How to Fix Housing, Employment and The Economy (Part 4)
It probably comes as no surprise to you that I feel Investors will play a critical role in turning this situation around. However, before we review the investors role let’s review the environment we have established with the first three parts of this series.
First thing we discussed is stopping artificial programs that extend, delay or paper over the problem. We won’t be giving any free money or creating accounting gimmicks that reward slow foreclosure processing. Instead the government will be partnering with Investors and no longer treating the Investor as the enemy but instead as part of the solution. The government will remove the ridiculous limit of 10 houses that actually punishes experienced investors while rewarding the new investors who are more likely to make mistakes.
We also discussed creating tax incentives for a short period possibly 5 years to reward investors or builders to flip (read improve distressed assets). The final area we discussed was rewarding buyers who put 20% down or more with a reduction in interest rate.
If we do all these things buyers will have stronger balance sheets, we will increase competition, increase prices and we will insure experienced investors are not left with few options.
Once these programs are in place we discussed how banks need to be the oil that keeps the system going. The first thing we did was talk about needing to take the pain quickly and foreclose on people who can’t or won’t pay their mortgage. We have to stop the craziness about people bragging about not paying a mortgage for 1+ year. Then we talked about banks financing some of their own REO’s to get better prices. As a cash buyer myself I know I would pay 50% more in many cases to get better leverage.
We also talked about small banks creating investor specific loan programs that fit their market. For example if their area has 50K rental units they could create a 10 Year loan program. We need banks to create programs that are profitable to process even if the loan balances are small.
Next we discussed builders and their need to tweak their business model for a few years. Many should become remodelers in the short tern instead of builders. This would reduce new inventory, create more competition and allow the builders to take advantage of the tax savings created by the government in the first part.
It should also be noted that with builders bidding on distressed assets we will create a positive feedback loop as more competition sparks higher prices and pretty soon we have housing being sold at or near replacement cost. Don’t forget all of this remodeling will also mean more jobs and a stronger economy.
Now we are going to talk about investors and I am going to break them into two distinct parts. First we will look at Active Investors who Buy, Fix and Hold or Buy, Fix and Sell. Then we will discuss Passive Investors who are looking for significant returns on secure investments. Each group deserves their own discussion as both groups can benefit by being a part of the process.
I will start with Active investors as this is the segment of the business I am a part of and close with Passive investors as I work with them on occasion and I talk to them frequently.
Active Investors
If we are working under the premise of the first three parts being put into practice the first thing active investors have to do is bring equity to table. Just to be clear I mean cash. If we are offered tax incentives, lending programs and all the other goodies then we need to bring some cash to the table to offer security and continue to deleverage the system. By having skin in the game of 20%+ we can insure investors will not just give up at the first sign of failure.
Active investors will need to understand that competition should be increasing given the first three parts but because we have leverage in the system returns could actually go up. Another thing the active investor should realize is that the window for aggressive acquisition will be short should the first three parts of this series be implemented.
The next area active real estate investors should realize is that they will need to run a tight business to insure long term success in what should be a rapidly changing environment. At the beginning of the cycle it should be easy to find, secure and turn or rent a property. But as the cycle turns and the press and the mass market pick up the new momentum we will see a lot of new or dumb money chase deals. Only the active investors with tight criteria will succeed in the long term. Don’t be fooled by momentum it will come in waves as we recycle the system.
Another standard I want to hold all active investors to should the first three sections be adopted is we can’t “Cheat the System”. Let’s have the capitalist system work and we create value as we help turn housing, employment and the economy around. If someone tries to game the system and somehow cheat, steal, lie or perform other dishonest things to turn a profit they should go to jail or lose 3X what they gained. The system should offer lots of deals if you’re willing to work for it. Don’t be lazy and look for the cheap and only dishonest routes. Do be confused even if it is on slightly dishonest or a gray area it should be passed on and we should look for a different deal.
Now for the Passive Investors who will have an equally vital role to play as we turn the system around. Just to be clear I refer to a Passive Investor as someone who invests capital in a deal for defined return over a defined period. They will have lots of options and they will need to do just as much work to validate an investor, their strategy, and the investment.
A Passive Investor might be someone who has Money but no Time. I talk to lots of people who have nest eggs that are earning almost zero in the bank and actually losing money when they calculate Inflation. That is crazy and very sad!!! But most people don’t know they have options outside of Banks, CD’s and Money Market accounts.
Others know they have options and they want a better return but they just don’t have the time between work, family and everyday living to master the skills necessary to become active investors. Let’s face it, it takes work, a system and a fair amount of experience to get dependable returns in any investment area, and a lot of people don’t have the time or desire to tackle yet another area as they already have a very full life!!!
Another frequent Passive Investor is someone who has money but afraid of making mistakes as they have read or heard about all the negative stories. Fear is holding a lot of people back and that is ok as people shouldn’t feel stressed with their investments. If their investments keep them awake at night they need a new investment. Not to state the obvious but some folks are not wired to invest directly in real estate as we have lots of ups and downs and active real estate investing would be too stressful.
