Tokyo’s Urban to Suburban Migration

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Image from Pixabay

By Priti Donnelly

For years, Japan has tried to prevent its population from being overly concentrated in Tokyo, a city sprawling with nightlife, work life, and a tourist hotspot. Economic and social shifts of the pandemic developed into the start of a natural progression of migration out of the capital. Although the greater Tokyo area grew in 2021 by 26,323 for a gain of 0.07%, that figure was down roughly 110,000 from a year ago. In 2020 net migration by locals into Tokyo shrank by 27,000, or roughly one-third from previous years as people embraced telework and crowd distancing.

Initially, at the start of the pandemic, to avoid commuting, Japan adopted the work-from-home concept already popular in many parts of the world. As employers learned to adapt to matters of productivity and controlling hours of work, employees discovered the concept value in work and family balance plus the benefits of saving time from hours of commuting. Then, ongoing lockdowns turned flexibility into a lifestyle leading to the realization of the potential to settle outside urban centres. And, so began the urban to suburban or even rural movement.

Image from Pixabay

One Tokyoite, Kanamori sought to leave his luxurious life and job of the Roppongi Hills complex in Tokyo’s Minato ward for solace in the city of Yamagata. A place familiar to him as the place of business of his parents’ long established sake store. Initially he moved to Tokyo to attend university, then joined an IT company in 2017 selling computer tablets with an application that helped retail operators keep track of sales. But, after three years, the business took a couple of hits. First, the consumption tax was raised to 10% in October 2019. Then profits were hit harder after Covid. This, in addition to the long working hours and overtime deeply rooted in Japan’s industrial ethics. It is not unusual for employees to work more than 80 hours of overtime a month, according to a 2016 government survey and those extra hours are often unpaid. Kanamori’s lifestyle became all about work and he didn’t like who he was turning into.

Recognizing that those long work hours translated less into productivity and more into exhaustion, he left his job for a change in lifestyle and moved to Yamagata. There he became a member of the city’s community development team that aims to make better use of vacant homes, working four days a week, no overtime. On his days off, yes, he has days off, he goes camping with his friends. Peaceful living.

Image from Pixabay

Kanamori is not alone. The mountain resort town of Karuizawa in Nagano prefecture added 595 people via migration, the largest increase of any town. For the first time since July 2013, the number of people moving out of Tokyo outnumbered the number of people moving in by 1,069. In June 2020, inbound migration topped outbound migration once again, but from July 2020 through February 2021, more people moved out of Tokyo than people moved in and the trend has continued, with the exception of the months of March and April when more people generally move into Tokyo because of starting new jobs or enrolling at university, at the beginning or end of the fiscal year.  

Should I stay or should I go? Although Tokyo is attractive for its job opportunities, thriving business hub, and growth-focused initiatives for start-ups, people are discouraged by the high cost of living. The nationwide average monthly rent, not including utilities, for a one-room apartment (20 to 40 sqm) is between 50,000 and 70,000 yen. Rent for similarly sized apartments in central Tokyo and popular neighbourhoods nearby usually start from around 100,000 yen.

Image from Pixabay

But, the high cost of living is just one deterrent from permanent settlement. Where people once enjoyed the ease of fast food to satisfy the palate and the belly, they are now finding solace in places surrounded by greenery with access to fresh seafood, fruits and vegetables. For the sole purpose of slowing down to take care of oneself, the concept of growing and preparing foods for its freshness, nutritional value including low sodium and carbohydrates by comparison to fast-food, has been revived.

The attraction to the suburbs or rural areas is real, but it is hard to tell if it is more of a sabbatical, or a trend as we strive to stay safe. Either way, Tokyo is not entirely out of the picture. Even Kanamori still thinks he might return to Tokyo in the future for business opportunities. The city is after all a thriving international hub and continuously evolving for entrepreneurs to launch and be successful. As the old adage goes, “You can take the person out of Tokyo but you can’t take Tokyo out of the person.” But, this time on healthier terms.

Sources: The Japan Times, Nikkei Asia, Japan Guide

Priti Donnelly

Priti Donnelly is the sales and marketing manager at Nippon Tradings International, a Japanese proxy helping foreigners access the second largest real estate economy in the world. As a Canadian with a background in mortgages and marketing, Priti keeps foreigners informed of the latest trends, business news and featured properties in the Japanese real estate market. Her articles have been featured in REtalk Asia, REthink Tokyo, REI Wealth, and Asian Property Review.

Have You Considered Adding Brownfield Development to Your Real Estate Portfolio?

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Image from Pixabay

By Patricia Gage, Principal,
RE Solutions

It’s understood that having a real estate component within your investment strategy is a tried-and-true way to diversify your risk and increase your investment returns. And while most people and companies find real estate opportunities with more common approaches, there is a less conventional way to turn a profit in real estate: brownfield development.

According to the Environmental Protection Agency, “a brownfield is a property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant.” It is estimated that there are more than 450,000 brownfields in the U.S. Some l brownfields are obvious, like a former oil refinery. Others may be a surprise, for example, an urban infill site that housed a dry cleaner in the 1950’s may now be the ice cream shop you’ve loved since you were a kid – who would ever think it could be contaminated?

Image from Pixabay

Assuming the developer of a brownfield property has acquired a Phase One environmental assessment (and a Phase Two environmental assessment if recommended by the Phase One) and is ready to move forward with the project, potential project investors should consider the following financial questions:

  1. What is the cost of the land? In general, there should be a discount for a brownfield parcel. When compared to an equivalent clean site, the price of a brownfield should be discounted by the cost to remediate the site plus some amount to compensate for the risk inherent in the cleanup and the additional profit that should come with cleaning up a contaminated site.
  2. Does the development budget include sufficient contingency for normal construction risk as well as the risk of remediation cost overruns or delays? While a 4-5% contingency is typical for a greenfield site, the development budget on a brownfield should include that standard contingency PLUS 20-25% of the expected remediation cost if the remediation contractor is working under a cost-plus contract, which is typical. The contingency should also be sufficient to cover any delays if remediation takes longer than expected.
  3. Has the developer obtained environmental insurance? A Pollution Legal Liability policy will protect against unknown contaminants and third-party liability claims.
  4. When you make your investment, will the balance of the capital (debt and equity) be in place? If not, recognize that a construction loan on a brownfield property will likely be underwritten more conservatively than a loan on a greenfield property. Some commercial banks won’t consider lending on a brownfield. When a loan is available, the loan-to-value and loan-to-cost ratios may be 5-10% lower than for a clean property.
  5. Is there a financing gap that wouldn’t occur on a similar greenfield property? Because debt and equity may be less available for a brownfield site, the developer will often have the option to cover remediation costs with a public finance mechanism such as tax increment or special district financing. Many municipalities have a Brownfields Revolving Loan Fund to provide developers with low-cost debt to cover remediation costs, which incents developers to clean up toxic sites. Some states also offer tax credits for brownfields cleanup.
  6. Is the project return reasonable given the risk associated with a brownfield site? Developers expect a premium return for taking on the risk of a contaminated property – investors should be rewarded with a portion of that premium.

Image from Pixabay

This is by no means an all-inclusive list of due diligence an investor should consider, or of the risks associated with brownfield redevelopment. We always recommend obtaining appropriate legal and tax advice before investing. That said, the best risk-mitigation strategy lies in underwriting the developer. Invest with those that have significant brownfields experience and a proven track record. Ask about their relationships with the regulatory agencies, lenders, design professionals, contractors, prior investors, insurance providers, and environmental consultants.

Real estate developers often raise money from individual investors in relatively small increments, allowing qualified investors the opportunity to participate directly in the success of a single development project. These investments are not without risk, and your due diligence should be thorough. Along with understanding the project’s market, projected returns, construction risk, and competition, an investor should be fully aware of the site’s prior uses and any contamination that may be present.

Everyone can win in a brownfield redevelopment – you as an investor, the developer, and the overall community. Financial benefits are compelling but contributing to the elimination of blight and toxic contamination in a neighborhood is the true reward.

