Wednesday, July 16, 2014
I can't open a newspaper or read the news online without seeing INCONTROVERTIBLE evidence of real estate bubbles nationwide. In Seattle, it is so obvious I wonder who is making financial decisions at some of these firms, especially on the buying side.
For example, a nice luxury hotel in downtown Seattle called the Hotel 1000 was just sold for $63 million. This works out to be a city record of $525,000 per room.
So let's look at the valuation here.
You can rent a room on Hotels.com for $339 per night at the Hotel 1000.
What is the average gross profit margin on each room? The number is extremely volatile but is now about 26.8%. (During the recession of 2008-2009 the margin was NEGATIVE 8%.)
This means the Hotel 1000 earns about $90.86 per room per night.
What is the average occupancy rate of an urban hotel like the Hotel 1000? About 62.9%.
365 days per year x ,629 is 230 days of occupancy per year.
So the new owners of the Hotel 1000 will earn $90.86 x 230 days per year or $20,897 per year per room.
At this rate they will earn their $525,000 purchase price back in twenty-five years. Or the year 2039.
The average investment yield on these number is a paltry 3.9%.
Of course these are rough estimates based on averages but they are solid numbers. These statistics do not assume room rates will rise over the next quarter century but so will taxes, maintenance and labor costs, and the need to do at least four complete hotel renovations over these same years. Hotels do sell things other than rooms but they usually lose money selling them. A great example is hotel gift shops which exist for the convenience of guests at most places.
You can juice the yields with leverage to raise them a bit but the results are still essentially the same. A high price without leverage is still one with it.
The purchase price here is just too high. You can make more money taking the original $63 million and earn four hundred basis points more by purchasing shares in the average hotel REIT. Current average yield is 4.3%. Plus you don't need to run a hotel and have complete liquidity over your investment to earn a higher yield.
To earn a 4.3% comparable yield on $20,897 per year the owners would need to pay a maximum of $485,976 per room.
In other words, the purchase price viewed from this perspective is $39,024 per room or 7.4% too high.
Saturday, July 12, 2014
Most real estate books I read leave me uninspired. The bad books fall into one of three categories:
1. Jargon and citation dense unreadable tomes. A CPA's wet dream. Lots of quotations from the Internal Revenue Code and court cases but really little practical information for investors. Mostly an exercise in microscopic documentation over useful information. Imagine reading an encyclopedia for fun.
2. Nothing new. The same real estate advice and information I have read in 10,000 books before. Old wine poured into new bottles. Boring. Lazy authors write these books to earn a quick paycheck.
3. Opinions, motivational speeches, and other claptrap which fills two hundred pages. The author means well but I'm reminded of the old Clara Peller line, "Where's the beef?" Readers of these books leave the table hungry, wanting more, but nevertheless with bellies empty.
OTHER PEOPLE'S HOUSES by author Jennifer Taub is NOT one of the above. This is a fantastic book filled with the perfect mix of facts and figures, anecdotal stories, and advice for investors shrewd enough to read between the lines.
Taub explores the causes of the 2008 real estate and financial market crash and how the same people and factors are still in control today. Little has been learned since the crisis and few changes put in place to avoid another one. She's absolutely right. Nero is still fiddling while the new Rome is being rebuilt as flammable as the last one.
What makes this book so good is her careful balance from being too wonky or preachy. This book is filled with many pages of citations but does not need them to drive the story. She tells the tale of the 2008 crash almost like a detective explaining a crime, fact-by-fact leading to a dismal outcome. Readers of this book can learn from history and avoid reliving the same personal disasters even if policy makers simultaneously ignore the very same words.
One of my standards for whether I like a book is simple. Do I want to read more by this same author? Are they that good to make me an instant fan of their work?
OTHER PEOPLE'S HOUSES is such a book. I really really want to read more of her words.
HIGHLY RECOMMENDED BOOK. A must read.
Here is an interview with Jennifer Taub discussing the 2008 financial crisis and her book.
Sunday, June 29, 2014
The depravity of real estate gurus should not shock me. After studying them for more than thirty years I thought I had seen and heard it all.
A guru banned for life from the real estate industry due to court convictions selling home study courses on how to become a successful property investor.
A guru selling seminars on how to make a fortune with foreclosures who lost their own home in a foreclosure because they could not afford the mortgage payments.
A guru who gets young underage girls drunk at their seminars for the purpose of seducing them.
I could go on and on and on and on. Trying to find an honest real estate guru is the equivalent of searching for a virgin in a whorehouse.
But this new story was unbelievable until I saw the evidence.
The facts run this way.
A major real estate guru was actually a genuine property investor. In fact, they owned so many rental properties they opened a property management office where they handled their own rental units but also expanded into managing the properties of other investors.
Unlike what they said in their books and course materials, their properties were financed conventionally with normal down payments and regular mortgages. No creative real estate hanky-panky or other nothing down nonsense.
So far, so good. Congratulations I would have said.
But there was a catch.
The guru raised the down payments to buy their rental properties by selling cocaine out of their management office.
No, this wasn't some nice person selling grams of blow for his friends on the weekend. This involved quantity and lots of it. LOTS.
The only reason I'm not posting the guru's name and some of the documents I've seen is this guru stopped selling dope when they started peddling get rich quick real estate home study courses. There is also no evidence they are still selling drugs.
Imagine that. You can make more money selling nothing down courses and seminar tickets than cocaine. At least this guru did.
Just amazing. And despicable.
Thursday, June 5, 2014
Real estate guru Randy Poulson has been arrested by the FBI in New Jersey for swindling $3 million from more than fifty of his own students and other investors.
Watch the video above from a local news station announcing his arrest and you can see Mr. Poulson teaching his students all about subject-to "Get The Deed" and other foreclosure rescue investing.
Then read the criminal complaint filed in the U.S. District Court of New Jersey against Poulson.
In the world of creative real estate and get-rich-quick gurus, this is nothing new.
Deja vu all over again.
Wednesday, June 4, 2014
Here are some interesting statistics to think about.
According to the National Bureau of Economic Research, the official organization which keeps records of such facts, the Great Recession which began in December 2007 ended in June 2009.
Historically, the two longest recessions in American history lasted 16 months (1973-1975 and 1981-1982). The Great Recession was 18 months. A person predicting the end of the really bad Great Recession at its start would have been nearly correct, off by just two months.
Historically as well, the average economic expansion since the end of the Second World War has been 57 months.
If the current economic expansion began in June 2009 and is 57 months in length, the next recession can be expected to begin in March 2014.
What happened in the first quarter of 2014? US GDP declined 1%, the first contraction in U.S. economic growth in three years.
Food for thought.