I write a lot about investing in the stock market and analysing businesses, etc. I haven’t really talked to much here on the blog about making investments in things outside of the stock market (e.g. Angel Investments, Real Estate Investments, etc.). Regardless of where I am investing my money or time, the thesis is always the same. I am only interested in having things that are worth more than I pay for them. My kids… I pay a lot of time and money for and they are worth far more than every day I spend coaching them. My stocks are all worth more than I paid for them (or less in the case of the shorts). My real estate is the same way. Part of what got me excited about this particular deal is the same thing that has me excited about $AIG and $BAC… Lawsuits!! That’s right, Ben Graham advises that the market undervalues things that are involved in lawsuits. Granted, lawsuits make it more difficult for investors to analyze the assets they are investing in; however, logic usually wins. In my case, I am investing in a strip mall that was in receivership as a result of the last investor going bankrupt. I am using a bank loan for leverage and a group of investors to spread the equity. I know a lot of my readers have thought about this with their neighbor or co-worker and never executed on it… it really is a simple analysis.
In the past I have always invested in the single family space and am decidedly making the shift into the commercial space. Don’t get me wrong. There are a lot of reasons to think that single family is still great to get into if the numbers are right. According to this NYT article, Seattle’s housing rental rates are increasing in line with the rest of the nation; however, there is an increasing amount of competition. Housingwire reports that Seattle’s market has a bottom around $200k and Estately has a good write-up on Seattle’s multi-offer environment. Luckily the single family homes we own are only financed to around that $200k limit and the rest is equity so property values can bounce around all they want.
With all that in mind, have a look at this video interview with Wilbur Ross. A lot of people love and hate Wilbur, but I think his insights into the housing market are correct regardless of his other thoughts on the economy.
Some of the other areas I saw some opportunity were in the Detroit market. Yeah I know – laugh… but I think we missed most of the boat on the Detroit market. The SE seems to be pretty strong as well; however, for me the problem is that I like to have my real property near where I live. Granted I am not buying commercial space in Seattle, but I am buying in the area and am pretty happy with the growth potential in the area.
The alternative to real property of course would be investing in REITs and the like. This is a good strategy and in fact I sold my stake in $AGNC to free up the funds for this purchase. $AGNC has been trading above book value for a long time and they are continuing to have trouble with the spreads. For me of course those same spreads and depressed real estate market are great! In fact I will probably be selling out of my other REITs in the coming year and look to put those funds into another property.
Back to this investment, with the bankruptcy and a previously poor vacancy rate, this property was overlooked by a lot of investors. In fact one investor that I talked to about it was surprised that I would look at a deal like this. The tough part here is that you have to talk to the tenants, ask them what they want. You have to look at the comparable properties and rental rates and determine what you need to do to compete. Most investors would have passed up this 65% rented strip mall with a brand new strip mall a few blocks away… but if you look at the tenants and ask them what they need you just may find (as we did) that you can quickly move to 100% rented and invest in some basic maintenance to get the property to a good place for the tenants. Of course it helps that strip mall vacancy is falling (finally) as well.
I’ll be looking for another one… but don’t think I’ll pull the trigger unless (like this investment) I am buying below the real value of the property as Sam Zell recommends.