Patricia Gage

Patricia Gage is a principal at RE Solutions, a company specializing in creating value for brownfield development projects. She can be reached at [email protected] or 303.482.2618.

The Capitalization Approach to Income Property Valuation

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Image from Pixabay

By Dan Harkey
Real Estate & Finance Consultant

Definition of capitalization of earnings:

The concept of the capitalization approach is a method of estimating the fair value of an asset such as income-producing real estate by calculating the net present value (NPV) of expected future net profits or net cash flow referred to as Net Operating Income. The capitalization of earnings is determined by taking the property’s projected annual net income and dividing it by the market capitalization rate (Cap Rate).

Understanding the income capitalization approach (Cap Rates) in the property valuation process is critical when investing in income-producing real estate or obtaining a loan. This concept is essential to commercial realtors, lenders, developers, and investors in income-producing real property. The concept is commonly referred to as the income approach.

Net income divided by the capitalization rate will reflect the expected value of the income-producing asset. Re-stated: Net operating Income divided by the capitalization rate= value (NOI/Cap Rate=Value).

Example: Property Income and Expense Statement Format
The calculation to arrive at the Net Operating Income

Stated one more time: Capitalization Rate represents the annual Net Operating Income (NOI) divided by the cap rate to derive the property asset value (NOI/Cap Rate= Value).

Why do we use Capitalization Rates?

The capitalization approach is a “comparative method” of valuing property with similar properties, similar income streams, in similar geographic locations, and similar risks that will yield a comparable rate-of-return. Once the value is established, the comparative method can calculate the loan-to-value to determine if property value falls within the lender’s loan underwriting guidelines.

Cap Rates are only one metric. Since the capitalization approach is calculated as if the property is debt-free the value will be the same whether the property has leveraged debt or is debt-free. It represents a market snapshot at the investment time and does not consider loan debt service or financing costs.

If an investor finances his acquisition, as most people do, further analysis such as cash-on-cash return will be helpful. Sophisticated loan underwriters and investors may also calculate an Internal Rate of Return. These calculations assist in establishing that the property is income-producing and a worthwhile investment.

Image from Pixabay

A licensed commercial appraiser may perform a rent survey to determine market rents for a property type in a geographic area. Market rents may or may not be the same as actual rents (contract rents). There are many instances where the existing rents are above or below-market rents. A tenant with a long-term lease may have locked in lower rents sometimes in the past.

I once underwrote a loan transaction on an industrial building near San Francisco that was about 100 years old. The property has a long-term lease of 18 cents per square foot, while the current market was $1.75 a square foot. Since current market rents were much higher, the valuation metric used was based upon the locked-in lower rental rate.

A property owner may own the property in one title method such as The Archie Bunker Corporation and occupy all or a portion of the building in different title method such as Archie Bunker Limited Liability Company. He may charge above or below-market rents to himself for tax purposes. Actual rents may also be higher than the market. In this case, the appraiser would use market rents rather than actual rents to determine the Cap Rate.

There are other instances where a conventional market Cap Rate analysis is inappropriate. The alternative method is a discounted cash flow analysis such as original ground-up construction. The building cost and the cash flow from a lease-up need to be projected over a reasonable time to the point of stabilized occupancy. This is done by a competent appraiser who can construct a model estimating a future projected cash flow and using net present value discount formulas to estimate the capitalization rate. The result may differ from the market comparison method.

Suppose you have income properties with similar characteristics in a geographically close location sold in arm’s length cash transactions, and the income stream data is available. In that case, there are web-based databases that track comparison capitalization rates (Cap Rates.)

Market rents are the amount of rent that can be expected for a property, compared to similar properties in the same geographic areas. Contract rent or actual current rent is what the same units are being rented for today. Many lenders will request a rental survey from an appraiser as an add-on task to the requested appraisal job.

There is an essential difference between market rents and current actual(contract) rents in the Cap Rate valuation process. Compare two different buildings, both identical, but the first property is well-kept and rented at a market rate, and a second building that has deferred maintenance. The property with deferred maintenance is rented for under-market rates by under 30%. In both cases, a lender and the appraiser will use market rents to determine the (NOI). The assumption about the second building is that a new owner will upgrade the building and adjust the rents upward to a market rate. The value of the second building would be adjusted downward or discounted to offset the cost to cure (cost to upgrade the building).

The only time that a lender, or appraiser, would use the lower rents is when those rates were locked into a long-term lease or a rent-controlled property. I underwrote the following example: A prospective loan for an industrial building in Richmond, California. The property was leased fee, leased out to a third party for 99 years, with 50 years remaining. The locked-in rent was only 18 cents per square foot triple net. The property owner and broker argued belligerently that current value should be based upon today’s rents.

An inconvenient fact in this example is that the property owner is locked into an 18 cent per square foot monthly income stream for the next 50 years. Capitalized rents will be based upon 18 cents per square foot lease rate. The capitalized value with an 18 cents per square foot will have a dramatically lower NOI compared to a similar building next door that rents at $1.75 per square foot lease rate monthly.

Image from Pixabay

A historic rents comparison databases are available to determine market rents to calculate a correct capitalized valuation. Historic market Cap rates may vary, even in the exact geographic location, depending upon the building improvements, effective age, class of construction, off-street parking, furnished or unfurnished, condition, compliance with zoning, easements or lack of needed easements, and amenities. Examples include Class-A vs. Class-C office, industrial, apartments, older dated, economically obsolete and under parked compared to a new modern building with adequate parking and currently popular amenities.

Advantages and disadvantages of the Capitalization approach to value:

Advantages:

  1. This method converts an income stream into an estimate of the value of the income-producing real estate.
  2. The method is a common standard in the appraisal, lending, and development business.
  3. While the income capitalization approach is common in evaluating commercial income-generating properties, it can theoretically be applied to any income stream, including businesses.
  4. Commercial appraisers are a reliable source for determining market cap rates.
  5. Commercial realtors provide an excellent source of cap rates with websites such as Costar and Crexi
  6. There are online databases such as the CBRE/US-Cap-Rate-Survey-Special-Report-2020 to obtain reliable data.

https://www.cbre.us/research-and-reports/US-Cap-Rate-Survey-Special-Report-2020

Disadvantages:

  1. The method is used for “comparison only with similar properties in a close geographic area.” The method does not consider liens on the property and debt service. A cap rate calculation is done as though the property is debt-free. Cap rates cannot be used to calculate overall net cash flow or cash-on-cash yield when a loan attached to the property (Income, less operating expenses, less debt service).
  2. The results of a cap rate calculation are specific only to a similar area with similar properties in certain segments of the market. You could no use Newport Beach, California cap rates to compare with a similar building with similar usage in Riverside, California. Also, the demand for properties and cap rates for different segments of the real estate market change. Current examples are residential income properties and Industrial are and will continue to be in demand. I read one estimate that industrial in the U.S. will require an extra billion square feet of warehouse by 2025. Office and lodging/resort related properties, not so will. Patterns change!
  3. The method contemplates stable economic market conditions. If a market experiences a significant downturn, collapses, or is subject to extreme political uncertainty, the calculations using market cap rates may be rendered irrelevant.
  4. Relying on a cap rate with an unstable market condition is difficult. Using market rents may become suspect because higher rates of foreclosures, tenants’ default much more frequently, vacancy rates go up, and replacement tenants will ask for higher rent concessions, thereby bringing the market rents down. Additionally, owner operating expenses may become constrained.
  5. Calculating forecasting future income streams involves a high degree of professional judgment, and therefore subject to variation.
  6. Professional judgment is subject to subjective vs. objective interpretations about expectations of future benefits.
  7. The method may result in miscalculations when estimating the cost of capital outlay for upgrades to bring the property up to current standards. All subsets of the job have a cost, time and frustration allocation, including municipal approvals, reconstructing the building, modern materials, safety, zoning, environmental, and social equity requirements.
  8. Property amenities, parking, easements, recorded encumbrances, and compliance with building and zoning regulations require a complex analysis.
  9. The lease-up period is only an estimate and may not be correct.
  10. Alleged appraiser and lender biases for racially segregated neighborhoods have been known to exist.

