SOME INVESTMENT REALITIES
1. QUANTATIVE EASING has given the Federal Reserve enormous power over the money supply and has resulted in ENORMOUS ASSET INFLATION. Much of this increase in asset values is justified since there is now an aggressive lender of last resort with infinitely deep pockets to (a) buy assets and provide a support to prices and to (b) flood the money supply. Assets are thus somewhat protected from any short term market driven declines in prices, at lest to the extent that the Fed choses to support them.
2. While keeping the money supply ample to prevent economic downturns promotes business and long term productivity, thus increasing people's ability to pay for either the purchase or rental of assets, and thus somewhat increases the actual economic value (summation of present values of profit from use or ownership), assets prices most probably inflate at a higher rate than this increase in long term economic value for anyone other than the very long term investor. The value of money and savings however clearly erodes over time.
3. There is nothing better than owning a business where the value of the underlying assets is going togo up for the forseeable future. Unfortunately it is equally true that in the long run all businesses make buggy whips or are disrupted by ruinous competition. Thus the potential income stream is not infinite for any company. (General Electric, General Motors, and IBM are the poster children of very bad equity investments.) That said, Microsoft, Walmart, Target and a lot of Berkshire Hathaway properties appear to be doing just fine.
4.Owning income producing assets without having to do all the bothersome things that most businesses have to deal with is deceptively attractive. Wall Street sells Master Limited Partnership assets that large businesses do not want to continue to own (deteriorating pipelines etc) to passive investors who are certain they are getting solid gold and not, essentially, worn out assets about to fall apart.
4. Real Estate is just a business: invest money, get a stream of gross income, pay expenses, and hope that over time you will recover the investment and then some. Many real estate investment trusts have proven to be even worse investments than GE, GM or IBM. The exception to date have been luxury residential apartment complexes in desirable areas for rent to high income people willing to pay $4K a month for rent. That most of these people will at some point become unemployed is however likely and the per sq ft cap costs of these properties are at nosebleed levels. Retail properties are being given away, for the obvious reason that retail space is declining every day in value.
5. Construction costs, ESPECIALLY REHAB, are OUT OF SIGHT!!!. The desirability of most fix and flips I see seems to be inversely proportional to their size. The same for that matter is true for new. ground up construction. Real estate developers can generally afford to spend more per square ft in highly desirable locations. ($500.00 a sq ft is typical in Naples FL for on the water).
6. Fix and flipping or new construction are desirable because they are short term with forseeable risks. These investments are also undesirable because they are short term and thus have no chance for long term compounding of values. Lending on these projects is desirable and undesirable for exactly the same reasons. (I as often as not make as much or more money as a mortgagee than the developer makes doing the work!!!)
7. Collateral is only as good as the market for it. Loan to value means little if a property never sells. A sustainable absorption rate is the single most important factor in making a good loan. IF A LENDER IS NOT CERTAIN THAT THE MARKET FOR A GIVEN PROPERTY WILL BE AT LEAST AS GOOD A FEW YERS HENCE HE SHOULD NOT MAKE A LOAN.
8. Any loan is only as good as the ABILITY OF THE BORROWER TO PAY. If you end up foreclosing on a property you made a bad loan, at least unless you REALLY want to own the property.
9. EXPERIENCE COUNTS. Only an idiot loans to people with no successful track record. WORK WITH WINNERS NOT LOSERS.
10. Prudently written high IRR mortgages will generally out perform all competing investment vehicles over a long period of time. Even bankable loans at a low interest rate perform competitively with equity and other investments.
11. There are a myriad of factors to consider when deciding what makes a good loan. IF YOU WANT TO DISCUSS A SPECIFIC SCENARIO, give me a call.
pl goduti
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