The Cash Flow Mercenary - Metro Detroit Cashflow Real Estate

It’s been a while since I posted something to this topic. July I think. Mostly because I’ve found that when dealing with adults in commercial real estate the deal process is about as exciting as watching paint dry. And I hate painting.

So let me bring you up to speed.

We last left this thread with my last deal dead and me starting the lawsuit process for the return of my earnest money deposit. Well if you can believe it, this hasn’t been resolved yet. The reason? Mr Seller, being the third grader that he is, is ducking the process server. So I’m still chasing him for his signature. But on the bright side, Mr Drama Queen is now in a world of hurt. Now I’m (generally) not someone that revels in the misfortune of others, but in this case I’m making an exception. You see, in anticipation of selling the building to me, he refinanced the building and took on a commercial mortgage with an interest rate that resets daily, and with all the volatility in the credit markets his interest rate is now so high that his building isn’t generating positive cash flow for him any more. I’m really broken up about this as you can tell. 

The good news is that I have made progress on another building that I first looked at back in April. This one is located near the GM Tech Center in Warren, and there’s a lot to like about it.

First is the location. The Tech Center is a good area to be near, because it’s probably the last GM facility that will close if they continue their collapse and walk away from the Ren Cen. Second, it had an assumable (for no fee) 15 year low-interest land contract with no underlying mortgage, and third it was being managed less than efficiently by an owner that had reached the point of wanting to retire, so there is some low hanging fruit to boost ROI performance.

Much to my surprise this process has moved along completely drama-free except for a couple of small mistakes and mis-communications.

We agreed on price. The inspection went well with no major issues arising. The Phase 1 environmental inspection was completely clean, and the financing is a breeze because of the assumable land contract. We’ve even filled a couple of vacancies as we have approached the close.

Now don’t get me wrong, there was a lot of tough back and forth negotiating along the way. Several disagreements, miscommunications, and mis-clarifications. But end the end it was a straightforward and unemotional process that was primarily focused, at least from my perspective, on the numbers.

As I mentioned before, I had always heard that commercial real estate was where the big boys and girls played. And this deal validated that belief pretty well.

I cross the finish line on October 29th at 10am.

I just received three tickets in the mail. THREE! From the City of Harper Woods.

It seems that the fine people in their Building Department believed that I was on the wrong side of the law when I bought two properties in their fine city earlier this year. And then again when I rented one of them a couple of weeks later.

Three stinking tickets. And not the kind you can simply pay to make go away. Nope. These were court cases slated for a hearing on 11/17/08 in District Court 32A at 10:30am. Fines of $500 each.

Serious stuff.

At least for most people it would be.

To be honest it really wasn’t a big deal to open the envelopes. I was more curious than anything else when I was asked to sign for three pieces of mail from them sent certified return receipt. They were very official looking.

Two of the tickets accused me of – the horror!- having the AUDACITY to buy a home there and not get a Certificate of Occupancy after I bought the home. The third one was kind of funny. And it was a pile-on: it was for RENTING a home that (they said) I had bought without a current Certificate of Occupancy.

Reading all this stuff made me feel like public enemy #1.

But they were all wet. (The people in the building department. Not the letters)

Why?

Because I do things by the book in my real estate business. And you wouldn’t believe the grief that I get for doing it that way.  Seems folks just love to cut corners and save a few bucks here and there if they can get away with it.

But instead of my blood running cold and a sweat breaking out in beads on my forehead and seeing $1,500 vanish before my eyes I smiled and calmly walked over to my file cabinet and in about three minutes found the documentation that I needed. Because I had a process that made sure that nothing fell through the cracks AND because I followed that process.

And after 1 fax, 10 minutes on the phone and three apologies from the fine folks at the City of Harper Woods all three tickets were dismissed.

Now don’t get me wrong – even though they’ve been a little disorganized lately, Harper Woods is a great city to buy in and the city employees have always been great.

It’s just that that $1,500 looks much better in my pocket than in theirs.

I saw an interesting discussion on twitter last evening. As you might expect, there has been some serious discussion about the economy and the stock market (which are two DIFFERENT things BTW).

As you may know, twitter is heavily populated by “Web 2.0″ types that know far more about social media and the internet that I do (or maybe than I ever will). They’re in lots of different fields, and many are actually (gasp!) using twitter and social media as a way to make money or at least  promote their cause to make money. I know, I know, the thought of actually making money when so many are suffering is scandalous.

In particular a pair of posts on the subject of the economy by someone that should know better stood out to me. He said:

“When wealthy invest in growth - GREAT! When wealthy buy up assets at rock-bottom prices cuz they’re the only ones who can: AWFUL!”

“Wealth doesn’t get destroyed in a depression — it just moves around. And by around, I mean “up”.”