Tenancies: A landlord and tenant may enter into four types of rental or lease agreements. The type depends upon the agreed-upon terms and conditions of the tenancy. All rental amounts and terms of a lease will be reflected in the capitalization evaluation.

Types include:

Image from Pixabay

1) Fixed-term tenancy is a tenancy with a rental agreement that ends on a specific date. Fixed terms have a start date and an ending date. According to the written lease document, time terms may be short or long such as ten years with multiple extensions.

A landlord can’t raise rents or change lease terms because the terms are codified in a written agreement. A key advantage for a landlord is to receive today’s market rents.A key for a tenant is to lock in a long-term lease where the rents are or become below market over time.

A tenant’s company’s profits are enhanced if they pay substantial under market rents. On the other hand, if a tenant’s company is making a good profit with rents substantially below market and a lease is coming due soon, the increased or negotiated upward lease rate may wipe out some or all the profits.

2) Periodic tenancy is a tenancy that has a set ending date. The term automatically renews into successive periods until the tenant gives the landlord notification that he wants to end the tenancy. Month-to-month tenancies are the most common.

The strength of the tenancies from national credit with long-term leases and corporate guarantees down to mom & pops month-to-month tenancies will result in a substantially different Capitalization Rate. National credit tenants with corporate guarantees have a considerably lower cap rate. Mom & pop tenancies will reflect a higher cap rate because they inherently have more risk.

The lower the market Cap Rate, the lower the perceived risks of property ownership. The higher the market Cap Rate, the higher the perceived risks. An exception would be where the national credit tenant locks in a lease rate that does not increase as the market dictates or anticipates increases. Eventually, over time, this tenant will reflect below-market rents.

A mom-and-pop tenant could be converted to a market rent more quickly because the term is usually shorter.

Market rents are obtained by surveying local brokers and appraisal data- bases of local market rents.

3) Tenancy-at-sufferance (or holdover tenancy). This form of tenancy is created when a tenant wrongfully holds over past the end of the duration of period of the tenancy.

I bring up this type of tenancy because of because of COVID. The government allowed tenants to skip out and default on paying rents without consequence. The tenants either defaulted on the rent or overstayed the term.In either event, the tenant becomes delinquent, and the owner attempts to evict them. The tenant or affiliates may become illegal trespassers.

There are many examples of a landlord attempting to get rid of an illegal tenant only to be jerked around through the court system, with multiple appeals requested by the tenant. They are usually granted.Then comes multiple bankruptcies, not only of each tenant, one by one, but unknown people who supposedly moved in without notice to the landlord.Then comes the transients and fictious folks who show declare that they are a tenant and request that the process start all over because of their fraudulently claimed tenancy. The courts, particularly in states like California just turn their backs on this behavior.

The focus for the property owner becomes using legal avenues to evict the tenants and regain occupancy of the property. This process has great cost and frustration.

4) Tenancy-at-Will. This form of tenancy reflects an informal agreement between the tenant and landlord. The landlord gives permission, but the period of occupancy is unspecified. The term will continue until one of the parties give notice.

Rehabilitated property or New Construction:

Image from Pixabay

Establishing market rents becomes essential in underwriting a rehabbed or new building. When there is an extended time delay for a lease-up period, such as with the new construction of an income-producing property, future cash flows need to be estimated to the point of income stabilization. Then the future stabilized income will be discounted, using an estimate of a market capitalization rate and a discount rate formula.

Work with a competent commercial appraiser to assist and calculate the correct market Cap Rate. Do not try to do this yourself without the help of an appraiser who knows the type of real estate and local market.

Below is an example: The market Cap Rate for a commercial property with triple net leases (NNN) has been determined to be 6.5%. Triple Net or (NNN) refers to a leased or rented property where the tenant pays all expenses related to the operation such as taxes, insurance, maintenance, and occasional capital improvements. The 10,000 square foot multi-tenant property under consideration generates monthly rents of $1.50 per foot. On a (NNN) example for a Cap Rate analysis, one would apply a 10% vacancy collection and loss factor and 5% for non-chargeable expenses that tenants usually do not pay including reserves. The NOI would be $153,900.

The NOI and Market Cap Rate are known so you can calculate the value:

10,000 SF rentable X $1.50 = $15,000 Per mo. X 12 Mos. = $180,000 = potential gross income.
$180,000–$18,000 for 10% vacancy = $162,000–$8,100 for 5% non-chargeable expenses to the tenants = NOI = $153,900
$153,900 NOI /.065 Cap Rate = value = $2,367,692

From an investment standpoint, market Cap Rates can show a prevailing rate of return at a time before debt service. The cap rate procedure will assist a lender and investor to measure both returns on invested capital and profitability based on cash flow. An informed lender or investor should understand that there may be dramatic variations in a property’s value when unsupported or unrealistic Cap Rates are applied.

Cap Rates as well as demand for income-producing properties will move up or down depending on market conditions. The term Cap Rate compression reflects a movement of the rate down because investors perceive real estate as a lower-risk, higher reward asset class relative to other investment options. Cap Rate decompression may result from demand for real estate purchases where cap rates increase, reflecting lower valuations. This may be a byproduct of higher interest rates or government intervention such as rent control.

Loan-To-Value Ratio (LTV):

Cash-on-Cash Return:

Cash on cash return is a quick analysis to determine the yield of an initial investment. The cash-on-cash return is developed by dividing the total cash invested (the down payment plus initial cost) or the net equity into the annual pre-tax net cash flow.

Image from Pixabay

Assume the borrower purchased the property, which costs $1,200,000 and provides an NOI of $100,000, with a $400,000 down payment representing the equity investment in the project. The cash-on-cash return for this property would be:

$100,000/$400,000 = 25% = cash-on-cash yield.

If the borrower were to purchase the property for all cash, as contemplated in a Cap Rate calculation, then the cash-on-cash return would be:
$100,000/$1,200,000 = 8% (this example the 8% is both the cash-on-cash yield and Cap Rate).

It is clear from this formula that leveraging or financing real estate transactions will yield a higher cash-on-cash return, provided the transaction is financed at a favorable interest rate.

Internal Rate of Return (IRR):

Internal rate of return (IRR) refers to the yield that is earned or expected to be earned for an investment over the period of ownership. IRR for an investment is the yield rate that equates the present value of the outlay of capital and future dollar benefits to the amount of money invested. IRR applies to all dollar benefits, including the outlay of the initial down payment plus cost, the positive monthly and yearly net cash flow, and positive net proceeds from a sale at the termination of the investment. IRR is used to measure the return on any capital investment before or after income taxes. Ideally, the IRR should exceed the cost of capital.

Is there an ideal Cap Rate?

Each investor should determine their risk tolerance to reflect their portfolio’s ideal risk-reward level. A lower Cap Rate means a higher property value. A lower Cap Rate would imply that the underlying property is more valuable, but it may take longer to recapture the investment. If investing for the long-term, one might select properties with lower Cap Rates. If investing for cash flow, look for a property with a higher Cap Rate. Declining Cap Rates may mean that the market for your property type is heating up, and demand is intensifying. For Cap Rates to remain constant on any investment, the rate of asset appreciation and the increase of NOI it produces will occur in tandem and at the same rate.

Below are examples of changes in NOI and Cap Rates that cause asset values to rise or to go down:

As NOI increases and Cap Rates remain the same, asset values will increase.
($300,000 reflects net operating income and .06 reflects a 6% cap rate)
$300,000 /.06 = $5,000,000
$350,000 /.06 = $5,833,000
$400,000 /.06 = $6,666,666
$450,000 /.06 = $7,500,000

As NOI remains the same and cap rates rise asset value will go down:
($500,000 reflects net operating income and .03 reflects a 3% cap rate)
$500,000 /.03 = $16,666,666
$500,000 /.04 = $12,500,000
$500,000 /.05 = $10,000,000
$500,000 /.06 = $8,333,333

Correlation Between Cap Rates and US Treasuries:

The US Ten Year Treasury Note (UST) is deemed to be the risk-free investment against which returns on other types of investments can be measured. USTs yields have been on a broad decline for many years but may soon rise. As interest rates increase those investors who bought USTs at a lower rate will find that their bonds will go down in value. Bonds purchased at the new higher rates will be in high demand.

