Staying one step ahead of the realtors

[Nords]

Spouse and I like looking at homes for sale. We get a feel for the market & neighborhoods, we get good ideas for our house, and someday we might buy a rental condo. I like crunching the numbers. It's a cheap hobby-- except, of course, for the weekend six years ago when we found our dream house. But she swears she's done moving now, and this time she really means it.

You would think that reading realtor's newsletters is another way to keep an eye on the market. Lately, however, I've felt that I'm getting more of an insight into investor psychology & marketing than into real estate.

Here's how it works in Hawaii. First, owning rental property here (compared to the Mainland) sucks. There is no 10% cash-on-cash return. There's hardly even 6%, and sale prices are rising right along with the rents so return on equity is flat or declining. While an investor could find foreclosures or distressed sales, there are too many well-capitalized professionals chasing too few opportunities. (One sign of the competition is a very creative realtor who's turning old hotels & apartment high-rises into student dorms.) The local average retail investor is at a disadvantage-- it's not impossible but it sure takes time, effort, & contacts. Oh, and money too-- Oahu's median condos sell for over $300K.

Local realtors aren't discouraged by the increased competition for dwindling opportunities-- far from it. The Hawaii realtor population is exploding to record numbers! They've been telling Hawaii landlords that their financials suck and that they could be getting 10% cash-on-cash or great ROE if they'd just transfer their "dead equity" to hotspots like Tulsa or Cleveland. An entire network of realtors & 1031 companies has grown up across the country to separate landlords from their equity find opportunities for property owners. "Sell at the top of the market before it's too late, you fool! We'll drive you around the Mainland and show you where to buy now!!" The local realtor is happy to handle the sale of the Hawaii property, hand off the 1031 arrangements to the network, and give the former homeowner a hot new property... all expedited for a suitably low fee, of course.

But wait, there's more than just being a Mainland landlord in Paradise! A realtor recently told me "I do know another good company if you have just a few hundred thousand lying around you want to earn 6-7% and they tell me it's guaranteed..."

Spectrus (formerly "FOR 1031") is happy to 1031 your dead equity into a NNN TIC property that you lease back to the manager. Now your money is pooled with other investors (low barriers to entry!), you have no landlord responsibilities (just let the manager handle it all), you earn a steady lease payment (instead of those ol' unreliable rents), and you retain your share of the property's appreciation ('cause you sold Hawaii at the top and bought Minot at the bottom!).

6-7% per year for a 20-year lease under an "escalating rental payment plan"... "guaranteed" by the stability of a company that's been doing this nationally for over 25 years. Who could resist? Who needs those CDs or annuities?

This whole concept sounds like a great way for commercial property managers to tap into other people's money at rates far lower than commercial real estate loans. I'm more interested in the shares of a company accessing such cheap capital than I am in their leases.

We don't plan to change our current real estate holdings or our portfolio asset allocation, but the process of composing this post helps me think through the business model. I'm also curious-- is anyone leasing their TIC NNN property to a manager like this, with Spectrum or any other firm? Any other "nice to know" details on the investment?

[tryan]

Nords,

Thanx for sharing ... I haven't had the gonads to throw my "dead equity" into some out-a-sate/off-shore NNN or limited partnership. Frankly I enjoy the rents the dead are bringing in.

There is no 10% cash-on-cash return. There's hardly even 6%

At the risk of repeating myself ... I won't touch a property unless I can see a way to 20% cash on cash. Simply too many unknowns to chase anything less. Quess that's why I've only bought 1 (bank owned) property in the last 10 years!

[poyet]

Nords,

What is a TIC ?

[honobob]

TIC = Tenancy in common

[Arif]

Because of the popularity in TICs the rate of return has gone down significantly in the last couple of years. When I was researching the feasibility of selling some units and going with a TIC the rates were about 8-9% on property leased by fortune 500 companies. That was also when a savings account would yield a 2-3% return. At the time the spread seemed worth it. Now the rates/rents have dropped and then you start to ask the question "Why bother selling your RE, doing a 1031, entering a TIC with strangers, for a 1-2% rate of return over an ING account?" Not very attractive at all. Sometimes it pays to do nothing.