I was very surprised to read these posts. I wasn’t surprised to see them on twitter, because the mush-brain socialist crowd is disproportionately represented there, but I was surprised to read it coming from that particular person because both statements show a fundamental lack of understanding of basic economics. Especially in this “internet age”, and especially when written by someone that’s using social media as a promotional tool.

Statement #1 is just bizarre - isn’t buying something low so you can at some point in the future sell it “high” one of the most basic fundamental tenets of the free market and capitalism? I think so - in fact my entire real estate business is predicated on that ONE idea. My client at work - the one that makes cars - thinks so. Starbucks, where I bought my coffee this morning thinks so. And the guy that owns the car wash that I went to yesterday thinks so.

In fact the ONLY way that a business can make a profit is to buy or create something and then sell it for MORE than it cost to make it. That’s the definition of profit. And that’s the definition of business.

And the bit about the “wealthy” being the only ones that can is a bunch of class warfare garbage. The fact is, over the last three years two things were widely available: 

1. ANYONE with a pulse could have easily built up a “portfolio” of unsecured business credit that amounted to hundreds of thousands of dollars (ask me how I know). I’m sure even the most ardent socialist would agree with me that that kind of capital opens lots of doors, and
2. ANYONE with a pulse could have bought investment real estate (aka “productive assets”) at rock bottom prices, and could now be reaping the benefits.

And statement #2 that wealth just moves up is - well - misguided. I was going to say silly but I’m stretching here to be as charitable as possible.

The truth is that wealth moves around all the time. Up down, and sideways. The people that produce know this in spades - they take calculated risks, and when the risks pay off then their wealth increases. When the risks fail their wealth decreases. That’s the nature of the beast.

Wealth doesn’t just float around in the ether waiting for a Vanderbilt or Rockefeller to come along. That’s hogwash. This economy both rewards and punishes risk taking (at least it USED to punish it).

So that even in a depression, wealth moves to the people that GO OUT AND GET IT.

The socialists and liberals would have us believe that there is an unequal access to opportunity in this country. I’m telling you that that’s a bunch of BS.

Because this is not about the Haves and Have-Nots.

Far from it.

It’s about the Will and Will-Nots.

When you understand the difference you can be successful in this country. Not before.

If you’re at all a regular reader of this space, you know that I’m a hawk for cash flow. Regular, boring, methodical cash flow.

Not only that, but I have been boldly proclaiming far and wide now for over a year that southeastern Michigan is THE best investment real estate market in the country for buy-and-hold cash flow investors.

And it continues to get BETTER.

The real estate market here is still in absolute gridlock. The absence of any meaningful activity in the first-time-homebuyer niche, driven by the lack of available financing, has the market here at a standstill.

Since first-time homebuyers can’t buy, the people in those first-time-homebuyer homes can’t move up, and so on and so on up the property price chain. So we remain in a state of gridlock.

And inventory continues to rise: foreclosures are still coming onto the market in large numbers, and non-foreclosures are increasing as well through the natural course of lifestyle changes.

And it’s these non-foreclosures that are presenting the opportunity.

You see, the prices of these non-foreclosed homes are being dragged down as the entire market suffers with the glut of homes on the market. Completely updated homes that are in move-in condition that as recently as 2005 sold for $140,000 are now listed in the $85,000 range and lower and aren’t even getting any showings, much less offers.

And that means that homes in spectacular school districts that historically were untouchable as rental properties, because at their prices they wouldn’t cash flow, are now available. This is almost a problem.

Why?

Because some of the houses that I’ve looked at are actually too nice to be rentals. It’s a good problem to have, isn’t it?

And that’s the case with my latest acquisition. 

Here are the details:
City: Harper Woods
School District: Grosse Pointe
Style: 3 Bedroom, 1.5 bath bungalow
Basement: Full partially finished
Updated kitchen, refinished exposed hardwood floors
New roof and windows
Central air and 2 car garage

The best part is the price: $60,000
The second best part is the rent: $1100 per month

This is another house that I should have rented before I close on it.

Take a look at the video and you’ll see why. And I found SEVEN more houses just like it.

You can see the rest of the house here:

http://www.youtube.com/watch?v=EPX_bC_udP8

The Wall Street Journal this week highlighted a problem that’s only getting worse as the financial sector melts down. 

Baby Boomers Delay Retirement

Declines in Assets Force a Generation to Face New Reality

By KELLY GREENE

Nancy Davis, a 59-year-old senior marketing manager for a law firm in San Diego, had hoped to ease into her retirement after her son finishes college in two years.

But “I may be 70 before I retire at this point,” she said Friday, after watching the markets take their toll on her 401(k). “It’s very unnerving.”

For millions of Americans approaching retirement, events of recent weeks are delivering a clear message: Not so fast. With nest eggs shrinking, housing prices still falling and anxieties about their financial future growing, the oldest members of the baby-boom generation are putting the brakes on plans to leave the office.