Image from Pixabay

As interest rates rise, cap rates will go up, and consequently, there will be a reduction in asset values over time. With so many uncertainties in the market and growth projections constantly being revised, the spread between UST and Cap Rates has not remained constant.

When the government intrudes in the market, the results are artificial. This has caused capitalization rates to go down, reflecting higher values. Near-zero interest rates have also caused a dramatic inflationary spike in all goods and services.

Summary:

Property appreciation from excess demand has been one of the most significant reasons for investing in real estate Appreciation is not part of the Cap Rate calculation. For investors, lower interest rates, tax benefits of owning commercial real estate may, in and of themselves, be the driving force to make such an investment. If the property is to be leveraged, there may be write-offs for loan fees, interest expenses, operating expenses, depreciation, and capital expenses.

As interest rates have been forced down to extremely low rates, below inflation, by government mandate! Refinancing at lower rates has resulted in lower debt service payments. Cash flows of income-producing properties have gone up, reflecting a higher net operating income.

The government intentionally creates market distortions that benefit the insiders at the top of the economic spectrum. The results are artificial. This has caused capitalization rates to go down, reflecting higher values. Near-zero interest rates have also caused a dramatic inflationary spike in all goods and services. All asset classes have now been “spiked with 200-proof illusions” that make everything seem fantastic on the surface. But hangovers the day after the party ends are no fun.

A one-to-two hundred basis points increase in lending rates (1% to 2%) would shatter the punch bowl into fragments. It is my opinion that an imediate 2% interest increase would collapse the economy overnight. Main Street and small capitalist entrepreneurs would bear the brunt of the widely spread financial damage.

Interest rates are increasing because the government realizes that inflation will only accelerate if they do not stop or slow it. Increased interest rates will result in newly originated loans having higher payment structures. Higher loan payments indirectly and over time cause cap rates to rise and values to go down.

Values may not go down immediately, but the demand to purchase income- producing properties will subside because ownership makes less economic sense. To add flames to this fire government, including federal and state, is passing legislation that will destroy investor motivation to own.

Over time the four-pronged whammy will become apparent. 1) Rising interest rates, 2) increase in interest rates reflecting larger loan payments, 3) general loss of investor confidence in the overall economy, 3) loss of investor interest in purchasing an income property, 4) overburdening & abusive government intervention into property ownership will come home to haunt the entire real estate market across the United States. 5) All of the above will cause cap rates to go up, and property values go down.

Image from Pixabay

Remember that increased debt service based upon higher interest rates is not considered in the capitalization approach. But, over time, as interest rates go up, borrowers will feel the sting of higher debt service payments. Some property transactions may become less appealing financially. As purchasers and borrowers elect not to purchase, that may compound and create more unsold inventory. Some sellers may get desperate and reduce the price to sell quickly. The lowered price would result in a higher cap rate. Higher interest rates will lower all real estate prices on a macro level.

How dramatic will lower real estate prices be over time? Between 2007 and 2010 we witnessed the downward value contagion spread resulting in substantially lower values and increased Capitalization Rates.

The four-pronged whammy is not a new phenomenon. It has just been forgotten while enjoying the Federal Reserve’s “free-for-all 200-proof infused financial punchbowl.”

Dan Harkey

Dan is President and CEO at California Commercial Advisers, Inc. He consults on subjects of Business Growth & Private Money. Dan often creates articles interrelated to these subjects. He has been active in the real estate and financial services industry since 1972 & possesses a lifetime teaching credential for secondary and adult education. He has taught over 350 educational seminars on subjects related to real estate lending, private money lending & loan underwriting for commercial/industrial properties.

Contact Dan Today
Mobile: 949.533.8315
Email: [email protected]

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Why Should Physicians Invest in Real Estate?

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By Blue Ocean Capital LLC

Since the news emerged regarding doctors investing in real estate, more physicians are looking into this option. Not just because they want to get passive income but also because they want to further decrease their overall tax exposure. They want to slow down and avoid burnout. You would agree that we all enjoy practicing medicine but we want to have some degree of control over our lives and future. We can add that by including passive income for physicians. Would you agree?

Why should physicians invest in real estate? With a number of benefits, it’s a great line of work to delve into if you’re looking for a way to earn some passive income for doctors and physicians or add security to your retirement portfolio with the least amount of volatility.

The number of physicians investing in real estate is on the rise. According to recent data from the Urban Institute, a research organization based in Washington, D.C., nearly 41% of doctors have reported that they have invested in some form of real estate. The attractiveness of real estate, when compared to other investments, becomes more apparent as one takes a closer look at how a real estate investment can play an important role in the financial portfolio by increasing its overall returns.

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Real estate investing can give you a huge financial advantage as a physician, but many of you don’t even know where to start or how this investment tool could help your retirement. Today we’re going to tackle what you should know about real estate investing so that you can start taking steps towards realizing your financial potential today.

Tangible Rewards One reason physicians may want to consider investing in real estate is that they can see the rewards they reap. If you own your own practice, you probably work long hours and deal with the stress of running a business. The nice thing about passive investing in real estate is that you don’t have to deal with the day-to-day operations. Instead, you can hire someone to handle things and concentrate on growing your business and making more money. The main perk of being a physician is having the status, financial stability, and respect that come along with the job title. Investing in real estate allows you to achieve those same benefits without putting in 80-hour weeks. Your money is working as hard as you are while it grows in the background.

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Here are a few reasons that every Physician should strongly consider:

Investing in real estate is a great way to earn some passive income for Physicians and add security to your retirement portfolio. But why should physicians invest in real estate?

  1. Real estate has consistently outperformed all other investments, including the stock market.
  2. Many doctors lack the time needed to actively manage their own real estate investments.
  3. Diversification is key in any investment portfolio, and real estate can provide an excellent hedge against the volatility of the stock market.
  4. With the right guidance, doctors can get started in real estate with very little money down, allowing them to diversify their portfolios quickly while minimizing risk. Yes, you can start investing passively by investing 50k if you do it each year and compound it over 10 years at a 15% return you will end up above 1.3 million in your bank. Does it sound like an interesting way to grow your wealth while you are working at your primary job?
  5. Selling your primary residence is considered tax-free under current law, providing much-needed capital for future purchases.

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Conclusion:

If you’re looking for a way to help grow your retirement portfolio without worrying about price fluctuations, investing in real estate may be right for you. In addition, if you plan on spending money on retirement travel or other expenses, investing in property can help ease the financial burden associated with those expenses. Please join our exclusive investor group for Professionals like you. www.bluoceancap.com

Is Austin The Wrong Place to Invest In 2021?

