Making Money in a Down Market

Making Money in a Down Market – or How to make Lemonade

This past Friday I attended the bi-weekly Commercial Investments Professionals meeting (CIP). This is a rather informal breakfast networking meeting where 45 to 60 of some of the best commercial brokers and investors in town get together to share property and market information, to make deals, and to meet their fellow professionals. The meeting starts at seven o'clock in the morning with breakfast and an hour of socializing, then promptly at eight someone leads an invocation, the pledge of allegiance, and then we often will have a 15 minute speaker about a topic that may help us all, (Perhaps the county appraiser or commissioner etc.) and then one of the agents leads us though a presentation of flyers that have been brought in by the various brokers on properties that the brokers are selling. We end the meeting with ten minutes or so of "wants" or brand new "haves" for which there are no flyers. By nine in the morning we turn our cell phones back on and are on the way to our cars and off to work some more.
I joined the group during its first year and soon after that joined the board. I became the secretary. My main job was to send email notifications of the meetings every two weeks. It was then that I started putting my picture and links on every signature on every email I sent out. This was not common back then. In fact no one else that I knew was doing it at the time. I am sure it was not my idea, but I am just as sure that many in the group began doing after I did. My goal was to be recognized by all in my peer group. It worked.
Most of the attendees at CIP, by the way, are quietly the most successful real estate agents and investors in Lee County. The informal information exchange that happens over coffee is one of the many things that gives these guys and gals the edge. I know it is one of the main reasons I have earned high seven figures since I joined - just on deals that I learned about at this meeting, and all this for four hours a month, before normal working hours.
Yesterday I got up during the "wants" session. I told my fellow professionals what I am now buying. I told them I want them to bring me their listings for occupied buildings that they are having trouble selling because they are trying to sell them as income property and the leases may not be long term enough for the investors to get financing. You see, a normal income property, say a warehouse, may sell at a cap rate of 8% . But if the existing lease has only two years to run, most banks will not loan the investor enough money for him to buy it. Hence the price gets lowered or the seller has to wait for an end user buyer. And end users normally will not buy two years in advance of their needs.
You residential folks may be thinking, "Why do I care about this?" But stick with me while I try to being this point home. My goal is to buy properties that do not cash flow well unless I put a great deal of cash down, but I only want to buy properties that are undervalued, not based on the income approach but on the replacement cost approach. Why?, because I believe very strongly in the fundamentals of the market.
I know, for example, that I can buy a new preconstruction commercial one story building for $240 per square foot. It will be vacant until I find a tenant. I know that it will cash flow (make sense on an income approach to value). I also know this will happen only after perhaps the first year after I pay leasing commissions, get through the vacancy period, and pay off my loan costs. I also know that the bank will finance my purchase because of either my financial strength, the fact that the building is new, and/or the fact that I have the construction period to locate a tenant. It is not easy to find these deals, but Market America Realty and Investments has them and in fact have sold over 18 of them in the past eight weeks to our clients. I love them as investments. There are just not enough available.
Alternatively, I can find existing older buildings, in good locations, in fair to good shape, with short term leases, but can pay considerable less than $240 a square foot THAT A NEW BUILING COSTS TO BUILD. Or perhaps I can purchase an old multi story office building at $280 a square foot when a new vacant one can cost me $400 per square foot (like MailScanner has detected a possible fraud attempt from "www.ma-realty.com" claiming to be www.cyperlincenter.com). My point is that the older purchase, for the commercial investor, may be a wise alternative FOR A CERTAIN CLASS OF BUYERS. This is because there will be, over the next five years, a meeting of the two prices per square foot, the difference between the two will be less significant. Chosen properly and wisely, both will make money and because we are continuing to build, I do not believe prices will come down, but believe the older properties prices will rise to meet the cost of replacement buildings. The market will cause this to happen.
The older building may require a cash infusion for two years (My polite way of saying "negative cash flow") due to the below market rents and some of the deferred maintenance items that need to be addressed by the new owner. But as a long term investment, the older building can pay off handsomely. Just as a preconstruction investment can, but I can better define my risk with an existing building.
The fundamentals of our market, by the way, that I believe in:
1. There will be a continued influx of buyers. Florida is and always will be a retirement destination and we still have 1000 new residents a week.
2. Time is not standing still just because the market has slowed. Baby boomers continue to age and will continue to bring their money and their families to the area.
3. Lee County has surpassed the 500,000 population mark and this is bringing new national companies to the area.
4. Interest rates on mortgages are still very attractive
5. The unemployment rates are low the economy is strong.
6. We have the weather, the lifestyle and the beaches
7. We have momentum.
8. Location RULES and is ALWAYS worth paying for.

Regarding the crowded roads, I am reminded of a Yogo-ism, "Nobody goes there anymore, there are too many people". Yes there are some folks leaving for less crowded areas, but the net growth is phenomenal and will continue to be.

Now let me relate all this to residential purchases. I have alluded to this in previous e-letters. Many second home buyers are attracted to the new and preconstruction homes and condos. Much in the same way entrepreneurs are attracted to brand new franchise opportunities rather than existing businesses. They are attracted to the promise, the sizzle, the smell of fresh paint, and the crispness and predictions of the marketer. Unfortunately more often than not they are paying more for the promise than they would have to pay for today's reality. In this market of high inventory of homes and increasing high cost of construction, you may be better off buying existing inventory, where you can see the construction, the amenities, and how well the neighborhood has done. You can see the construction that was done at a lower cost to the builder and developer.
I say now IS the time to use price per square foot as a thumbnail comparison. If you can buy a fully decorated home on a canal at $325 per square foot (Look at my home in the historic district. This home was redone only two years ago, with a new boat lift, master suite and kitchen and above all, with a location that has been the most desirable in Fort Myers for many years is a bargain). Or look at existing condos that have just closed like The Shores at Paramount or Grand Isle. Or older condos with superb locations like The Citadel. There is a mentality that preconstruction purchasing, since you can leverage the purchase with ten or twenty percent for 18 months is a better deal than buying new now. I say this MAY be true, but more often than not in today’s market this is not true. Increased cost of construction materials, the cost of money and labor, and the higher cost of land are making the new construction more costly than the existing inventory. Further more, the higher cost of the new construction will have an upward pull on the cost of existing homes. Heck, it already has. Just like in the commercial market.
The market climate can be very profitable for the savvy buyer. I say buy now. It's a buyers market and you need to take advantage of it. Get with a knowledgeable Realtor and plan your purchase based on age old qualifications. Remember, there are only three:
1. location
2. location
3. location.

Remember, you make money when you buy, not when you sell .

And have some lemonade.

And one more comment - if you think we are in a down market, which way do you think we can go from down? What are you waiting for? Lower prices? Don't count on 'em.

Gregg
Gregg@ma-realty.com
www.investinwaterfront.com
www.cyperlincenter.com

PS. A few words about Cyperlin Center. Number one - LOCATION. Number two -UNIQUENESS. I know there is a severe shortage of class A space in Fort Myers. I know there is a dearth of luxury homes in Fort Myers. Cyperlin Center is where these folks need to work. They live in luxury, why not work in it? Check it out.

G.

PPS - We ARE the knowledgeable Realtors you should call. 239-277-9309

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