HOUSING NEWS REPORT
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involved in getting the proper financing as the financing you get often determines the success of the project. With interest rates so low, we have shifted to financing that has a long maturity. There are others who view a short term floating rate debt as the way to maximize cash on cash. It depends on how conservative you are. So far while we have been expecting rising interest rates for a number of years, we have had a longer period of low interest rates than almost everyone expected. That means those who went for a floating rate and short terms have come out better. However, I remember when first mortgage rates were as high as 13 percent and you if do something relying on low rates in that environment you could be in deep trouble. The Chinese say that luck is
cap rate up in the first five years usually to 7 percent or better, increasing the value of the properties by at least 40 percent. As to the properties you already own, spending capital on them can create a better return than you can find spending that money in acquiring a new property. Regardless of the general economy there are always some areas that are improving and some that are declining. Obviously in a recession it is easier to find a good buy but the risk of catching a falling knife is greater. One partner has the ability to find the best buy and improve it and the other has the ability to fund the equity required. When I started out 50 years ago there were opportunities far in excess of our reserves to purchase. We never looked at a property unless it was a 9 cap or better. Today the reverse is true. We have almost unlimited capital offered to us continuously and have a pool of over 100 investors which is constantly growing — even though we do not advertise, we do not used Wall Street, and we work almost entirely on word of mouth. Funds are almost unlimited but the number of opportunities is much harder to find. In the beginning it would take only perhaps 10 potential property inspections to find a good deal, but today the ratio is probably over 100 to 1. One hundred come in and probably 80 are immediately rejected in a two-week period. Then we underwrite 20, and that’s reduced to five;, then we make offers on five and if we are lucky we get one. NOT ROCKET SCIENCE Real estate is not rocket science; it is just sixth grade arithmetic. But it takes a lot of due diligence, work, and time to find a project that makes sense. Once it is found then there is a lot of effort
preparation. While we say it is much better to be lucky than smart, a lot of preparation and due diligence is required to be successful continuously. Be careful not to over-improve. Appreciation versus high cap rate. Good luck and if you find the next Reno give me a call. •
Mr. Freshman founded and was the managing partner of the law firm Freshman, Marantz, Orlanski, Cooper & Klein, which is now the Los Angeles office
of K&L Gates. Mr. Freshman is also an acknowledged expert on real estate investment and syndication. He has served as Adjunct Professor of Real Estate at the USC Marshall School of Business, and as an expert witness in over eighty cases. In addition, Mr. Freshman is the author of numerous articles on real estate matters. His book, Principles of Real Estate Syndication, is the bible on the subject.
32 | think realty magazine :: april 2018
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