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By Adiel Gorel

I get many calls from people interested in buying in various cities and want my opinion.
One of the popular markets right now is the Austin metro area (people get excited about the overall thriving of the local high-tech scene, Elon Musk publicly decamping to Austin, and others moving there from California). It is tempting to think of Austin as a good destination to buy in 2021. However, in my opinion, it is not! Austin, in fact, is a good city to be a SELLER in 2021. Austin prices have climbed rapidly in the past six years, while rents went up much more slowly. As a result, the rents are too low to cover all expenses. One expense in Austin (and in the state of Texas overall) is the very high property taxes. The property taxes in the Austin metro can get to almost 3% of the home value per year (depending on county and town). That is over 2.5 TIMES the property tax rate in Oklahoma (or California). Together, the high prices, relatively low rents (relative to the prices, that is), and the high property taxes, as well as high insurance costs, create an untenable cash flow.
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Here is a partial headline of a Business Insider article “Elon Musk and other tech powerhouses are flocking to Texas, pushing an already bonkers real-estate market to new heights”. Just logically, do you want to be a buyer in a market that is “already bonkers” and now is being pushed up even more? They have a name for such a market in the real estate world: “A strong Seller’s’ Market”.
Do you want to be the BUYER in that strong Sellers’ market? You will be the one paying “bonkers” price to the savvy sellers, fending off multiple offers higher than list price.
It is very tempting for a California resident to say, “What? I can buy a new home in Austin for “only” $320,000? That is so cheap! Yes, it is. “Cheap” relative to San Francisco prices. However, it is not cheap to buy as a sound rental home, and has bad cash flow. Austin is a place where many of our savvy investors are now SELLING, as the selling market is strong. It is not uncommon to see an investor selling one Austin home and buying 3 brand new homes in a 1031 tax-deferred exchange in Oklahoma City, or Tulsa, or Baton Rouge, or Central Florida. This move creates much more quality real estate owned, more 30-year fixed loans at todays’ super low rates, and brand-new properties with brand new roofs, ACs and all other parts of the homes.
Similar logic applies to the Dallas Ft Worth metro area (DFW), Houston, Phoenix, Las Vegas, Nashville, Denver, Salt Lake City, Boise, and others. I even get some investor talking about Seattle and Portland, which make no sense at all. Some misguided reporters (who in many cases have no actual experience in real estate investing themselves) confuse high prices and growth with an attractive place to invest in. The two are not necessarily linked. An example of another very popular destination for Silicon Valley people leaving to other states, is Miami. Miami is popular, large (much larger than Austin, for example), has an international airport, great weather, beautiful beaches, and proximity to great vacation spots. Miami also has a thriving tech sector. Sounds perfect, right? We should invest in Miami, right? No! Miami prices are way too high to make sense at this time. While the property tax is “only” about 160% of that in Oklahoma or California, the price/rent ratio makes it an unattractive place to invest. Miami has been a magnet for the wealthier set of tech and finance people as of late. The prices reflect it. There is an interesting article in Business Insider written by a tech person who had moved from San Diego to Austin and regrets it. It’s titled: “I moved my family from California to Austin, Texas, and regretted it. Here are 10 key points every person should consider before relocating.” The author mentions the harsh Texas heat, coupled with humidity, which, in the summer keeps you indoors and runs your AC 24/7, while also bringing scorpions and the like, and being hard on the houses. Of course, he mentions the super-high property taxes and high insurance costs. He talks about the very high cost of power and water, much higher than he had in California. Overall, he was surprised by the cost of living being much higher than he had anticipated. He mentions the travel difficulty, as Austin doesn’t have a large airport, requiring an extra “hop”. He laments the relative lack of public parks and spaces, to which he was used in California. While this is only the account of one high tech family who moved to Austin, and may not reflect everyone’s experience, some of the points are absolute.
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We have investors who actually LIVE in Austin. They are absolutely not interested in investing in Austin. They live there. They know how little sense it makes to buy in Austin in 2021. They seek investments in saner markets where the prices, rents, and property taxes, are in much better balance. We also have investor who live in Miami, Phoenix, AND Las Vegas, as well as Portland and Seattle, among many other places. All these investors wouldn’t dream of buying rental homes in the market they live in at this time. They know the insane sellers’ market that exists there, and the way-too-high prices.
This phenomenon is not new. Investors declare they want to “Buy Low, Sell High”. However, in reality, many investors end up “Buying High and Selling Low”. Right now, Austin is the darling market touted for its growth and Elon Musk. The people who are buying super-high in a “bonkers” market, pumped by the media hype, will be the first ones to sell frantically when a recession hits, or even lose those homes to foreclosure. We have seen these scenarios throughout history, time and time again. You see the same phenomena in the stock market. People secretly love to “Buy High”.
The reason is usually “But this market will appreciate a lot!” Really? You mean you know the future? No one else does. Just because a market behaves a certain way, and even booms, it is not necessarily a guarantee of everlasting constant appreciation. We have seen it in many areas of the country.
One other factor that is important to discuss is, again, the heart and soul of single-family home investing in the United States. The reason single family rental homes change futures so effectively and powerfully: The 30-year fixed-rate loan. I talk a lot about the wonder of this loan. A very quick recap for new readers: The monthly PI payment never changes, while everything else in the US economy constantly changes with the cost of living. Same is true for the mortgage balance, which goes down due to amortization, but also never keeps up with the cost of living. This creates incredible futures for people, as inflation constantly erodes the real value of the loan balance and monthly PI payment. No need to wait for 30 years. Typically, after 12, 14, 16 years, the loan balances are very small relative to the home price. The monthly payment is very small relative to the rent. It is not uncommon for a person to find, after 14 years, that the loan balance (even though the loan still has 16 years to go), is merely 20%-25% or so of the home price. Many sell a couple of homes at this point, and use the after-tax proceeds to pay off several other small loans, and leaving several free and clear homes, enabling them to retire. People also see how this can send kids to college (even costly colleges), and achieve many other long-term financial life goals.
The reason I hark back to this point in this article, is to remind you that the most important point is to buy a good new single family rental home, put a down payment, and then get the constant power of inflation and the payments by the tenant, to pay off and erode the loan balance, building equity for your future wealth. With today’s astoundingly low rates, strong results may be seen even sooner, perhaps 10, 11 years.
The single-family home is the VEHICLE to let inflation work its magic on the 30-year fixed-rate loan. The location of where you buy the home (as long as it’s large metro areas in the Sun Belt states, where the numbers make sense), is of secondary importance. It would behoove the smart investor to buy in a market where the prices are not “bonkers” and where the rents measure up to the price well, preferably in an environment where property tax and insurance costs are low. This enables the owner to enjoy cash flow (especially with today’s low rates), which building their wealth for the future with the help of inflation.
ICG (International Capital Group) Real Estate Investments was established in the 1980’s. Adiel Gorel, founder and CEO, has been helping people achieve financial security for over three decades, and in that time worked with investors to purchase over 10,000 homes. Gorel is a real estate broker in several states in the U.S., an international keynote speaker, and notable author of three books: Remote Controlled Retirement Riches – The Busy Person’s Guild to Real Estate Investing, Invest Then Rest – How to Buy Single­Family Rental Properties and Remote Control Retirement Riches – How to Change Your Future with Rental Homes. He has been featured on major television and radio networks across the country and in Fortune Magazine. He has also been featured on Public Television with his show, “Remote Control Retirement Riches with Adiel Gorel.” To invite Adiel Gorel to speak for your group, email [email protected] and visit AdielSpeaks.com. For more information on ICG Real Estate Investments visit icgre.com.

Enhanced Diligence for Syndication Investing

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By Bruce Kellogg

What About Enhanced Diligence?

In the beginning, commercial real estate brokers invented the term “due diligence”. Lacking a specific definition, it basically means, “Check it out”, when making a real estate purchase. Nowadays, the term has received wider use in home purchasing, turnkeys, syndications, and more, but its application still has no formula. This article aims to correct that for syndication investing with what can be called Enhanced Diligence.

Initial Philosophy

When an investor purchases a syndication share in a distant location from a promoter, the investor is investing in the promoter as much or more than in the property. The property could be bad, or good, or so-so. The promoter could be competent and honest, or incompetent and honest, or competent and dishonest, or incompetent and dishonest. BUT the investor’s funds are tied up for 3, 5, or 7 years, and the success or failure of the project might not be known until the end of the holding period. This is why Enhanced Diligence is so important.

A Recent Example

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There was a “meetup” attended by about 70 people with an attorney speaking on the subject of “Asset Protection”. At the close, the organizers called out, “Who here is an accredited investor? Come up to the table to learn about our multi-family syndication in the south side of Chicago.” Now, Chicago has the highest murder rate in the country by far, and the south side is where it happens. Can you just imagine the robberies, the violence, the drug dealing, the arrests, the vacancies, the turnover costs, the lawsuits, and the insurance claims? And some “real estate entrepreneurs” from the Bay Area of California are going to successfully nurture this syndication for 5 years? Uh, huh. No doubt they just graduated from some “guru’s” “boot-camp”.