The final Passive Investor I run into frequently are the investors that have money but can’t find a decent return or deal in their home market. Let’s face it not all real estate markets are created equal and if you happen to live in a high priced or low return market it is tough to make something work. In this case investors can pick up stakes and move or they can look into long distance land lording or they can be passive investors that deliver better returns than their home market.
As we round out the discussion on investors and how both Active and Passive investors can complement the other 3 parties involved in turning around housing, unemployment and the economy I feel compelled to offer just a few suggestions to those contemplating becoming a passive investor.
First you need to do your homework and check out at least the following three things at a minimum. Don’t fall for promises of riches, possible returns, and bloated appraisals. Also I recommend not lending on distressed assets unless you are compensated for the extra risk. In short make sure you do the following.
It should be obvious but first you need to review the Investor and insure you understand how both of you are going to make money. You should never invest in skinny deals where the investor is only making upside on appreciation. Remember negative cash flow kills most investors and if your loan helps the investor produce negative cash flow you need to avoid the deal because at some point both of you will lose.
The Investor needs to be able to show you in black and white how they have such a wide margin of safety that your loan will not impact the security of the property. Remember if they lose the property you lose the cash flow which is what you are likely investing for.
I have heard it said many times that an effective investment strategy needs to be simple, clear and repeatable. If the investor can not clearly show you how the strategy works, how you both make money and they hide behind fancy vocabulary then run away. The investment might be great but if I can’t understand it I won’t invest in it. Equally important is the idea of repeatability. Is this the investor’s first deal or do they have documented success that you can review to insure they are not one hit wonders hoping to score a homerun with your money. You should invest in a proven investor and their strategy.
The final area is likely obvious as you should obviously review the deal being offered. Does the deal meet your long term goals? Do you want a certain return for only 6 months but the deal is for 10 years. Does the deal offer the margin of safety you’re looking for? Do you understand the worst case scenario?
I believe in the statement that an Active Investor should offer his Private Investors a deal so good that the Private investors hope they don’t get paid. This type of arrangement insures that all parties get paid and everyone stays in the game and gets what they are promised in the original agreement.
In the end with Active and Passive investors complementing The Government, The Banks and The Builders we can turn housing, unemployment and the economy around.
We are a great country and we will be back. If we adopt this framework we will be back in as little as three years, if not it could take 10 years. As an investor I hope for 10 Years but as an American I hope for three years!!!
Good Investing
First thing we discussed is stopping artificial programs that extend, delay or paper over the problem. We won’t be giving any free money or creating accounting gimmicks that reward slow foreclosure processing. Instead the government will be partnering with Investors and no longer treating the Investor as the enemy but instead as part of the solution. The government will remove the ridiculous limit of 10 houses that actually punishes experienced investors while rewarding the new investors who are more likely to make mistakes.
We also discussed creating tax incentives for a short period possibly 5 years to reward investors or builders to flip (read improve distressed assets). The final area we discussed was rewarding buyers who put 20% down or more with a reduction in interest rate.
If we do all these things buyers will have stronger balance sheets, we will increase competition, increase prices and we will insure experienced investors are not left with few options.
Once these programs are in place we discussed how banks need to be the oil that keeps the system going. The first thing we did was talk about needing to take the pain quickly and foreclose on people who can’t or won’t pay their mortgage. We have to stop the craziness about people bragging about not paying a mortgage for 1+ year. Then we talked about banks financing some of their own REO’s to get better prices. As a cash buyer myself I know I would pay 50% more in many cases to get better leverage.
We also talked about small banks creating investor specific loan programs that fit their market. For example if their area has 50K rental units they could create a 10 Year loan program. We need banks to create programs that are profitable to process even if the loan balances are small.
Next we discussed builders and their need to tweak their business model for a few years. Many should become remodelers in the short tern instead of builders. This would reduce new inventory, create more competition and allow the builders to take advantage of the tax savings created by the government in the first part.
It should also be noted that with builders bidding on distressed assets we will create a positive feedback loop as more competition sparks higher prices and pretty soon we have housing being sold at or near replacement cost. Don’t forget all of this remodeling will also mean more jobs and a stronger economy.
Now we are going to talk about investors and I am going to break them into two distinct parts. First we will look at Active Investors who Buy, Fix and Hold or Buy, Fix and Sell. Then we will discuss Passive Investors who are looking for significant returns on secure investments. Each group deserves their own discussion as both groups can benefit by being a part of the process.
I will start with Active investors as this is the segment of the business I am a part of and close with Passive investors as I work with them on occasion and I talk to them frequently.
Active Investors
If we are working under the premise of the first three parts being put into practice the first thing active investors have to do is bring equity to table. Just to be clear I mean cash. If we are offered tax incentives, lending programs and all the other goodies then we need to bring some cash to the table to offer security and continue to deleverage the system. By having skin in the game of 20%+ we can insure investors will not just give up at the first sign of failure.
