Apr 19

There are a lot of articles predicting that many companies will continue the work from home experiment long after Corona is under control. Here’s three of the more interesting ones:

I was predicting in 2017-2019 BC (Before Corona) that commercial space, other than warehousing, manufacturing or social engagement, was a risky investment. Corona simply accelerated the move to remote business.  My daughter has worked from home for AT&T for probably close to ten years,

If this was s 70s pandemic remote work would not have occurred, nor the shut down. We did not have a capacity for it. And we would be talking about it on a Party line Yea, it was a real thing when I was a kid. 

I was having a conversation with a friend about this. He asked “Are there any other sectors that will (May) win you’re thinking about?”

My reply (edited to make it more readable)

There is only one in R.E.  Residential.  You can’t sleep in a virtual bed, in a virtual house.  You can’t work from home, without a home.  While many business properties can be replaced with virtual assets, a house cannot.

The factory of the future will have only two employees, a man and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment.

Warren Bennis ( ~ 1989)

Boil it down to the essential.  To live you need air, water, food, shelter, clothing, companionship and … the internet. 😉  

Provide any of those and you will both survive and be very well regulated by the government.  And of course entertainment.  Without entertainment and engagement, why live?   Entertainment is music, travel, hiking, bars, boats, reading, TV… and a huge amount of other things,  People often would rather spend on entertaining themselves than the “necessities” making that more of a necessity than the necessities. 

Air is freely available.  If it isn’t, nothing else matters. Water is a municipal service, a well, or a river.  Food can be delivered from unmanned warehouses via internet orders.  Today I get my food from InstaCart and have not been inside a store since 3/18  Clothing can be purchased online. Companionship can be provided in Zoom meetings, online chats, video church, FaceTime, etc. 

This pretty much shelter and entertainment. Entertainment has changed as people are hesitant to go to the movies, restaurants, and not so much bars and casinos.  We watched the new release of Trolls this past weekend on TV for $20.  Going to a movie theater would have cost twice as much, used twice as much time, and exposed us to an infinite amount of unknown germs. Remember back when you were young, unattached and looking for a mate?  That will exist for as long as humans do.   It will be the driving force behind social gatherings, bars etc., well into the years A.D. (After Disease)

Shelter though is not replaceable. It may change form, and ownership models, but it remains a basic need.

People want their own space.  Even at home, I’m sure you want your own space, be that a desk, a lazy boy recliner or the left side of the couch. This is regardless of how much you like/love your spouse, offspring and or roommates.  We are by nature both communal and territorial. 

So if I vote for one, it is shelter, followed closely by entertainment and social venues But entertainment and similar venues are risky as they will be the first to be closed when the virus strikes.

So those of us in residential are lucky. But we need to survive the next six to 24 months.*

*Modeling study suggests 18 months of COVID-19 social distancing, much disruption.

Opportunities will abound for those that see opportunities. Failure will abound for those who see only failure. 

Nov 28

In 2006 a well dressed thirty-something guy showed up at my office to talk real estate investing. I always enjoy hearing others’ opinions.

We start talking about debt. He would leverage the entire purchase or even more if the bank would give it to him. “In the long term, the market only goes up.” he boldly proclaimed. My opinion is that while debt is necessary, particularly at the beginning of your career, too much debt is deadly.

He pulls out his laptop and opens Excel and shows me how terrible my cash on cash yield was. His return was infinite, as he was 100% or more financed. I jokingly said, “Soon you’ll be richer than Bill Gates” to which he replied seriously, not that rich, but very wealthy. He also tried to sell me a copy of his Excel spreadsheet so I too could be leveraged rich.

By late 2008 the sharp-dressed kid was busted out. Yet, despite my “terrible” yield, I’m still here. Sometimes fancy Excel spreadsheets can get you into trouble.

Nov 27

Decades ago one of the people I considered a mentor told me: Pay $100 a month extra principal on the property with lowest mortgage balance.

When that property pays off, pay the mortgage amount plus the $100 towards the property with the next lowest balance and so on.

I argued that the money should be put towards the loan with the highest interest.

He said ‘Cash flow is king. Without cash flow, the rate of interest doesn’t matter, you’ll go broke.’

Ten years later I thanked him. He said ‘I wished I would have followed my own advice.’

Jan 20
Note, this began as a discussion between myself and another well known Milwaukee investor.
 
I have been an investor in Milwaukee real estate since the seventies. I have seen the market roller coaster many times. My belief for the coming months is:
 
In the next 12-18 months, we will get to near 2008 levels of correction both the mid-upper end of the market and the lower end, with the middle being less affected. Trump could make it worse, or Trump could make it better. It is not in Trump’s nature to not be involved an issue of this potential magnitude.
 
Mid-upper, 350k-1.5M range depending on the location, valued home sales will suffer as interest rates rise and the limits on tax and interest deductibility make them less affordable for those who are currently, marginally able to have such a home. In some markets, such as south FL and NYC, we’ve already seen discounting in the upper segment. It will get worse. Not many people, including politicians, feel sorry for the overextended Yuppie with the leased BMW in the drive of his McMansion that is filled with furniture bought on credit while working at a job he got with his degree that came with a significant college loan debt.
 