The Basics

Syndication” is a generic term for a group investment. It can take the form of a joint venture (JV), Limited-Liability Corporation (LLC), Limited Partnership (LP), Tenancy-in-Common (TIC), or possibly another legal structure. The LLC is most popular lately due to the ability to pass through to the investors such things as depreciation, interest expense, operating expenses, and other deductions. A “sponsor”, or “promoter” puts the syndication together and runs it during its term.

Diligence and the Promoter

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An article appeared in the November/December, 2013 issue of Personal Real Estate Investor Magazine, entitled, “12 Ways to Earn Money as a Real Estate Syndicator”, written by Kim Lisa Taylor, Esq., a securities attorney. It very thoroughly laid out the many ways an enterprising person can get rich investing other peoples’ money. Today, there are “gurus” traversing the countryside teaching syndication. When evaluating a promoter, several things need to be investigated, as follows:
  1. What is the promoter’s background, education, and experience with similar projects?
  2. Who are the promoter’s team—accountant, property manager, attorney, etc., and what are their qualifications?
  3. How much is the promoter investing? Is it CASH, or is it “equity”, which could be anything. Beware of non-cash promoter contributions!
  4. What other projects and assets does the promoter have? Is the promoter spread too thin?
  5. Does the promoter put together serial syndications, leaving the older ones to neglect?
  6. What provision is there for removing the promoter if they are not working out? Is there any?
Under Enhanced Diligence a “background search” should be performed on every decision-maker involved in the syndication. Certainly, this is the promoter, but it also includes anyone else in authority. This involves ordering a report from Lexus-Nexus, Trans-Union, or another data base firm. The report will usually include any liens, judgments, and bankruptcies, along with addresses, professional licenses (including any revocations), relatives, phone numbers, and email addresses. Costs of reports are only a few dollars for those with subscriptions to these companies. Otherwise, call 3-5 private investigators for quotations. Their costs are under $15.00, and they have the necessary systems. The Social Security number of the promoter is not needed, and neither is their permission needed because this is a public records search. They will not know the search is being done.
C’mon, is this really necessary? It depends. If you are comfortable wiring $50,000 – 250,000 to a promoter out-of-state who you don’t know very well, then go for it. The author has discovered syndicators in bankruptcy, with federal tax liens, and civil judgments. Would you trust them with your money? You can’t know your promoter too well!

Diligence and the Property

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When it comes to the property, bear in mind that the promoter will be presenting it in its best light. Here are the primary items that need to be investigated:
  1. Age: Nothing older than age 30-35 should be considered. Syndications intended to add value to deficient older properties usually turn out poorly due to excessive rehab costs.
  2. Building Class: A=Luxury, B=Professional, C=Working Class (“Blue Collar”), D=Low Income (“War Zone”). Luxury apartments don’t cash flow as well, and low income units are, frankly, treacherous. Stick with class B or C.
  3. Pictures: Hire a service such as wegolook.com to take pictures of the property and its surroundings, or go to Google View, or Bing Street View. Properties need to be fairly clean-looking. No industrial properties or strip centers close by. Schools, a hospital, and houses of worship are a plus. You probably know “nice” when you see it. Tenants do, too!
  4. Crime Rate: Go to ciity.data.com and check out the neighborhood crime rate. While you are there, check out the school ratings and the household income. Renters are attracted to low crime areas with good schools, and you need that to keep your building full.
  5. Unemployment Rate: Go to the Bureau of Labor Statistics website, BLS.gov and check this out. It shouldn’t be more than 20% above the national average at the most.
  6. Unit Mix: The Offering Circular from the promoter will normally say how many units are studios, 1-bedroom, 2-bedroom, and so on. Avoid projects that are largely studios and ones because turnover is higher, and so are related costs.
  7. Project Plan: Also in the Offering Circular there is usually the promoter’s plan for the project to add value by remodeling, adding amenities, raising rents, and so on. Consider this carefully because all of the projected returns from the promoter depend on the plan succeeding.
  8. Rents: Go to zilpy.com and accurent.com to check out the rents given presently and projected by the promoter. If not satisfied, feel free to call the property manager to discuss them. Don’t be shy. Your investment is at stake.
  9. Market Conditions: Oftentimes these are discussed in the Offering Circular. There is no formula for evaluating this, but see if they make sense to you.

Diligence and the Deal

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Lastly, you need to evaluate the deal itself, which is described in the Offering Circular. Here is what you need to consider.
  1. Holding Period and Exit Strategy: See if this makes sense to you and fits your time frame.
  2. Dispute Resolution: How are any disputes between the investors and the promoter going to be resolved? Can the promoter be removed and replaced if necessary?
  3. Voting Rights: What voting rights do the investors actually have? Are you comfortable with that?
  4. Reporting: Reports should be monthly or quarterly.
  5. Promoter’s Fees: The Offering Circular will disclose these. There will be plenty because syndicators often set up a certain return for the investors, then pile on the fees wherever they can. See the article by Kim Lisa Taylor on the 12 ways syndicators can make money, under “Diligence and the Promoter”, above.
  6. Cash Distributions: When are cash distributions made to investors, and what are they for?
  7. Leverage: How much cash down-payment will be made, and what loan(s) are there? 30-40% down-payment is common. Be suspicious of overleveraging with anything less.
  8. Overpaying?: The commercial real estate market, especially multi-family, is “hot” right now with syndicators competing for properties and bidding them up. Your promoter could be overpaying, which would severely reduce your investment return. Usually some Comparable Sales are presented in the Offering Circular along with some discussion. Study these carefully. Does your project make sense?
  9. Project Financial Measurements: Projects are measured primarily on Internal Rate of Return (IRR), which is used to compare investments of all kinds, and on Cash-on-Cash Return, which basically expresses the productivity of the investor’s cash in the project. Promoters provide estimates of these and others in the Offering Circular. Familiarize yourself with these if you intend to invest in syndications, or hire an accountant, financial planner, or real estate consultant who is versed in them.
  10. Investor Returns: Usually there is a Preferred Return, which is paid to investors monthly or quarterly from ongoing operations. It runs 6-10%, with 8% being typical. Anything outside this range should be questioned. Beyond the Preferred Return, there can be additional distributions in which the promoter will probably participate.
  11. The other primary return is the Split, which applies to profits and distributions above the Preferred Return, plus proceeds from any refinancing. These rates can be 80/20, 75/25, even 50/50. They are described in the Offering Circular, and you need to decide if they are acceptable to you.

The Syndicator’s “Flip”

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Enhanced Diligence requires that you research the property’s history. To do this, contact the Customer Service department at a major title company at the location of the property. Ask for “a Property Profile” that has transactions going back 10 years. Usually, this will be provided at no cost. Look it over to see if the promoter already owns the property that they are trying to syndicate. If so, they are trying to do “a Syndicator’s Flip” as their exit strategy from ownership of the property. Usually, they will build in a nice profit for themselves upfront such that the investors pay retail or above. Then, since the promoter has their profit, they usually go on to neglect the syndication. Is this common? Not so much. But it happens, and you need to guard against it. Is it legal? Good question! Don’t bother to find out!

Conclusion

Many syndication investors take the easy path by reading the promoter’s Offering Circular, maybe seeking an advisor’s opinion, then wiring funds or writing a check. This is nowhere near enough! They need to go beyond even “due diligence” to Enhanced Diligence. This article equips investors to do that.
Good Luck! NOTE: The author is available for Enhanced Diligence of Syndications, Turnkeys, Joint Ventures, and other investment acquisitions of most kinds. Compensation is based on an hourly rate.
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Bruce Kellogg

Bruce Kellogg has been a Realtor® and investor for 40 years. He has transacted about 800 properties in 12 California counties. These include 1-4 units, 5+ apartments, offices, mixed-use buildings, land, lots, mobile homes, cabins, and churches.

