All Forum Posts by: Scott L.

Robert, I just saw your point, thank you. All feedback is good! For me, it seems to make sense and I would think for others in a similar position. As an investor, I'm only able to participate in one, maybe 2, refurb-or-build projects at a time (assuming I'm not a small cog in a big syndicated real estate deal). So that seems to fit the category of eggs in one basket, benefitng from hedging. I would think the same would apply to those holding many more rental units. If a concentrated location for your rentals goes south, they all will be impacted to some degree. The tough part for me as an investor would be to diversify my projects so much that I'm dealing with different types of real estate in different markets - too much ground and market knowledge to cover. Even then, real estate is prone to price bubbles across whole regions of the country, due to how the Fed sets interest rates and how REITs and stock are doing. It's hard to diversify that away.

Thank you again, and I'll keep posting what I find. I believe options can be had for a few hundred bucks and go up from there, with modest training needed beyond stock buying online.

Good points Paul about the type and size of hedge. For the investment vehicle to use, I was thinking of ITB which is the US Homebuilder's index ETF for house construction projects, and REZ, the residential equity (i.e. home rentals) REIT index ETF. While neither are specific to one MSA/location, and each have a bit of extra stuff in them (ITB includes a bit of home DIY store stocks), they should be directionally correct in case of a big downturn. You can buy options on these fairly easily. There's also buying futures on the Case Shiller index for any of 20 major housing metro markets; it purely measures changes in repeat-sale home prices, a proxy for refurb projects. For me, this would take a new options account at a specialist broker, but I'm calculating out the benefits of this "pure play" hedging index, vs the effort.

As to the amount/cost of the hedge, I agree that you're mainly trying to avoid a loss if a market bubble hits or you're stuck with an unpurchased/unrented home for some time. Having said that, long-duration (6-12 month) put options, that are out of the money (the market would have to decline at least 5% for them to start generating positive $ returns) are not that expensive. I'm working on the calculations this week, but hopefully you can protect from a loss on a property you are targeting 12% - 20% profits on, for just the 'insurance price' of 1 to a few percentage points.

Has anyone on the forums had experience reducing the risk of a downturn in the home market, by buying a hedge on the stock/options market?

For example, you're building or refurbing a home that will be targeted for a sale close in 9 months. You believe in the project & your gen. contractor, but wan't to limit risk from a housing downturn at some point. So you could buy on the equity markets a 'put' (option to sell the investment at a net gain, if the market turns down) or a future (locked-in price for the home market index in your metro region) for 9 nine out to protect much of the downside, like insurance.

It looks straightforward enough to buy options "insurance" - some volatility like stocks but well within the realm of rational investing - not a gimmick. I'm researching the options/futures that are easiest to understand, most cost efficient to acquire and manage like standard stock investing, and will write something up. If you've found good 'instruments' for trading (like an option on a REIT or on the Schiller home index), please chime in. Also, if you'd like to collaborate on the research, do write me.

Thanks

Scott

Thanks for all the feedback on building uneven land, with a stream. BP participants are a great bunch. I found this discussion chain as well about uneven land. http://ths.gardenweb.com/forums/load/build/msg0807512327940.html .

Not surpisingly, most folks agree that it could be possible to build here but could be expensive and has risk, so buyer beware.

I have the possibility of investing in the development of two new homes (1 acre each) in my town. The neighborhood is exceptional and land purchase price will be lower than market, given personal contacts.

The land right now is about half filled with small-to-medium-girth trees. The ground is bumpy underfoot and our town is known to have rocks under the topsoil. There's a small brook on one edge of both properties. One neighbor have dealt with it by building a small tunnel under one side portion of their driveway. So net-net, lots of promise but also these topology concerns I haven't dealt with before.

Can anyone point me to guidance like cost increases to bulid, pitfalls to watch out for, and due diligence steps to take, to asset the impact of the grounds on building the house? I'm hoping for more guidance than "it's more expensive," "it depends", "talk to the zoning board", or "hire a surveyor", though I understand these are part of the answer. For example, how expensive does it get to remove stones, clear a field of trees, or flatten the property? Can a basement truly be waterproofed from a brook that's 50 feet away and down-grade? I'd be happy to read anything written about a developer's experience with 'bumpy' land. Thanks in advance!

That response is a huge help, thanks Bill. And I'll get my photo updated :-)

Dave Savage, thanks so much for the feedback and well wishings, and the new perspective on the question.

Bill Gulley, I've found BP to be the most welcoming and helpful investment site on the web, so it was disappointing to get such a negative retort. Why make assumptions about my background? I've been involved with financial research, mortgage-backed obligations, commercial lending, and regulatory compliance for two decades, and have co-led 4 analytic businesses. Each requires some new learning but the basics of IRR, WACC, market research, project risk management and legal covenants apply everywhere. Direct residential real estate investing is new but everyone needs to start somewhere and I've been evaluating opportunities in my home market for 6 months. We're talking about one, single family flip, with a 6-month, secured note to a friend's firm who has 10 years development experience and solid references. Fortunately I have supportive friends in real estate and a great lawyer and CPA, and this first deal should go just fine.

Hello, I'm just delving into acting as a private money lender for single family house rehabbers. Common terms I've been offered by the developers/borrowers range from 8-10% interest, for me to invest 85-100% of acquisition+fix costs. I receive first lien plus a personal guarantee. The borrowers are small but have experience with a dozen previous properties and have personal assets in the high hundreds of thousands to low millions, I'm guessing.

My questions:

- What are typical default rates on loans like this? 1%? 5%?

- Should there be a default how 'ugly' in effort and cost can this become legally to get paid or take over the property?

- Is there a way people look at these loans compared to other fixed income streams with greater security? I.e. a CD gets 0.65%, and a secured 'flip' loan gets 8%, does this imply a 7-something % default premium?

Thanks for thoughts on this - there are so many 8-10% single family loan possibilities they seem relatively safe, but there has to be more too it.

Regards,

Scott

Thanks Jon. This was my first Bigger Pockets forum question, and yours is the first answer - and most useful so far :-)

Hi, I'm new to multi-family rental investing; trying to get my spreadsheets in good shape.

Can someone help me understand: If the 50% rule starts out estimating 50% of gross rent goes to expenses, and folks on these forums have said it's not worth investing in a rental property if you're getting below $200/unit/mo cash flow, then...

- At what LTV rate for debt financing is the cash flow calculated? 100% finance? 75? 0%?

- I assume geography has a big impact on the $200 rule, correct? What about for the east coast - NY, CT, MA?

- Wouldn't these two rules together rule out lower rent housing? It's a rote formula; the only way to achieve >$200/unit cash flow is to invest in higher rent buildings, or calculate using a lower LTV, correct?

Thanks for any input, these forums are a wealth of help.

Scott