Robin Ward.........................................Wonderful Summer
Tuesday, August 6, 2013
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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