Dave Paladino’s Blog

Although Warren buffet said in the New York Times that we need to be greedy right now as it investing. I find it difficult to do this. I know the ecconmy will bounce back. It has to. The biggest reason that I think this is that our population continues to grow and all those people need someplace to live.
Dave

There are only two ways to add value you in real estate fix or fill

real estate is opprotunistic. meaning you make money seeing things that others cannot clearly see

I got this off of wikipedia as a definition of inflation.

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused when money supply increases faster than the rate of economic growth.

The more and more I study this the more I see that we are going to have inflationary pressures in Omaha

I have been thinking of the remarks of Sam Zell lately. Sam came to MIT(not when I was there) to give a speech to a group of students. Same currently owns The Chicago Tribune and the Chicago Cubs. At the time of this comment, Sam owned equity office. The nations largest office landlord, which he recently sold to the Blackstone Group for records levels. Sam’s remark was that if you cannot fit the specifics of a deal on the back of napkins it is too complicated. I really believe in this thought. I think too many real estate investors thing way too much about a deal. I saw another interesting thought that Sam Zell had on the sub prime mortgage crisis. “This country needs a cleansing. We need to clean out all those people who never should have bought in the first place, and not give them sympathy’

As many american do this time of year, I set my goals. I encourage every real estate investor to set some goals for the year so they can create a framwork of there plan for the year. I saw an interesting article in the Boston Globe last night that I think you will find interesteding. It is titled 12 Mistake that real estate investors make. I think it can be easily applied to real estate investing
http://www.boston.com/business/personalfinance/gallery/12investingmistakes?pg=2

There as a recent article in the WSJ that said that Foreclosure Filings Up 81% in 2008 comared to 2007. This will ultimately bode well for residential lanlords. The questions is when will that be.

Accounting is definitely the language of business. I know that if you are an accountant right now locally you can really name your price and easily find a job. The inflationary environment will be very interesting this year. It should go up but it will take a while. In the money management business people are scared and last year people really found out what their appetite for risk was. For most people minus -40 percent would be unacceptable.

Warren Buffet says that it is more important to never loose money than to make money. If you think about this a little bit. It amazing that the people that run into problems with their investments are not the ones that made to little. The people that run into problems are the ones that invested in something and it did not cash flow enough to pay its debt or operating expenses. So when you hear one of your buddies bragging at the bar on how much money he made flipping a house. You should probably be equally impressed with a guy that simply did not loose money of a long period of time.

If you are like me you are always looking for ways to be informed about the real estate market in general but are worried about information overload. I used to subscribe to the Wall Street Journal but got tired of mounds of paper laying around that I only read a fraction of. So when my subscription ran out, I did not review it and I go to http://www.wsj.com. Click on the real estate tab. There are great article in there everyday. The ones I saw today are about how a government owned developer in Dubia that was going to build a 1 Kilometer building and has not put it on hold because of the credit crisis and another article on how owners and developers of apartment complexes across the country are struggling.

Wow, the articles get getting better in the WSJ real estate section there is a great article in the real estate section on how there are so many tenants out there looking for a bargain. I could not agree with this more. I talked to a tenant today that she wanted to rent another house from me. And the reason for moving is that she was looking for a change. I really believe that landlords need to come up with better ways to keep there tenants for longer. Especially considering the cost of turn over.

Luke, what are the wall street guys saying the stock market will do this year?

Ok I could not help my self, I found another article about loans that is very interesting. I guess the number of CMBS loans that are not being paid off at maturity is rising. Check out this article.
http://www.costar.com/News/Article.aspx?id=8C9B5EDF378D078D74A1A1852DCDEABA&ref=100&iid=114&cid=8A24AEA45E5146CD632D48C0A030F383
To bad we are a market participant and not a market observer. Ernie Goss is right it is a great time to be an economist to make sense out of all of this.

dave

The article in the OWH today 1/21/09 in the business section. Is about our local real estate supply and the inventory is coming down. It also references activity in the marketplace picking up. Its nice to see the media taking a positive approach.
Dave you mentioned earlier the two ways to add value to real estate. “Fix or Fill”, fix would also need to include “change use” as part of its definition. This method to me offer the greatest return. Taking an exsisiting structure or parcel and repositioning it into something completly different.
You last artricle regarding commercial loan defaults. I was at a luncheon in December and the speaker said $80 Billion dollars of commercial paper is to reset in 2009. There is high concern that alot of these will not be reset and will instead be forced to the marketplace. But in todays marketplace getting a new loan will require a whole new tighter set of standards. This in turn will absolutely lower the value of the property, if the seller must sell. I would expect some of the same things happen in the residental market to move into the commercial market.

And another from an MIT professor argueing that it may be better to rent http://web.mit.edu/cre/research/hai/better-off-renting_fisher_08-1204.html

These comments along with Jims that the value of real estate is not what it used to be and these items are a good indication that things in our business has significalntly change. Most speficially the less competition there is in a business there more likely you will make money. A good book to read more about this Micheal Porters Competitive advantage.

