Real Estate Returns
From 2004 through 2007 I was securities licensed and participated in Tenant in Common (TIC) market. TIC’s were classified as securities and were essentially sold as a security backed by a fractional interest in real property. The attraction to the TIC product was it’s qualification for the IRC Sec. 1031 Tax Deferred Exchange and was considered the investment of choice for property investors planning to retire from active management of their investment property. TIC’s just like any investment in real estate in the 2004 – 2007 era are having varying results but the supply of capital they generated for commercial investment market was robust.
TIC investments in apartments are generally doing OK or better than the market and the same can be said of Health Care Properties. The areas of concern and hurt are Office Buildings, Retail Centers including Auto Facilities, Student Housing and Hospitality. There has been some total losses in these property types and there would be a lot more if there were not some form of loan modifications or cooperation from lenders. Don’t get me wrong! Lenders are not accommodating because they’re good guy’s,. They’re doing it because they’ve discovered being a landlord usually costs them a lot more money, headaches and liability. They don’t like that last one!
I decided to not renew my securities a couple of years ago to focus on real estate only. There were several reasons for this but the main one was the amount of mark-up or load by securities folks was getting outrageous and next would be the limitations on available product through securities sponsors. Another was the restrictions placed on me by the Securities license. A lot of the time a successful real estate investor is a Mom & Pop. They invest in real estate because they believe in it. They can go see it everyday. They can look at the history of the country and the history and return of investment in real estate and see a correlation. They don’t care that they’re over weighted in one investment… that’s the way they want it, and they get real peeved at any “Wall Street Type” who tries to tell them different.
Real Estate sales and 1031 tax deferred exchanges are still our main focus. In sales we’ve found a niche liquidating estates for administrators and trustees. For exchanges, it’s not in the best interest of most of the folks I consult with to trade what they have for whats available, which must be the first consideration of an exchange transaction. At times we find exceptions which turn into good and profitable transactions that fits into the investors plans. These are mostly local real estate deal where properties have to be sold to liquidate a probate or trust estate. In terms of TIC’s they’re still around and there are a couple of good sponsors out there in the TIC arena. Likewise TIC sponsors are getting good deals in this market although they’re usually secondary markets and the transaction markup is still over and above the regular real estate. Nevertheless, a good TIC representative can produce a deal that will provide a landlord with a terrific retirement investment.
If you’re an investor looking for an exit strategy from active property management or you’re just tired of tenants, it would be better to focus on finding NNN investments that will give you the same or better returns as a TIC where you’re the only investor and you have almost total control. Lots of these investments exist in properties where ground leases are used. A good example would be a fast food restaurant on a high profile corner. You own the land and the franchise or tenant leases the land on a 20-30 year lease and takes responsibility for paying the bills on everything. You enjoy the cash flow from the real estate which can be sold, traded, exchanged or borrowed against. Control!
In terms of what is going to happen in the next couple of years… It will depend on the labor market. If we begin to create real jobs, not minimum wage or slightly better middle-man type employment, then things will improve. Also the further away we get from the 2008 collapse the better chance we have for a new normal. Unlikely we’ll ever get the returns we got in 2004-2007. If you see that happening again, it would be a good time to start shorting the stock of the lenders involved.
The bottom line on sustainable return on investments is controlled by the supply of capital. There is an abundant supply of affordable capital for banks which will is available for qualified real estate investments in the 60-75% Loan to Value ratio. If we return to the days of sensible real estate investment principals, then we look to the lenders rate and add a risk margin for the return on our higher risk down payment. A hypothetical example would be; a lender loan rate of 5% then an investor should be looking at 6-6.25% to compensate for the added risk.
That was a long way to say we won’t have the crazy 2004-2007 market in real estate again for a long time.
