embodiment of the entrepreneurial spirit. He did not discover shale gas and oil: geological surveys had revealed them decades before he started. He did not even invent fracking: it had been in use since the 1940s. But few great entrepreneurs invent something entirely new. His greatness lay in a combination of vision and grit: he was convinced that technology could unlock the vast reserves of energy in the Barnett Shale beneath Dallas and Fort Worth, and he kept grappling with the unforgiving rock until it eventually surrendered its riches.
Fifty years ago..........................................
Robin Ward.........................................Wonderful Summer
33 Guidelines for investing in real estate....................
Guideline #21: Pyramiding is not to be undertaken lightly
Pyramids stand the test of time.........only if they have really strong foundations.
Pyramiding, the practice of using the equity in one property to secure the financing to acquire another property, is not to be undertaken lightly. As with leverage (See Guideline #20), pyramiding can be your friend, or your worst nightmare.
With a strong foundation (well maintained properties with strong tenants, ample cash flow with reserves on hand, and a respectable amount of equity) a pyramid will build solid wealth.
With a weak foundation (poorly maintained properties with transitional tenants, little or no cash reserves, but perceived equity) a pyramid is nothing but a house of cards - soon to be tumbling down.
Not so many years ago, a good friend, who was a really smart stock market guy, was in a real estate partnership with an aggressive and hungry partner. The two made an investment in a 20 unit apartment that threw off lots of cash. After a cash rich year, the aggressive partner convinced my friend that they should buy an 8 unit apartment complex, 100% financed with zero money down. While the newly acquired units would have negative cash flow at first, the surplus money from the first project would certainly cover the losses and then some. Next, they bought a 16 unit building under the exact same conditions. Not bad. Except that they forgot Guideline #14 (sometimes cash flow is just another word for deferred maintenance). The first investment building that was supporting the other two investments had a dire need for maintenance, however, all the cash flow from that building was going to support the mortgages on the second and third investments. The maintenance did not get done. After a passage of time the tenants publicly complained, and the Health Department got involved. Ultimately, the Health Department declared the 20 unit apartment "unfit" for human habitation and caused it to be vacated. Ouch. Their house of cards came tumbling down. It was not pretty. Ultimately, the partners reached a separation agreement and my friend was left to solve the whole problem himself. It was a struggle and cost a him great deal of money and time, but it got solved. If only......
Pyramids stand the test of time.........only if they have really strong foundations.
Pyramiding, the practice of using the equity in one property to secure the financing to acquire another property, is not to be undertaken lightly. As with leverage (See Guideline #20), pyramiding can be your friend, or your worst nightmare.
With a strong foundation (well maintained properties with strong tenants, ample cash flow with reserves on hand, and a respectable amount of equity) a pyramid will build solid wealth.
With a weak foundation (poorly maintained properties with transitional tenants, little or no cash reserves, but perceived equity) a pyramid is nothing but a house of cards - soon to be tumbling down.
Not so many years ago, a good friend, who was a really smart stock market guy, was in a real estate partnership with an aggressive and hungry partner. The two made an investment in a 20 unit apartment that threw off lots of cash. After a cash rich year, the aggressive partner convinced my friend that they should buy an 8 unit apartment complex, 100% financed with zero money down. While the newly acquired units would have negative cash flow at first, the surplus money from the first project would certainly cover the losses and then some. Next, they bought a 16 unit building under the exact same conditions. Not bad. Except that they forgot Guideline #14 (sometimes cash flow is just another word for deferred maintenance). The first investment building that was supporting the other two investments had a dire need for maintenance, however, all the cash flow from that building was going to support the mortgages on the second and third investments. The maintenance did not get done. After a passage of time the tenants publicly complained, and the Health Department got involved. Ultimately, the Health Department declared the 20 unit apartment "unfit" for human habitation and caused it to be vacated. Ouch. Their house of cards came tumbling down. It was not pretty. Ultimately, the partners reached a separation agreement and my friend was left to solve the whole problem himself. It was a struggle and cost a him great deal of money and time, but it got solved. If only......
Monday, August 5, 2013
Let us rejoice and let us sing and dance....
Donovan......................................................Atlantis
Even more beautiful..............................