He writes and edits copy for Realty411 and REI Wealth Monthly magazines.

Mr. Kellogg is a recipient of an Albert Nelson Marquis Lifetime Achievement Award, listed in Who’s Who in America – 2019.

Mr. Kellogg is available for consulting about syndication, “turnkey” investments, joint-ventures, and other property purchases nationally, and other consulting assignments. Reach him at [email protected], or (408) 489-0131.

California’s Gold Rush for Valuable Land

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By Rick Tobin

California’s nickname is the “Golden State” for many reasons as it relates to the gold discovered at Sutter’s Mill by James Marshall near the city of Coloma in 1848, skyrocketing real estate prices, a Top 5 global economy ranking, and consistent warm sunshine. Of all of the assets ever discovered in California’s history since it joined the union as the 31st state in 1850, land that is buildable has been proven to be the most valuable asset of them all.

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By the end of December in 2020 during a global pandemic designation, the median price of a California home was published by the California Association of Realtors (CAR) as being a shocking $717,930 value. In January 2021, CAR reported that statewide median home prices rose +21.7% year-over-year. Statewide home prices surpassed $700,000 in August 2020 for the first time ever. For example, a 21.7% price gain for a $700,000 home would be equivalent to a staggeringly high $151,900 equity gain in just 12 months. For more expensive coastal homes that are valued near $2 to $5 million, a 21.7% year-over-year price gain would be be as follows: ● $2,000,000 home value = +$434,000 annual price gain ● $3,000,000 home value = +$651,000 annual price gain ● $4,000,000 home value = +$868,000 annual price gain ● $5,000,000 home value = +$1,085,000 annual price gain

The Priciest California Counties by Region

Let’s take a look below at recent county price trends for California to better understand how high median home prices have risen so high. For January 2021, the California Association of Realtors (CAR) reported the following most expensive median prices for these Southern California regions:

Southern California Counties

#1 Orange: $971,000 #2 Ventura: $776,000 #3 San Diego: $730,000 #4 Los Angeles: $697,660 #5 Riverside: $495,500 #6 San Bernardino: $390,000

Central Coast Counties

#1 Santa Cruz: $1,100,000 #2 Santa Barbara: $920,000 #3 Monterey: $860,000 #4 San Luis Obispo: $698,000

Bay Area Counties

#1 San Francisco: $1,745,000 #2 San Mateo: $1,605,000 #3 Santa Clara: $1,375,000 #4 Marin: $1,350,000 #5 Alameda: $1,060,000 #6 Napa: $835,000 #7 Contra Costa: $765,000 #8 Sonoma: $715,000 #9 Solano: $510,000 https://www.car.org/en/marketdata/data/countysalesactivity

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California’s Top 5 Global Economy

By 2018, California had surpassed the United Kingdom as the 5th largest economy in the world if it were listed as a separate nation. The fact that London, and the rest of the United Kingdom, is one of the most powerful, wealthiest, and historic regions in world history and is behind the Golden State in terms of economic size is quite impressive. Listed below are the Top 10 largest world economies: 1. United States $19.391 trillion 2. China $12.015 trillion 3. Japan $4.872 trillion 4. Germany $3.685 trillion 5. California $2.747 trillion 6. United Kingdom $2.625 trillion 7. India $2.611 trillion 8. France $2.584 trillion 9. Brazil $2.055 trillion 10. Italy $1.938 trillion Source: International Monetary Fund (2018 data) In 2019, it was reported that California was closer to $3.2 trillion in annual economic output. Because California has such a diverse employment market that ranges from entertainment in Hollywood to multi-billion and trillion dollar digital media and marketing companies in Silicon Valley like Apple, Alphabet (parent of Google), and Facebook, the future continues to look bright for the Golden State’s economy.

California’s Population Base and Finite Land Supply

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There are approximately 40 million residents in the Golden State. As of January 2020, the US Census Bureau reported that the US had a population base of 330 million. This translates to California residents representing 12.12% of all US residents.
The famous film and stage actor, writer, and witty humorist from Pacific Palisades, California named Will Rogers once said: “Buy land. They ain’t making any more of the stuff.”
Another historic quote by Harold Samuel, the founder of Land Securities which was one of the United Kingdom’s most successful property companies, about the key to success in regard to how to make money in real estate is as follows: “Location, location, location.” California is filled with an abundant supply of land that is adjacent to the majestic Pacific Ocean and includes scenic rivers, mountain ranges, and forests up and down the state which borders Mexico, Nevada, Arizona, and Oregon. Our state is 1,040 miles in length and 560 miles in width. There are an estimated 156,000 square miles of land and an additional 7,734 square miles that are covered by water for a grand total size of 164,000 square miles. If you flew on an airplane between two airports in the state that didn’t fly over the Pacific Ocean, you’d probably see primarily empty land regions. Did you know that our 40 million residents live on approximately just 5.4% of the state’s entire available land supply?

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Almost 95% of California has no people living on it due to very strict zoning and usage laws and incredibly high building costs like environmental-impact study and “sustainable living” or green home building fees. Lumber prices have reached all-time record highs in early 2021 after topping $1,000 per 1,000 board feet for the first time ever. The combination of costly environmental-impact fees and rising lumber supply costs are two of the main reasons why there haven’t been many affordable homes or apartments developed in the state. If we divide 156,000 square miles of available California land supply by the estimated 5.4% of land that’s allowed to have residents living there, this means that only 8,424 square miles of California has residential or commercial real estate and residents on it. If so, this is equal to 4,748 California residents per square mile of the buildable land supply. Let’s put this 8,424 square miles of buildable land in the Golden State into better perspective by comparing it to other US regions: ● All of the Hawaiian Islands combined: 6,422 square miles ● The Big Island of Hawaii by itself: 4,028 square miles ● The state of Connecticut: 5,543 square miles ● Puerto Rico: 3,515 square miles

Money Supply + Land = Golden Returns

Most California residents created the bulk of their family’s overall net worth from the acquisition of residential property, both owner-occupied and investment. Few places in world history have experienced real estate booms like California as seen in recent years especially. Most California homebuyers or investors need third-party money sources to get into and out of a property. This is because generally there are more buyers who need mortgages to purchase a property than there are all-cash buyers. Conversely, the same homebuyer is likely to later become a home seller who needs a qualified new homebuyer who has access to his or her money sources to close the sales transaction. As California home prices skyrocket, the loan limits for conforming, FHA, VA, non-QM, and other types of creative money sources from places like hedge funds, insurance companies, and banks rise as well. For example, the high-cost conforming loan limits for the more pricey California counties were increased to $822,375 (97% loan-to-value). Or, a home, condominium, or townhome may be purchased with as little as 3% down payments up to almost an $850,000 purchase price.

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More flexible FHA loan products which allow lower credit scores and cash reserve allowances may require 3.5% down payments up to the similar $822,375 loan amount. Quite surprisingly, VA loans for qualifying active military or veterans have the option to purchase a single unit property (home, condominium, townhome) up to as high as $1.5 million with no money down and with 100% loan-to-value financing. After June 2020, both Fannie Mae and Freddie Mac began really tightening up their underwriting requirements for self-employed borrowers partly due to serious concerns about rising unemployment rates and collapsing small to midsize businesses. Fannie and Freddie are the two largest secondary market investors in America that purchase a high percentage of 30-year fixed mortgage loans and other loan products. The Jumbo mortgage market also started to freeze up after an increasing number of lenders stopped lending on larger mortgage amounts for owner-occupied, second home, and rental properties for one-to-four units. As a result, it forced more self-employed and high net worth borrowers to seek out non-conventional mortgage alternatives with funding sources from mortgage companies like mine who are partnered with more flexible hedge funds at prices that are very competitive with other loan products with or without income verification up to several million dollar loan amounts. There’s a finite supply of both prime buildable California land and access to affordable and flexible money to purchase and sell these same property assets. As the number of buyers for California properties continues to far exceed the diminished available listing supply, you should better understand why homes have increased 10%, 20%, 30%, and 40%+ annually in various statewide regions. If you have access to land and money, then you’re well on your way to prospering here in the Golden State just like how the early Gold Rush settlers panned for gold.
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Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

A Third of Realtors® Assisted Their Clients With Buying or Selling a Property That Had “Green” Features in the Past Year

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Photo from Pixabay

Key Highlights

  • Sixty-five percent of Realtors® said promoting energy efficiency in listings was valuable.
  • More than a third of respondents – 36% – reported that their multiple listing service had green data fields.
  • Over half of Realtors® said their clients were interested in sustainability.

