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Think Like a Lender: 7 Rules of Thumb Lenders Use to Size a Loan

August 20th, 2016|CRE Financing|0 Comments

Why Lender Rules of Thumb are Important

One of the more common mistakes of investing in commercial real estate is not fully understanding the importance the lender has on a property’s return on investment.  Now I know what you’re thinking.  “Doug, of course the lender is important to a property’s ROI.  The lower the interest rate the higher the ROI.  Duh.”  Yes, that’s true but that’s not what I’m referring to.

Maybe even more critical to a property’s return on investment is the size of the loan.  It’s the lender that ultimately determines the loan size.  Not the pro forma found in the marketing flyer, nor the buyer’s proposed budget.  It’s the lender.  And without having an accurate estimate of the loan amount, the buyer doesn’t know how much cash is required at closing.  And how much equity that’s required to purchase the property is a key factor in determining the property’s cash-on-cash return.

This is not an academic exercise.  As an investor the sizing of the loan is a critical component for calculating the property’s return on investment.  That’s why it’s important to understand that lenders have rules of thumb that they use in their underwriting guidelines.  It has the potential of significantly affecting the property’s cash-on-cash return.  Not all lenders have the same rules of thumb.  That would be too easy.  No, each lender sizes the loan differently but generally there are seven rules of thumb that most lenders will use to determine the loan amount.

As capitalization rates continue to decline, loan sizes are more and more being constrained by the lender’s debt coverage ratio instead of their loan to value ratio.  This puts additional importance on understanding these rules of thumb. (more…)

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My Take on Hillary Clinton’s Trust Issue

August 5th, 2016|Current Events|10 Comments

In March, I wrote a blog post titled, My Take on a Donald Trump Presidency in which I ended the article with, “He would be dangerous as President of the United States.  We deserve better.”  Being an equal opportunity offender, I now turn my attention to Hillary Clinton.

It has been reported in the press, that Hillary Clinton has a trust issue with the American people.  A New York Times/CBS News poll earlier this year found that 64% of voters answered “no” when asked if they felt Clinton was “honest and trustworthy.”

In his New York Times bestselling book, The Speed of Trust, Steven Covey identifies trust as a function of two things merging together: competence and character.  In order to trust someone that person must both be competent at what they do and have the character, i.e., the integrity and honesty that you know they will do what they say.  If either competence or character is not present in a person, trust is not possible.

Let’s take an objective look at these two qualities in Hillary Clinton.  (more…)

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4 Lessons Learned from Investing In My Loser Property

July 23rd, 2016|CRE Investing, CRE Market|4 Comments

I want to let you in on a little secret: Not every commercial real estate property I invest in turns out to be a “home run.”  Now that I got that confession off my chest, maybe some of you can relate.  In the summer of 2007, which turned out to be the absolute peak of the last real estate cycle, I, along with a like-minded group of investors, purchased a 32 unit apartment located in a small town.

Indicators of a Good Commercial Real Estate Investment

At the time it seemed to be a good investment:

  • Large unit sizes
  • One story buildings
  • Nice, quiet little town
  • The potential down the road to convert to condominiums

Hey, what could go wrong, I asked myself?  Well it turns out that plenty could go wrong, some of which could not have been predicted by even the most savvy of real estate investors.  Because of that I needed to extend mercy to myself instead of beating myself up over investing in this property, which I eventually did.  In 2015, with a sigh of relief, we sold this apartment.  For several weeks after the sale you could see me doing “back flips” celebrating the sale of this loser property.

A year has passed since we sold this property and from the vantage point of time I now realize that I learned some invaluable lessons: (more…)

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Brexit – How it Impacts U.S. Commercial Real Estate

In spite of everybody and their brother having written about the United Kingdom’s vote on June 23rd to leave the European Union I believe I can provide a bit of clarity for my readers with some well-chosen, pithy comments.  So here goes.

Make no mistake, Brexit will have enormous impact on the world economy and more importantly, from our point of view, on commercial real estate in the United States.  But before I explain how it will affect U.S. CRE, let’s review the impact it is already having on the world stage, in the short few weeks since the Brits voted to leave the European Union.

Four Major Impacts on World Economy

  1. The value of the Sterling pound in relation to the U.S. dollar has dropped precipitously, losing 14% of its value.
  2. U.S. Treasuries rates have plummeted. The 10 year treasury rate traded at 1.67% before the vote and as of July 8th, it closed at 1.36%.  This is the lowest rate on record!
  3. Bank stocks in the U.K., the E.U. and the U.S. have dropped about 36%, 25% and 8% respectively.
  4. The U.S. dollar in relation to a basket of other currencies continues to strengthen.