At the end of June, 2012 a derecho blew through Licking County with 100+ mile per hour straight line wind. It was a nasty storm. Along with many other buildings, St. Luke's Episcopal Church in Granville was damaged. The Greek Revival styled building, erected in the later part of the 1830's, had recently received significant structural improvements - mostly to insure that the roof stayed where it belonged for another 180 years. While the old timber roofing system was replaced, the original timbers supporting the plaster ceiling were not. In the course of the derecho, the unusual wind pressure caused some of those ceiling timbers to crack. A quick and casual inspection would have shown no damage. A more studied review would have led one to say, "Wait a minute. Isn't that part of the ceiling out of level and lower than it used to be?" A thorough review showed that the entire ceiling was in danger of collapse. A life, and building, threatening event, should it happen. The building was secured to prevent occupancy and our friendly insurance agent was called. Several architectural studies later, it was agreed that the old ceiling must come down, and a new ceiling put back up. Easier said than actually completed. Fourteen months later, the ceiling structure has been rebuilt and the church put back together. Yesterday was the first church service in fourteen months in the restored old Church. It is a thing of beauty.
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| St. Luke's Episcopal Church, Granville, Ohio |
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| The new ceiling is looking pretty sharp |
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| The house was full and the choir was in fine form |
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| Yesterday's service included a brief wedding ceremony. |
Fifty years ago......................................
Bobby Vinton...............................There, I've Said It Again
Ouch..................................
"The pigs in Orwell's 'Animal Farm' have more suavity than the US government is demonstrating now. Their credibility is below zero."
-Bruce Sterling, as quoted at Samizdata
33 Guidelines for investing in real estate............
Guideline #20: Leverage is a two-edged sword.
It is through the miracle of leverage that real estate becomes such a fabulous investment vehicle. Leverage is borrowed money, a mortgage.
The following example is a fairly typical, if simplified, example of how all this works:
Imagine buying a $250,000 single tenant investment property, with $25,000 of your own cash and $225,000 of borrowed money. For arguments' sake, we will assume that the rental income from the tenant is sufficient to pay the mortgage, property taxes, insurance, maintenance, with all remaining cash flow going to the reserve for replacement account and to pay the income tax generated by the investment- in other words, you receive -0- cash flow. After the passage of ten years, you decide to sell the investment. With the combination of minimal (2.5%) inflation and correspondingly modest rent increases, along with the fact that the asset has been well maintained, the property is now worth $320,000. The original loan of $225,000 has, after ten years, been paid down (by the tenant's rental payments) to $98,000. After selling expenses (have to pay the broker their justly earned commissions) are deducted, your net from a sales price of $320,000 is $295,000, and then after paying off the $98,000 mortgage, you receive a net proceeds check of $197,000 at closing.
So, after ten years of prudent stewardship, you receive your original $25,000 back, plus an additional $172,000! Leverage indeed.
(Remember, this was labeled "if simplified" because our neat little example ignores the tax man, which one should not do. But we get ahead of ourselves. Wait for Guidelines #28 and #33, where and when more will be revealed).
Leverage, if not properly respected (See Guideline #21 and Guideline #22), may have a dark side. Trust me when I tell you that it is possible to buy an investment property with zero down payment. In previous times (and perhaps again in future times) it was possible to borrow more than the purchase price. In other words, one could buy a single tenant investment property for $250,000, and if the stars were properly aligned, borrow $275,000 or more. Situations like this may turn out very well, but they leave very little margin for error. If you lose your tenant, or if the market falters, such a loan may turn out to be problematic.
When one borrows money on real estate, one also signs a note promising to re-pay the money. Just make sure you can.
It is through the miracle of leverage that real estate becomes such a fabulous investment vehicle. Leverage is borrowed money, a mortgage.
The following example is a fairly typical, if simplified, example of how all this works:
Imagine buying a $250,000 single tenant investment property, with $25,000 of your own cash and $225,000 of borrowed money. For arguments' sake, we will assume that the rental income from the tenant is sufficient to pay the mortgage, property taxes, insurance, maintenance, with all remaining cash flow going to the reserve for replacement account and to pay the income tax generated by the investment- in other words, you receive -0- cash flow. After the passage of ten years, you decide to sell the investment. With the combination of minimal (2.5%) inflation and correspondingly modest rent increases, along with the fact that the asset has been well maintained, the property is now worth $320,000. The original loan of $225,000 has, after ten years, been paid down (by the tenant's rental payments) to $98,000. After selling expenses (have to pay the broker their justly earned commissions) are deducted, your net from a sales price of $320,000 is $295,000, and then after paying off the $98,000 mortgage, you receive a net proceeds check of $197,000 at closing.