“We’ll see more and more people postpone” their retirement dates, says Helga Cuthbert, a certified financial planner in Decatur, Ga., who spent a good part of last week fielding telephone calls from nervous investors. “Their expectations about the future and the kinds of returns they would get were simply unrealistic.”

As discouraging as that message might sound, it’s exactly what many baby boomers need to hear, according to financial planners and researchers. Most people underestimate how much money they will need for retirements that could easily last two or three decades, and are leaving the work force with nest eggs that are likely to expire long before they do.

Consider: Less than one-quarter of workers age 55 and older — just 23% — have savings and investments totaling $250,000 or more, according to a study published in April by the Employee Benefit Research Institute in Washington. About 60% have less than $100,000. The average retirement age in the U.S. is 63 — but most investors don’t recognize the benefits from working even just two or three additional years, financial advisers say. According to research from T. Rowe Price, the Baltimore-based mutual-funds company, a 62-year-old with a $100,000 salary and a $500,000 nest egg will see his annual retirement income from investments and Social Security rise by 6% for every additional year he remains in the work force.

Working longer “gives people time to build up their 401(k) balance, can result in a bigger benefit from Social Security, and reduces the amount of time people will have to depend on their savings,” says Alicia Munnell, director of the Center for Retirement Research at Boston College and author of a recent book about the value of extending time in the work force. “The arguments in favor of working longer are overwhelming. We just need to convince people.”

Even before events of the past two weeks, some older adults had begun adjusting their sights. In a survey published in May, 27% of surveyed workers age 45-plus said the economic slowdown had prompted them to postpone plans to retire, according to AARP, the Washington-based advocacy group.

John Dougherty is among them. “Two weeks ago, it was frustrating; last week it was scary,” says Mr. Dougherty, a mortgage broker in Raleigh, N.C. who estimates that his nest egg has lost 20% of its value in the past 18 months. He had planned to retire at age 62 — but now, like Ms. Davis, he says 70 might be a more realistic target.

“Time will tell if my physical capabilities will allow me to continue to work that long,” he added.

Patrick Hayes, a 58-year-old physician in Columbus, Ohio, was hoping to retire in two years. “But I’m watching my funds getting smaller and smaller, and I keep hearing this is the worst thing since the Depression,” he says. “It’s particularly tough if the market gets hit in your early years of retirement. If you’re about to retire and something like this happens, maybe you should stay working.

“What I don’t want to do is take 10 years off, be 70 years old — and have to go back to work if I’ve lost my technical skills,” he added.

That story — retirees returning to work — is also being played out in the wake of the market turmoil. At RetirementJobs.com, an online job search provider, “the volume of visitor traffic to our online résumé writing service doubled in the past week,” says Tim Driver, chief executive officer. “The common motivation we’ve heard from these people is that they need to go back to work due to the economy.”

Jack Pogalz, a 63-year-old project manager in Cottage Grove, Minn., was laid off last year from a medical-device maker and has been looking for part-time work as a grant writer in the nonprofit sector. But he recently shifted his job search to full-time employment after realizing that his 401(k) has dropped 16% since December. “That translates into about four years of income” in retirement, he says. “It’s either get back into the work force or retirement’s going to be cut that much shorter.”

So far, he has had a number of interviews but no offers. “The age thing I think is hurting a little bit,” he says. “With the job market increasingly getting tighter, I think it’s going to get more difficult.”

Even retirees who have been prudent with their nest eggs say they’re facing tough times — and tough decisions. “We weren’t extravagant people. We didn’t go on cruises. We didn’t buy a Cadillac. And here we are, we thought we could retire, but our savings are just going too fast for us,” says Noreen Hilinski, a 67-year-old retiree in Madison, Conn. Her financial planner told her recently that she and her husband, a 69-year-old retired engineer, have used about 10% of their investments.

That news has her considering asking the catalog-company where she used to work to let her come back for the holiday season. Her husband is looking for odd jobs, perhaps in a hardware store, she says.

“There’s a lot of people who are going to go back to work in my age bracket,” Ms. Hilinski says. “More and more of my friends are talking about going back to work.”

Jack Wolfe, a 64-year-old retiree from a natural-gas-pipeline company, moved to a lake between Houston and Dallas last year. Now, he’s trying to go back to work, “and the closest we are to anything is 60 or 70 miles,” he says. “I’m probably going to have to go to work for a few months at a time. What I’d really like to do is inspection work on new pipelines.”

After nearly a decade in retirement, “I’m trying to go back to work and let our portfolio build back up,” he explained. “We’ve lost such a big amount of money lately, we’re going to get to the point where we can’t recover.”

He and his wife, also retired from the same company, lost about half their savings after Sept. 11, 2001, he says. “We were building it back up really slow. Then this thing hit, and it put the nail in the coffin.”

There is an alternative that will help you salvage retirement savings. Visit Great Lakes Investment Fund to learn more.