These are some of the unintended consequences of the Brexit vote.  It will take years to fully feel the impact of this historic decision resulting in a lot of uncertainty which the markets of the world absolutely hate.

Other possible Brexit related carnage: (more…)

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Why U.S. Treasury Rates Will Continue to Decline

Over the past couple of years I have gone out on a limb and stated unequivocally that U.S treasury rates will not rise any time soon.  While all the pundits keep predicting that The Federal Reserve Chair Janet Yellin will raise the federal funds rate, I’ve consistently said whatever action she takes is relatively unimportant to five and ten year treasury rates.

Past Comments

Shown below are a few examples of what I’ve said: (more…)

3 Life Lessons from Dad, my Role Model

June 9th, 2016|Principles of Success|2 Comments

Stan Marshall

Dad as a Role Model

Even though my father passed away ten years ago this August I’m surprised how often I think about him.  Something happens during the normal course of my day, and it triggers a flashback of him.  It wasn’t a conscious decision to think about him, but rather some random thing happens and instantaneously I’m transported back in time forty years hearing my dad say or do something.  It happens all the time.  Does that happen to you?  Dad in many ways was a good role model.  He also had his faults but as time passes the good memories of him are winning out and the not so pleasant memories are fading.  I hope that’s what happens with my two adult children when I’m dead and gone.

As I said my dad was a good role model, but he was a lousy teacher.  I don’t ever recall him ever trying to teach me an important life lesson.  He just lived what he believed.  At the time, I didn’t understand the importance or appreciate what I was witnessing.  It was just my dad saying or doing what he always said or did.  It was nothing special, or so it seemed.  It was just vintage Dad.  But the older I get the more I appreciate the values that he lived.

So what life lessons did I learn from my father?

(more…)

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How to Take Your CRE Investing to the Next Level

May 27th, 2016|CRE Investing|4 Comments

Traditional Approach to Valuing Commercial Real Estate

Bless your pea-pickin’ heart.  Years ago, that was the endearing quip Tennessee Ernie Ford liked to say to the people he met.  I’m not sure what the phrase meant then or what it means now but I’m reminded of the saying when I receive a marketing flyer for a new for-sale listing.  It’s full of pretty pictures of the property and nice sounding words of the neighborhood.  And the most intriguing thing about many marketing flyers are the projected rents and expenses are in no way connected to reality.  I can’t help but think to myself, “Bless their pea-pickin’ hearts.  They must think I’m stupid.”

(more…)

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5 Trends That Will Impact Your Real Estate Investments

May 10th, 2016|CRE Market, Current Events, Economy|6 Comments

 

 PORTLAND ECONOMY & REAL ESTATE MARKET

The Portland economy and real estate market are clicking on all cylinders right now.  All you have to do is read The Barry Apartment Report Spring 2016 edition to realize just how good we’ve got it:

  • Unemployment at 4.3%
  • Job growth at 3.2%
  • Population growth at 1.6%
  • Portland-Salem Consumer Price Index at 1.2%
  • Apartment values up 10 to 20% in 2015
  • Apartment income up 4% to 7% in 2015
  • Apartment vacancies at 3.5%

Life is good.  Isn’t it?  It’s so good that there are days that I pinch myself to see if I’m living in reality or some make believe world.

But how is the rest of the U.S. real estate market doing?  You may be thinking, “Why should I care?” The answer is simple: You should care because sometime in the not too distant future we will follow down the same path.  In some instances we’re already doing so but we have yet to feel the full affect of the nascent trend.  The Portland market is not an island unto itself that is unaffected by the rest of the country.  So Portlandia and the Pacific Northwest in general will inevitably follow.

FIVE GROWING REAL ESTATE TRENDS

So what’s going on?  There are some interesting trends happening even as we speak: (more…)

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I asked. You Answered. See Survey Results.

April 30th, 2016|Miscellaneous|2 Comments

Last week I asked my blog readers to take a short survey of seven questions.  These questions can be summarized into one of three categories:

  1. Who is reading my blog?
  2. What topics would you like me to write about?
  3. What keeps you up at night (other than a weak bladder)?

(more…)

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Investor Mutiny Ignores 5 Principles of CRE Investing

April 15th, 2016|CRE Investing|5 Comments

 

Caught Between a Rock and a Hard Spot

Have you ever been caught between two highly contentious factions with your personal vote determining who wins and who loses?  To make matters worse, whichever side doesn’t get your vote, considers you their enemy.  That happened to me recently.  It’s no fun being caught in the middle.  But I apologize, I’m starting in the middle of this true story.  Let me start this time from the beginning.  So here goes: (more…)