What to go in 2018 and what I did this year. What about you?

[Steve Hodgdon]

Hello fellow note and real estate investors,

Where are you headed in 2018? What’s your spin on the tertiary mortgage market? Would love to hear your points of view.

Two RE friends were sharing their points of view on chasing high yields while looking for safety. I figured I’d share my experience. 

I’ve ridden the California wave up, down and up again. I exited CA right in 2009 just as the world was coming apart. That house is now worth $400,000 more than I sold for. That’s just to point out, I’M WRONG A LOT!

The subprime pool that Dion DePaoli guided me through has been a steady performer. Breaking $10k every month. The yield/effort/default balance is working out well. I like that I only have to bug the collector at Security National once a month.

Notes. Sold some, bought some. Portfolio is now about 30, mostly performing. Created 150 small balance medical finance loans in my “day job” as a licensed California lender.

Running a note portfolio, looking for plus 12% return, lending money in my day job and doing 8 real estate projects in Pensacola this year give me a decent view of the whole landscape.

Better returns? Rust Belt. With enough headaches to bring it down to the same as other markets. Poor economies and aging inventory point to the need for killer on the ground teams. Working on an Indiana foreclosure to flip right now. Looks good but not on market yet. Lost $16k on a blighted Cleveland NPN too.

Landlording. I didn’t think I’d ever do this again after running a 300 door single family property management business. Well, diving into corporate housing in 2018. Renting rooms to travelling medical workers, nurses, assisted living staff. That kind of thing. Not the margin like AirBnB, but much less turn over.

Retirees. I'm 61. So these are my peeps. We messed up. Didn't save enough money. We need a cheaper place with a yard. I like the BRRRR model and what we're accomplishing in Florida. Creating seller finance contracts on retail priced sales. But ask me in 10 years. Want to JV on the next house?

Jobs. I think it’s jobs. If there’s work, there’s money to pay the mortgage. Homeowners have been taught it’s ok not to pay your loan. The consequences of walking away from a “crap shack” (quote one of the tribe) is far less than us in CA think. It they have a good job, hope for the future, then they might think otherwise.

The links below talk about “18 hour Cities” and migration. I think I can improve my odds by following mega trends in where the whole country is going. Fighting a battle where population is declining isn’t working for me. I’m thinking I should get as many pluses as possible. So, I’d rather Florida than Alabama. 1.5% rent multiple vs. 2% but my renter/borrower can find another job if he’s laid off. What do you think?

[Christian Hutchinson]

Originally posted by @Bruce Lynn:

One of the local $1billion real estate gurus here once said..... "Want to making a killing in real estate?....buy in the path of progress."   I'm pretty sure that was Ross Perot.....he built at least 3 huge projects that netted him a lot of money on that theory in real estate....remember the old EDS hdq....no one was out that far when they built that building.  Forest Lane was probably on the edge of the earth back in the 1970s.   Then build's another HDQ building in Plano as Perot Systems.... then built Alliance airport...the only private commercial airport in the United States....probably many other projects too with the same idea.

Makes a lot of sense.....I'm sure someone will and can make money in the rust belt, but that scares me.  There's a wave coming here....and interestingly enough the people I meet from Detroit, and Michigan, and Indiana, and Cleveland...etc...they're hard workers...they want work...once they get settled they look for better work....then invite the family down one at at time to work.   We're getting some of the best who are trying to improve their situation.   I'd be scared to be investing in what is left behind.

Texas is the perfect storm of all the things wrong in terms of long-term planning in this Country.  Its been highly profitable for Texas but this is what I seen working in various parts and being there TDY.

Texas:

Low cost State
Low tax State
Export driven economy historically (extraction and agriculture industries)

When the economy started changing in the 1970s Texas got out in front of it. Very savvy political leadership.

The secured and pumped up the Military Bases

Enticed Defense Contractors with cheap land and low taxes

Cut education/public sector wages

Allowed in cheap undocumented workers from Latin America.  This is not a political statement its an economic statement.  They allowed in cheap labor to fuel expansion to get better returns on capital. Then those same bodies were counted via Census for federal monies to be distributed. Lastly, their representation in Congress increased by means of a undocumented people in their districts but the number of "voters" distributing the economic pie did not increase drastically.

Then with the creation of DHS, Customs and Border Patrol became one of the largest federal agencies. All centered essentially in Texas.  So Texas two largest industries can not be moved: They are Defense and Border Protection. It produces jobs/economic activity that are recession proof, and are the FIRST things to be paid.

With this great backing of the Feds, Texas can provide a low-cost, low-tax State level environment.  Texas has lots of Fortune 500 companies located there from its legacy early-20th Century business-activity (extraction and agriculture).  But more than 1/2 of all the other companies in Texas relocated there.  Meaning the brand, business, customers, talent were cultivated in another location, and was relocated to Texas for purely tax/cost purposes.  This is no different than companies relocating to the Ireland or the Bahamas, etc.

Meaning, Texas is not a place of innovation where people come up with new ideas or building a better mousetrap.  They go there after using one region's resource as a cost-savings measure.

Sure there is lots of "growth" in Texas the people moving there are not the highly educated chasing six figure knowledge/creative based economy jobs. Its people chasing work that will eventually be automated. Its Customer Service Jobs, or local govt jobs.  I know lots of people from my church who went to Texas, they  have HS education or uncompleted college education, maybe do skill-trades work.  On the flip-side people I grew up with in an affluent community they have relocated to CA, NYC, Boston, B-more/DC, Philly, Chicago, ATL, Charlotte, Seattle, Toronto, Austin(yes its Texas, but it has homegrown companies in Dell and Whole Foods). Those people are relocating back to Michigan because they have skills to live anywhere, and do anything. The people relocating to Texas, they come back for visits see things are "better" but they realize a job/quality of life at their income levels are tough to do in Michigan.

Ross Perot (my Dad worked for EDS for 30 years) made his money providing payment system services for Govt based payment systems.

Texas is made of Federal Money from Defense and National Security, Public Utility Conglomerates (low-margin business so low-taxes matter).  That provides a cost-structure for mature developed companies to locate.