Low value (sub 100k) homes will take the hit as wages have remained static and interest are rising. We have been returning to “soft” underwriting. This is a segment where homeowners are more likely to quit when it gets hard. Those owners will fail. Unfortunately, no one in power truly cares when a poor family loses their home. The Dems say they care, but many secretly rejoice as each failure allows them to increase their political base by verbalizing outrage and empty promises of help. The Reps loyalty is more to the bankers than the homeowners. Rand Paul cannot change the world by himself.
 
Learning from the 2008 debacle, the government will prevent the full-on implosion of the middle. Too much economic and political damage if the voting class loses their homes again. But I still expect a 10-20% discount when owners must sell.
 
Throughout my career, when owner-occupied housing has suffered, rents and/or occupancy rise. Beginning in 2008 and continuing to this day, we’ve seen the most robust rental market of my career. In 2005-2007 we had our worst vacancy rates as every good tenant was suddenly, and temporarily, a homeowner.
 
When the economy is terrible opportunities abound.
 
In Carter’s 1980, prime rate was 21% at one point. Nobody was buying, well nobody but me and a few of others. I bought a hundred fifty units in the ten years between 79 and 89 when owner-occupied mortgage rates were consistently over 10% and rental mortgages near impossible to obtain.
 
In 79-89 we bought properties that worked at the 10-12% interest we were paying. I structured my buys so that I survived and made enough to support my family. When rates fell, values increased. Interest rate chart.
 
The longer the downturn goes on, the higher number of tired landlords, or their estates, will be seriously motivated to sell. They will create ways to make to make sales happen. Much of my purchases in 79-89 were owner financed because banks were not even enthusiastic about lending to owner-occupants at the time.
 
The combination of Amazon and remote working arrangements killed most commercial property value. My daughter does something important for AT&T corporate. She has worked from her living room for the past five years, and AT&T sold her former office.
 
The Chinese are selling off their US holdings.  WSJ: Chinese Dumped $1 Billion of U.S. Real Estate in Third Quarter, Extending Recent Retreat (Dec. 4, 2018)
 
Millennials don’t buy homes. They live in mom’s basement, or they rent. 
 
My three-year view:
 
I have good feelings about residential rentals across most segments. This will only hold true if:
• You have fixed rate financing; or
• You structured your purchases so that they still cash flow at 12% interest.
 
I think flipping will be a flipping foolish thing to do for the foreseeable future. Even if you are buying well today, you are buying higher on the price curve than you will be selling at three to six months from now.
 
Keep your powder dry for the next six to twelve months, i.e., hoard cash. Opportunities will abound.
 
Warren Buffet: “Be fearful when others are greedy, and be greedy when others are fearful.”
 
Jimmy Buffet: “If life gives you limes, make margaritas.”
 
Further reading: (A lot of WSJ pay-walled articles, but they do some of the best research.)
 
 
 
 
 
 
Aug 29

For years I struggled with setting rents. Too much under market rents and the properties did not perform as well as they could. Too much over market rents, they sat vacant and do not perform as well as they could. There seems to be a theme developing here. 😉

To succeed you need to know what others are charging for rent in your very specific market. To that end, we spent a lot of my time, my staffs’ time and effort trying to collect comparable rents.

Ten, fifteen years ago our team manually enter details from for rent ads in the local papers, Craigslist, Zillow and anywhere else we found them. Then we would combine that information with city property records, trying to get an accurate view of what the market rent was for a particular unit. This was expensive and annoying.

We tried freelance data collectors through oDesk (now UpWork) to collect and correlate the records. Better, but still costly and the results still were not exactly what I wanted.

Then I saw promise in AI and Machine Learning, using tools like BlockSpring. Better results, but then Craigs and others started blocking automated collection tools.

We went back to manual data collection where we had to and automated what we could.

We were doing the rent surveys once or twice a year due to the hassle and costs. Quarterly would be better to catch trends.

I had looked at Rent-O-Meter in its early days. It seemed promising but had far less data than even our rudimentary data set.

Last October I relooked at Rent-O-Meter. Wow. We have been using it ever since.  They have both a free version and a free trial of the “Pro” version that goes for about $200 per year.  Setting one rent wrong will cost you more than that. You may want to take a look.

Note: while this may sound like an ad for Rent-O-Meter, it is not.  I’m just a happy, paying customer of theirs.

Feb 23

The first question you must ask is ‘What is the market for similar units today?’

Market rates can change quite a bit in both directions.

If an area is suddenly overbuilt or there is the loss of a major employer, rents can go down. In those cases even keeping the current rent may cause you to lose a great tenant.

If the rents have gone up a lot, then you may be leaving too much money on the table.

You can look at a bunch of local ads and Craigslist to get an idea. This can be a lot of work. I cheat and use rentometer.com (they have a free level, but we do enough to make the pro version worth while) Then go and look at their comps to see where you should be as all three bedrooms in Anytown, USA are not created equal.