So, after ten years of prudent stewardship, you receive your original $25,000 back, plus an additional $172,000! Leverage indeed.
(Remember, this was labeled "if simplified" because our neat little example ignores the tax man, which one should not do. But we get ahead of ourselves. Wait for Guidelines #28 and #33, where and when more will be revealed).
Leverage, if not properly respected (See Guideline #21 and Guideline #22), may have a dark side. Trust me when I tell you that it is possible to buy an investment property with zero down payment. In previous times (and perhaps again in future times) it was possible to borrow more than the purchase price. In other words, one could buy a single tenant investment property for $250,000, and if the stars were properly aligned, borrow $275,000 or more. Situations like this may turn out very well, but they leave very little margin for error. If you lose your tenant, or if the market falters, such a loan may turn out to be problematic.
When one borrows money on real estate, one also signs a note promising to re-pay the money. Just make sure you can.
A brief glimpse of history...................................or, they certainly had gumption back then.................
Speaking of Granville, Ohio.....................The community was settled in 1805. The historical marker honoring the occasion is classic:
"In 1804 a group of neighbors in Granville, Massachusetts and Granby, Connecticut formed the Licking Company for the purpose of moving to "Newlands" in Ohio. Inspired and informed by the development of Worthington in 1803, the Company purchased 29,040 acres in the U. S, Military District. Advance parties surveyed and mapped a site, established a mill, and planted grain. The Company planned a public square, a school, a library, quarry, burying ground, and property for the support of churches. In November and December of 1805, some 150 emigrants in ox-drawn wagons arrived in their new home and built temporary shelters on the designated public square. On December 9 through 12 1805, Company members selected their Granville lots in an auction that was described as peaceable and honest."
Imagine the nerve and fortitude of those 150 folks. Then repeat the story countless times. Not having a "frontier" does change things.
"In 1804 a group of neighbors in Granville, Massachusetts and Granby, Connecticut formed the Licking Company for the purpose of moving to "Newlands" in Ohio. Inspired and informed by the development of Worthington in 1803, the Company purchased 29,040 acres in the U. S, Military District. Advance parties surveyed and mapped a site, established a mill, and planted grain. The Company planned a public square, a school, a library, quarry, burying ground, and property for the support of churches. In November and December of 1805, some 150 emigrants in ox-drawn wagons arrived in their new home and built temporary shelters on the designated public square. On December 9 through 12 1805, Company members selected their Granville lots in an auction that was described as peaceable and honest."
Imagine the nerve and fortitude of those 150 folks. Then repeat the story countless times. Not having a "frontier" does change things.
Weathervane...................................
My Sweetie and I attended the final night of the final show of the 2013 Summer Season at the wondrous Weathervane Playhouse in Newark Saturday night. Monty Python's Spamalot ("a new musical lovingly ripped off from the motion picture Monty Python and the Holy Grail") was on the bill. Great show. We laughed ourselves silly. The cast was great, the voices and music in fine tune, the costumes perfect, and the set creatively put together. A fun ending to a great season of shows.
Sunday, August 4, 2013
Got that right..........................
Nicholas Bate, as only Nicholas Bate can, reminds us that "Life is good"...................
Life is good. Rarely easy. Often funny, outrageous, wonderful, thought-provoking. At times exasperating, doubt-inducing, desperately worrying and frightening. But deep down: life is good. Life lacks enough clear maps, timetables and simple instruction guides..............
Life is surely worth one or two hiccups in order to be exposed to the entire collection of Beatles masterpieces.
Life is good. Rarely easy. Often funny, outrageous, wonderful, thought-provoking. At times exasperating, doubt-inducing, desperately worrying and frightening. But deep down: life is good. Life lacks enough clear maps, timetables and simple instruction guides..............
Life is surely worth one or two hiccups in order to be exposed to the entire collection of Beatles masterpieces.
Uptight.........................................
Traveling Wilburys....................................Handle With Care
Trivia question of the day.............................
What is a dodecagon................................?
In status-symbol land.......................
..........the one status to be avoided is "victimhood." Cultural Offering provides today's lesson. For a more in depth look at the situation, go here.
Fifty years ago...........................
Dion DiMucci.............................................Drip Drop
On why we should believe the New York Times editors when they instruct us about the economy
New York Times sells Boston Globe at 93% loss.