Active investors will need to understand that competition should be increasing given the first three parts but because we have leverage in the system returns could actually go up. Another thing the active investor should realize is that the window for aggressive acquisition will be short should the first three parts of this series be implemented.
The next area active real estate investors should realize is that they will need to run a tight business to insure long term success in what should be a rapidly changing environment. At the beginning of the cycle it should be easy to find, secure and turn or rent a property. But as the cycle turns and the press and the mass market pick up the new momentum we will see a lot of new or dumb money chase deals. Only the active investors with tight criteria will succeed in the long term. Don’t be fooled by momentum it will come in waves as we recycle the system.
Another standard I want to hold all active investors to should the first three sections be adopted is we can’t “Cheat the System”. Let’s have the capitalist system work and we create value as we help turn housing, employment and the economy around. If someone tries to game the system and somehow cheat, steal, lie or perform other dishonest things to turn a profit they should go to jail or lose 3X what they gained. The system should offer lots of deals if you’re willing to work for it. Don’t be lazy and look for the cheap and only dishonest routes. Do be confused even if it is on slightly dishonest or a gray area it should be passed on and we should look for a different deal.
Now for the Passive Investors who will have an equally vital role to play as we turn the system around. Just to be clear I refer to a Passive Investor as someone who invests capital in a deal for defined return over a defined period. They will have lots of options and they will need to do just as much work to validate an investor, their strategy, and the investment.
A Passive Investor might be someone who has Money but no Time. I talk to lots of people who have nest eggs that are earning almost zero in the bank and actually losing money when they calculate Inflation. That is crazy and very sad!!! But most people don’t know they have options outside of Banks, CD’s and Money Market accounts.
Others know they have options and they want a better return but they just don’t have the time between work, family and everyday living to master the skills necessary to become active investors. Let’s face it, it takes work, a system and a fair amount of experience to get dependable returns in any investment area, and a lot of people don’t have the time or desire to tackle yet another area as they already have a very full life!!!
Another frequent Passive Investor is someone who has money but afraid of making mistakes as they have read or heard about all the negative stories. Fear is holding a lot of people back and that is ok as people shouldn’t feel stressed with their investments. If their investments keep them awake at night they need a new investment. Not to state the obvious but some folks are not wired to invest directly in real estate as we have lots of ups and downs and active real estate investing would be too stressful.
The final Passive Investor I run into frequently are the investors that have money but can’t find a decent return or deal in their home market. Let’s face it not all real estate markets are created equal and if you happen to live in a high priced or low return market it is tough to make something work. In this case investors can pick up stakes and move or they can look into long distance land lording or they can be passive investors that deliver better returns than their home market.
As we round out the discussion on investors and how both Active and Passive investors can complement the other 3 parties involved in turning around housing, unemployment and the economy I feel compelled to offer just a few suggestions to those contemplating becoming a passive investor.
First you need to do your homework and check out at least the following three things at a minimum. Don’t fall for promises of riches, possible returns, and bloated appraisals. Also I recommend not lending on distressed assets unless you are compensated for the extra risk. In short make sure you do the following.
It should be obvious but first you need to review the Investor and insure you understand how both of you are going to make money. You should never invest in skinny deals where the investor is only making upside on appreciation. Remember negative cash flow kills most investors and if your loan helps the investor produce negative cash flow you need to avoid the deal because at some point both of you will lose.
The Investor needs to be able to show you in black and white how they have such a wide margin of safety that your loan will not impact the security of the property. Remember if they lose the property you lose the cash flow which is what you are likely investing for.
I have heard it said many times that an effective investment strategy needs to be simple, clear and repeatable. If the investor can not clearly show you how the strategy works, how you both make money and they hide behind fancy vocabulary then run away. The investment might be great but if I can’t understand it I won’t invest in it. Equally important is the idea of repeatability. Is this the investor’s first deal or do they have documented success that you can review to insure they are not one hit wonders hoping to score a homerun with your money. You should invest in a proven investor and their strategy.
The final area is likely obvious as you should obviously review the deal being offered. Does the deal meet your long term goals? Do you want a certain return for only 6 months but the deal is for 10 years. Does the deal offer the margin of safety you’re looking for? Do you understand the worst case scenario?
I believe in the statement that an Active Investor should offer his Private Investors a deal so good that the Private investors hope they don’t get paid. This type of arrangement insures that all parties get paid and everyone stays in the game and gets what they are promised in the original agreement.
In the end with Active and Passive investors complementing The Government, The Banks and The Builders we can turn housing, unemployment and the economy around.
We are a great country and we will be back. If we adopt this framework we will be back in as little as three years, if not it could take 10 years. As an investor I hope for 10 Years but as an American I hope for three years!!!
Good Investing
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