Last week I attended a panel discussion for real estate brokers and investors.  The panel consisted of five broker/investors who had been in business in the late 1980’s during the last major downturn in the real estate market. 

Here are some bullet-points (and comments) from their discussion in no particular order: 

 

·        Foreclosures affect not only a given property value, but affect everything nearby, driving down values and rents.

·        In the eighties, no one wanted to borrow because of high interest rates.  Today, rates are low but banks are extremely restrictive with their lending.

·        Talk to lenders. You can get some really good deals now.

·        Everyone needs to survive.  It is going to be hard for everyone. 

·        Don’t include tax benefits in Property Analyses.  Government can take away tax breaks, as they did in the eighties.  They are a nice thing to have, but don’t count on them.  

·        In the Denver market area, residential real estate has probably bottomed out.  However, Commercial real estate lags, and is still on the downswing.

·        You don’t have to hit the bottom or top of the market exactly.  But you must recognize which direction the market is trending.

·        Real Estate is a local phenomenon.  Know your local market & trends.

·        Don’t let your ego get in the way when it is time to make a hard choice. 

·        Look for residential deals now. Form partnerships if necessary to acquire. 

·        Economic Fundamentals are not good now.  We will probably bounce along the bottom for 3 to 5 years.

·        Many of the economic programs are being implemented more for political rather than economic reasons. 

·        The coming Tax increases will negatively affect the commercial real estate market. 

·        Investors will need to get 2-3% spread on Capitalization Rate over Cost of Funds.  

o       Banks are borrowing at interest rate of about 0.25%, but are lending with a floor rate of about 5%. 

o       Need to stabilize at about:

§         6-7% Interest Rates

§         8-9% Capitalization Rates.

·        The “Appreciation Game” has dried up.  Can’t count on buying at inflated prices, with assumption that value will go up.  This trend will result in upward pressure on Capitalization Rates. 

·        Cash is King.

·        Low end Residential may be stabilized.  However higher end residential may still be dropping in value. 

·        The next round of defaults will be the “Alt-A” mortgages.  Low documentation Loans, etc. 

·        80/20 loans will be a big problem.  80% First mortgage used to be a good loan to make.  But not with a 20% Second mortgage behind it, and falling values. 

·        Lots of commercial loans will be coming due in the next two years.  Many lenders are trying to get those loans off of their books.  Refinancing those loans may be difficult, if not impossible. 

·        In general, the government wants inflation.  They can pay back today’s debt with tomorrow’s cheaper money. 

 

So what is the consensus on what to do?  Here are a few suggestions: 

·        Pay off (Free & Clear) as much of your real estate investments as you can. 

·        Highly leverage the rest.  That way you won’t have as much equity tied up if you have to give something up. 

·        De-finance and de-leverage excess inventory.  But don’t destroy your asset base. 

·        Don’t let your ego get in the way of making hard choices.

·        Pay down consumer debt and any other expensive debt.

·        Get to cash. 

 

 

 

For the Brokers:

 ·        Cash is king.  But do whatever it takes, in order to get the deal done.  You might have to take your commission in personal property (cars, boats, jewelry, etc.) or other property.  

·        Make sure you are going to get paid.  Get written agreement from the lender. Build your pay into the deal.

·        Protect yourself and your family first, then your clients.

·        Cut Expenses.  Really cut expenses.  Both living and business expenses.  Save half of every commission.

 

The folks on the panel have been through difficult times in the past.  Some lost everything.  But all are doing very well today.  

So other than some interesting discussion topics, what should we take away from this?  I think it can all be summed up in three points.

1. Cash is king.  Get to cash positions.  

2. De-finance, de-leverage, free & clear your properties wherever possible. 

3. Cut your expenses. The generations before us understood getting by and doing without. We can too.

Thanks for listening,

-Jim

Jim@DenverBoulderRealty.com