Thirty-two percent of Realtors® said they had been directly involved with buying or selling a property that had green or eco-friendly features in the past 12 months, according to a new report from the National Association of Realtors®.

NAR’s 2021 Realtors® and Sustainability Report surveyed Realtors® about sustainability issues facing the real estate industry. The association released the report in recognition of this year’s upcoming Earth Day celebration.

Sixty-five percent of respondents said promoting energy efficiency in listings was valuable, with 36% reporting that their multiple listing service had green data fields. Among Realtors® who did have MLS green data fields, 36% used them to promote green features, 25% highlighted energy information and 13% listed green certifications. More than half of those surveyed – 55% – said their clients were interested in sustainability.

“A growing number of consumers are seeking homes with features that are good for the environment and, by extension, good for their wallets by reducing utility expenses in the long run,” said Jessica Lautz, NAR vice president of demographics and behavioral insights. “The pandemic has led to an increased focus on wellness and sustainability is an important variable in that overall equation for some people.”

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A strong majority of Realtors® – 82% – said properties with solar panels were available in their market and 40% said solar panels increased the perceived property value.

Twenty-two percent of respondents said that a high-performance home – defined as a systematic building science approach to home improvements that enhance indoor comfort, health, operational efficiency and durability – increased the dollar value offered compared to other similar homes.

The home features that Realtors® believed were most important to clients included the windows, doors, and siding (39%); proximity to frequently visited places (38%); a comfortable living space (37%); a home’s utility bills and operating costs (23%); and commuting costs (15%).

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A quarter of respondents – 25% – had clients who frequently or sometimes requested to see properties close to public transportation. Fourteen percent of those surveyed said that a neighborhood’s walkability was very important to their clients while 8% said the same about access to bike lanes and paths.

Methodology

In March 2021, NAR invited a random sample of 65,471 active Realtors® to fill out an online survey. A total of 5,048 useable responses were received for an overall response rate of 7.7 percent. At the 95 percent confidence level, the margin of error is plus-or-minus 1.38 percent.

The National Association of Realtors® is America’s largest trade association, representing more than 1.4 million members involved in all aspects of the residential and commercial real estate industries.

Rx for Growth and Security

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Photograph from Pexels

Article By Bruce Kellogg

The Next Level?

How many times have you heard a “guru”, or “trainer”, offer to help you take your real estate business “to the next level”? Most of the time they are referring to investing skills, but there is a whole other area which they do not address, and that can be labeled “support”. Three areas in particular are important:
  1. Affordable Healthcare
  2. Personal and Business Legal Solutions
  3. Identity Theft and Privacy Protection
Innovative, proven solutions in all these areas are offered individually, or in combination, by Remmel Solutions.

Affordable Healthcare

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Remmel Solutions offers healthcare strategies for individuals, employees, and their families that are superior to traditional insurance programs. Monthly healthcare costs are typically reduced 30-50% for individuals/families, business owners, and any size enterprise. Team members win by living happier and healthier with low out-of-pocket costs, even for large or catastrophic health events. The business can usually pay for their team members’ healthcare while still saving money. This makes them an employer of choice, attracting and retaining top talent versus their labor competitors. For “solo”-preneurs and investor businesses, the significant savings can improve cash flow and liquidity.

Personal and Business Legal Solutions

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Instead of paying lawyers expensive hourly fees, Remmel Solutions offers a plan for personal legal work based on a small monthly payment, starting at just $25.00 per month. Lately, the author’s experience is that most attorneys charge $300.00-400.00 per hour, with some specialists charging $600.00 and up. Remmel Solutions’ legal services membership provides access to experienced attorneys who can help with any legal issue. Services include consultation, letters and phone calls on your behalf, review of contracts and other documents, 24/7 emergency access, trial defense services, court representation, and other benefits. Most investor businesses can use the membership’s business features which include legal consultation, contract and document review, debt collection letters, legal forms, trial defense, and tax attorney assistance for IRS audits.

Identity Theft and Privacy Protection

Identity theft is becoming increasingly sophisticated as swindlers deploy an ever-evolving array of techniques and tools to hijack personal information. Remmel Solutions has the most comprehensive identity protection and privacy management solution available. Monthly rates start at $12.00 for family coverage. This is accomplished in three ways:
  1. They alert you whenever there is a problem with virtually any aspect of your identity, including social media.
  2. They provide access to expert advice when you need it, proactively and reactively.
  3. They assign you a licensed private investigator to restore your identity when you become a victim. This means that your identity is restored to what it was before it was stolen, no matter how long that takes.

Learn About Remmel Solutions

cyber-security-2765707_1280Image from Pixabay

During a 25-year human resources career, Steve worked at global corporations including Hewlett-Packard Company, Agilent Technologies, Beckman-Coulter, and Foxcomm Electronics. In 2013 he transitioned to being an independent Empowerment and Protection Consultant. Today, Steve enjoys helping businesses, individuals, employees, and their families by connecting them with Legal Services, Identity and Privacy Protection, Debt Elimination, and Affordable Quality Healthcare. Steve’s mission is to help others be better citizens, parents, business owners, and teammates. He is proud to have helped many people all over North America live better and experience peace-of-mind in a world that often seems increasingly complex and dangerous.

Following Up

Steve can be reached at [email protected], or by phone at (408) 509-5315. Read his blog and watch videos at www.RemmelSolutions.com.
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More About Bruce Kellogg

Bruce Kellogg has been a Realtor® and investor for 40 years. He has transacted about 800 properties in 12 California counties. These include 1-4 units, 5+ apartments, offices, mixed-use buildings, land, lots, mobile homes, cabins, and churches. He writes and edits copy for Realty411 and REI Wealth magazines. Mr. Kellogg is a recipient of an Albert Nelson Marquis Lifetime Achievement Award, listed in Who’s Who in America – 2019. Mr. Kellogg is available for consulting about syndication, “turnkey” investments, joint-ventures, and other property purchases nationally, and other consulting assignments. Reach him at (408) 489-0131.

Solar is Disrupting Real Estate – Learn How Investors/Brokers Can Benefit Now

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Investors, it’s time to take our Powur back. How will we take our Powur back? Powur delivers home-energy solutions that save residents, investors, builders money and lower their carbon footprint.

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Homeowners have had a variety of reasons why they’ve switched from traditional to solar energy. Many have done it for the long-term financial savings it provides. In this enlightening episode, we interview Powur Ambassador, Robyn Mancel. She will discuss creative ways real estate investors are utilizing solar for more than just financial benefits.

Here are some examples:

Solar is a great way for sellers to make their home more attractive for buyers. Powur offers 12 months of zero payments, so sellers won’t feel the pinch while adding value to their largest investment. Landlords can add solar to their multifamily properties and then lease back the energy to their tenants, while increasing profit and cash flow. It’s time to learn about the benefits of solar with Robyn Mancell. Solar provides a great opportunity for Realtors® to provide homeowners with a solution to rising electricity costs and to add value to their homes.
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Robyn has been self-employed over 30 years and is very much a serial entrepreneur. After a divorce that left her to raise three sons, Robyn went back to school for Environmental Studies.
Since then, she became active in spreading the word about solar and renewable energy. Powur has a program specifically designed to educate agents, Realtor.com®, and brokers to add another stream of income to their existing portfolio of business. It’s a win/win for everyone.

Listen to our latest Realty411 Radio podcast below to discover how the solar industry is impacting real estate on a national scale.

Learn more about Powur: CLICK HERE