People often times ask me.. When will the residential real estate investment market rebound.
My answer “ when rents go up”
When will rents go up? When the supply of rental houses is less than the demand.
When will this happen? When developers stop building new apartments and the natural growth of Omaha catches up with the existing home inventory.
When will this happen???????????????????????

Would you rather be smart or lucky? Success in business probably has mart to do with luck than anything else. Just think about market time. There is a house on my street that sold for $408,000 three years ago no it is listed for $249,177. That is over $150,000 in profit that guy would have not made if he would have waited to sell.. This house has been on the market for 421 days. Was the guy that sold the house $408,000 smart????????

Ok, thats it if you beleive this article this changes everything. This has come comments from Bill Weaton once of my profs from MIT who I really liked
http://www.careerjournal.com/article/SB122764977315457619.html#printMode
I would love to here your comments

One thing I do not talk about enough is the role of govt. Bill Weaton a professor of economics at MIT told us once. “The role of govt is keep the playing field level” To me this meant making sure business all had to play by the same rules, so some business could not ignore the rules and the have an unfair advantage.

I think most proformas grossly underestimate the cost of vacancy loss. I think you need to figure that a house will be vacant two months between tenants. by the time you do the work needed to make it ready and wait for a tenant that can move in after there 30 day notice expires. It has been two months. any one have comments on this?

Dave Paladino Axiom. Life is 5% what happens to you and 95% how you react to it

Here is an itnteresting article that I found on co stars web stie.
http://www.costar.com/News/Article.aspx?id=8BF2590E41B392530B05DF90ACC7A547
It talks about all kinds of distressed proeprties and businesses for sale at upheard of multiples but I am not seeing it. any comments

There was an interesting article Omaha World Herald Today
http://omaha.com/index.php?u_page=1100&u_sid=10551561. It talks about the last time we were in a recession this deep was 25 years ago. This was when I was in high school. I always wondered why it was so hard to find a job then. What is interesting about this graph is how fast the economy grew right after this recession; do you think we will have this kind of growth soon? It sure does not feel like it after we read that First National Bank of Omaha just announced a major layoff.

I am listening to the book on Tape” Snowball” During this Buffet talks about the 1960 Election when John F Kennedy won and the country was in a mild recession. After the election the economy took off because of fresh ideas. Possibly this could happen to Obama. I read another interesting thing yesterday. Some reporter was asking a real estate developer when the economy would get better and the answer to the question was” when banks start lending again”. I love this answer. In light of all the job layoffs in Omaha. I do not think guys are just going to sit around and play WII. I think a lot of them will come up with great ideas and start all kinds of businesses

Snowball really has been making me think about the opportunities ahead of us. I really think there are lots of possibilities in ways to make money. Especially when it comes to the operating businesses. A great book to read when it comes to what business to get into is a book called competitive advantage, pay specifically to the part about the five forces of industry profitability. In his book he talks about when there are industries with high fixed costs there is increased rivalry because the business must operate near capacity to get the lowest unit cost. It is one of the reasons that owning real estate is so difficult. I would argue that almost all of your costs are fixed. There are very few that are variable. Anyone have any thoughts on this?

I think we are onto something. “Asked for signs that will show the country’s economic woes are abating, George A. Kahn said Americans should watch the credit markets’ I got this out of the Omaha World Herald. I agree with this statement, once it is easy for consumers to borrow money the accounting will start growing again. I say it will be 2nd quarter 2010 before this happens.

Standard and Poor had an economist quote that the recovery will happen in 2010. There is another economist agrees with me. I met a developer today that did a 10 unit aparment upgrade in midtown and is convinced that is the way to make money in real estate. Myself, I would rather build a storage facility

The partnership pod cast has prove to be very popular. With that in mind I wanted to tell you about something I read.
Sun Tzu was a Chinese military leader that wrote a book called the Art of War. This book was written 6 BC, yes that was 2600 years go In this book he states that is better to have one bad general instead of two good ones. This is something that I think s important remember when you are considering interesting when into a partnership.

Landlords often time ask me what are the most important considerations that a tenant is looking for when finding an apartment or house to rent. They are in order location, amenities, and price

Location. First and foremost tenants make their decision on renting something based on location. They normally will want to live around friends, family or work.

Amenities. The second thing they look for is amenities. This could be as simple as the size of the rooms or if a place has a basement or not. Some tenants want may want amenities such as granite countertops or top floor apartments. When you interview a tenant this factor can be the easiest to figure out which house or apartment is the best for them

Price. Price is the third consideration and it ties into the other two. If a unit has exactly what a tenant wants for location and amenities they there price will have low elasticity.
The basics of this post is price is not as important as you would think so long as it is located where a tenants find desirable and the apartment has all the offeringz that a tenant would want.