John Henry, the principal owner of the Boston Red Sox, bought the 141 year old Boston Globe (without its $100 million +/- pension liabilities) for $70,000,000. The NYT had paid $1.1 billion for the Globe in 1993. Ouch. To put it in context, Henry acquired the paper for about half of what the Red Sox payroll is for 2013. No word on whether the deal includes an outfielder-to-be-named later.
John Henry, the principal owner of the Boston Red Sox, bought the 141 year old Boston Globe (without its $100 million +/- pension liabilities) for $70,000,000. The NYT had paid $1.1 billion for the Globe in 1993. Ouch. To put it in context, Henry acquired the paper for about half of what the Red Sox payroll is for 2013. No word on whether the deal includes an outfielder-to-be-named later.
33 Guidelines for investing in real estate..........
Guideline # 19: Read the fine print.
Read the fine print BEFORE you get to closing. Insist on being provided copies of the documents you will have to sign prior to the day of closing. Read them and understand them. Never forget Guideline #10 (these are business relationships, not friendships).
Have we always done this? No. That's why this is a guideline!
We once signed mortgage papers that contained a "yield maintenance" clause. It was fairly technical. We did not understand it. We did not ask our attorney's opinion. We just assumed it was a form of a pre-payment penalty. Yeow! Think pre-payment penalty on steroids. At the peak of the late-and-not-very-lamented real estate mania (very late in 2006), we had the opportunity to sell one of our larger investments at what we thought was a VERY good price. When we called the mortgage broker asking about the pay-off of the +/- $4,000,000 loan, we were advised that in addition to the loan payoff they would be expecting the yield maintenance payment of just shy of $500,000. Oops. We declined to sell. All in all, it was not a bad thing - we still own the asset and are very happy we do, but we felt a tad foolish for not knowing.
We have signed many mortgage documents that contain language giving the lender the right to ask for an appraisal. We now have a more thorough understanding of what that clause is for and what it can mean. After the retail real estate market imploded in 2007-2008, one of our friendly lenders send a very shell-shocked appraiser to look at a strip center we had developed about three years earlier. Said appraiser determined that our property was worth about two-thirds of the value we were supposed to have to support the loan we did have. This is known as a bad thing. The friendly lender asked for a meeting and suggested that it would be a good thing if we provided them with either cash or other collateral for the "missing" one-third of the value. Let me tell you....that hurts. Never missed a payment. Never late on a payment. Still in "default" because of the appraisal.
Read and understand what you are signing. Please.
Read the fine print BEFORE you get to closing. Insist on being provided copies of the documents you will have to sign prior to the day of closing. Read them and understand them. Never forget Guideline #10 (these are business relationships, not friendships).
Have we always done this? No. That's why this is a guideline!
We once signed mortgage papers that contained a "yield maintenance" clause. It was fairly technical. We did not understand it. We did not ask our attorney's opinion. We just assumed it was a form of a pre-payment penalty. Yeow! Think pre-payment penalty on steroids. At the peak of the late-and-not-very-lamented real estate mania (very late in 2006), we had the opportunity to sell one of our larger investments at what we thought was a VERY good price. When we called the mortgage broker asking about the pay-off of the +/- $4,000,000 loan, we were advised that in addition to the loan payoff they would be expecting the yield maintenance payment of just shy of $500,000. Oops. We declined to sell. All in all, it was not a bad thing - we still own the asset and are very happy we do, but we felt a tad foolish for not knowing.
We have signed many mortgage documents that contain language giving the lender the right to ask for an appraisal. We now have a more thorough understanding of what that clause is for and what it can mean. After the retail real estate market imploded in 2007-2008, one of our friendly lenders send a very shell-shocked appraiser to look at a strip center we had developed about three years earlier. Said appraiser determined that our property was worth about two-thirds of the value we were supposed to have to support the loan we did have. This is known as a bad thing. The friendly lender asked for a meeting and suggested that it would be a good thing if we provided them with either cash or other collateral for the "missing" one-third of the value. Let me tell you....that hurts. Never missed a payment. Never late on a payment. Still in "default" because of the appraisal.
Read and understand what you are signing. Please.
Why Is There Corn in Your Coke?
Here is another one of the fun videos from LearnLiberty.org. This one takes on the unholy alliance between sugar growers and the government.. One thing she leaves out - these regulations must make the corn growers pretty happy too.
Answers................................
A dodecagon is a polygon with twelve sides and twelve angles.
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