For a great tenant we do not raise to market, but will often raise a bit. There is a cost to turning a unit in prepping, advertising and lost rent.

If you are not planning on selling the place, getting the last 5% of rent  may be a fools errand. On the other hand if you are selling a place, 5% of additional rent can be thousdands of dollars of added value.

Dec 28

It is clearly advantageous for most people who have businesses or itemize their personal deductions to pay as many deductible items as possible in the next couple of days.  (Of course, check with a tax pro and not rely on some landlord you found on the internet before acting)

This could include property taxes, general bills due in the next 60 days, and state estimated income taxes. Perhaps if you have subscription based software etc., you could get a discount by switching to annual instead of monthly payments and move that payment into 2017. Same if you are on an installment plan with insurance let’s say.

We paid as much as we could and I’m feeling a bit broke today.  Knowing so many others had to do the same, it got me to thinking.

My prediction is retail and things like autos and refrigerators are not going to sell well for at least the first quarter of 2018 as so much was spent by small business owners in the final two weeks of 2017.

If you are into the stocks and options, perhaps there is an opportunity to make some money, knowing that the economy will be depressed for a couple of months as people recover from the forced spend to move tax deductions into 2017. (But again, don’t take my advice as I am Just A Landlord)

Dec 02

When I was just a wee lad of six or seven I was given a book for Christmas, The Way Things Work.

I do not think any gift had made as much of an impact on my life as this. Learning so many fundamentals of mechanics, physics, electricity, plumbing etc as a grade school kid was a foundation that helped me understand so much of what I needed as a small landlord that initially had to make all my own repairs.

These fundamentals also helped me succeed in my prior career in manufacturing.

How different my life would have been if instead I had gotten the Tonka dump truck I thought I wanted for Christmas.

Today, when deciding what gifts to give my grandchildren, I try to find gifts that may impact their lives as much as this book impacted mine.

In fact writing this post brought back such memories, that I just bought a used copy for myself.

Jul 19

Perhaps excluding the likes of Amazon, Google, and Tesla, most well run, and effective businesses can achieve 10, 15, 20% or more sustainable improvement every couple of years by applying “Fresh Eyes” to their procedures and processes.

Your business is doing well, at least you think so. But you know it would do better if only you could just … [put your challenges and opportunities here] You say ‘I’ll jump on doing that next week, or after the vacation, or after Labor Day or by the end of the year.’ Sorry, buddy. Ain’t happenin’. You said the same last year and the year before and…

Let’s be honest you can’t see the opportunities and obstacles, and if you do, you cannot act on them. The excuses your staff and you have created to avoid doing what must be done have been internalized and are no longer even noticed. Processes that were in place and working have fallen by the wayside. You step over great opportunities sitting on your front step every morning, without even noticing them anymore or worse, curse them for being in your way.

We are blind to missed opportunities and obstacles because we are too close. In the past twenty-five years, I went from 175 to 200 pounds. I did not see even one of those pounds sneak up on me, but they are here today. Your business is the same, slowly getting fat, but not noticed.

‘Well, I’ll just have my staff take a look and make changes.’ Sorry, they have worse baggage than you.

What we’ve done at my company for many years now is to hire a temporary set of “Fresh Eyes.” This person must be a potential superstar, who is available to work for a couple of, or a few months. They are never hired to fill a current role.

Rather the “Fresh Eyes” position is to question everything we do. You know how it is easier to tell someone how they should run their business or their life than to do the same yourself. That is what we are looking for in a “Fresh Eyes” person.

Typically we hire people outside of the rental industry, so they have a different perspective than us. We’ve had a former Health Department inspector, a former Alderman, a couple of former community leaders, a former manager of a temp service. I lean towards people different than us, but who have proven themselves as leaders and producers.

The goal is to hit a sustainable 15% improvement with a two to four-month commitment to work with the “Fresh Eyes” employee.

To get value full value from this experience, you must remember that “Ego is the Enemy”* and do not allow yourself to feel insulted or defensive of your soon to be former bad ways.
——
*Ego is the Enemy is the title of a book on Stoicism by Ryan Holiday – It is worth the read. Find it on Amazon.

“MY OPPONENT IS MY TEACHER. MY EGO IS MY ENEMY.”
— RENZO GRACIE

Aug 23

We spent much of week two of our three weeks out west in the warehouse district of Los Angeles. I was shocked at how large LA’s homeless population is. I was also a bit shocked as how bad the area smelled – stale urine, extreme heat and no rain to wash it away is not very pleasant.

It is really a sad scene given the overall wealth of our country and of SoCal in particular.

An interesting real estate related concept in LA was the number of what appears to be privately owned SRO (Single Room Occupancy or rooming houses) Nice, modern buildings.

So even in this most economically, and probably socially, challenging housing environments, rental owners are able to find workable solutions by providing housing uniquely suited for a specific population.

The third thing I learned while out west for much of July is the most interesting. It has kept me busy for the past three weeks. … More to come 😉

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