I am starting to question the rule risk always equals return. If the return of an investment is the all equity discount rate minus the growth rate of an income stream. And the growth in income for real estate is three percent. and warren buffet loaned $300 million to harley davidson at 15 percent then what is the all equity discount rate? one could argue that it is 20 percent? If so what is the required rate of return of real estate?

Last night Lisa and I had Rick Mann over to our house to talk to some friends about the movement of business as missions around the world. Rick talked the movement around the world to the model where missionaries go around the world to start businesses that are self sustaining. There are currently two projects that Christ Community church are involved in. One is a coffee shop in China the other is one that just got started in Bamako, Mali Africa. Where Dusty Reynolds went to start a business that makes T Shirts.

This was an ad placed in the New York times that states exactly how I feel about the proposed stimulus package. More goverment spending does not drive our economy. We need to cut taxes and the impediments to productivity to spur our economy.

Here is the ad
http://www.cato.org/special/stimulus09/cato_stimulus.pdf

It seems like everyday another past business associate is calling me looking for work. The recession is much deeper than it appears, especially when it comes to businesses that have anything to do with real estate. What is even more amazing is there are a lot of articles out there about the residential tenants being in a position to negotiate rents. I find this to be very true in Omaha. The market is so competitive right now. We have over 120 houses for rent. And the list gets longer every day.

There was a great article on yahoo yesterday and they were quoting the fed saying that the recession could last all of 2009. That means that the economy will contract for all four quarters in 2009. They also mentioned that the unemployment rate could reach as high as 9%. What really worries me is that the administration will see this is a opportunity to put in place more social programs that will be difficult for us to pay for. On the good side, money supply has increased by 70% in recent years. Ernie Goss says that since the economy has not grown that much in the same amount of time we have to much money chasing around to few products and inflation will bound to happen. What is good about that statement is that the best inflation hedge is inflation. So start loading up on real estate.

I had another friend get laid off in the last couple of days. The thing that I do not understand about large companies, is how do they fill in the void they leave behind when they lay off employees that are a productive part of the companies’ daily operations? Meaning who does the work when a company like FNBO lays off 300 employees? More importantly how and when do they bring these employees back on line?

I am listening to Snowball by Warren Buffet. One of the interesting things he says that when you are looking at a deal and it just does knock you over the head that you should do the deal you should not do it. The other interesting thing he said is that he does not use Excel or spreadsheets to analyze deals. I love that quote. Just imagine you should not buy an entire business unless you cannot use a calculator

I cannot beleive this post abou renting vs owning has been on the mit cre website for seeveral months without me noticing. Lynn looks at from a little different point of view but here you go.
http://web.mit.edu/cre/research/hai/better-off-renting_fisher_08-1204.html

As many of you know the Buffet annual report is out. I really lie his comments on how it is going to be nearly imposible to wean companies dependace on the govertment. He also talked about inflation again. I want to remind you that real estate is considered the best inflation hedge there is.

My favorite quote in the Warren Buffet annual letter is his shareholders. “Beware of geeks bearing formulas.” He was referring to analysis’s on wall street and all there analysis when underwriting deals that require calculus. I agree with warrens view on the importance that we should only sell houses to people with 10% down.

Well I got to say that the rental maket for landlords is getting better. I do not want to make this official yet, But I can tell you there are alot more calls than there was a month ago. The big test will be this week. But I am starting to see alot more activity.

I really thing all the talk about stimulus is a complete waste of time. What is wrong with people having to come up with 10% down to buy a house. So people have to save to do this. I think all the talk about pumping money into the economy is only going to make us more dependant on the government. I think it would be better if we just let the economy play its self out. Sam Zell the former owner of the cubs and the current owner of the Chicago Tribune says there is a bunch of people investing that had not business doing so. I agree.

The only way for you to do something the most productive way, you are going need to do it several of the lease productive ways first

Its official banks have stopped lending. Now we wait. We will know that market has turned when the banks start lending again

What do Google, Jimmy John’s, Toyota have in common? Each got into a business that was dominated by someone else and are now wildly successful. Yahoo for search engines, Subway sandwiches and General Motor for Vehicles. Google, Jimmy John’s, Toyota all started a business that had a company dominating the marketplace. And each of these companies was in the crucial stages of growth at time of economic uncertainty. Google in the 2001-03 recession, Jimmy Johns during the 1983-85 recession and Toyota during the 1973-75 stagflation economy. What we can learn from this is that right now there is someone coming up with a great business Idea in an industry that is dominated. by someone else. Dave Paladino quote of the day. There is no present or future there is just the past repeating itself.. I would like to say that I came up with this but I did not

My prediciton is that once the real estate market bottoms out, it will stay flat for 10 years. And from here on out all deals will be valued on there cashflow only with no value placed of appreciation