What Does The Wall St. Crisis Mean To You?
Fall 2008: Historic U.S. Investment Banks Fail - $700B bailout announced .. Circuit City files for Chapter 11 ..Car makers teetering on bankruptcy .. Dow Jones falls over 500 points (in mid September ... and again in mid October .. and again around November 12 testing new lows). What does this mean to you as an (existing or prospective) co-owner in Prestigious Property assets ?
You no doubt saw or heard the news on Lehman Brothers filing for bankruptcy and AIG (the world's largest insurance firm) being saved by U.S. government financial aid. Why? These firms, like many others, were overleveraged. Unlike regulated banks, their legal underpinning did not require them to have a minimum cash amount or securities; things we have as real hard asset owners. The US is not out of recession. Some banks are not safe as people run for their money. Money supply is tightening up although it is still very plentiful worldwide. What does this mean for you as apartment building owners or prospective co-owners ? It means that owning or buying a rental property is a smart investment choice today if the asset is:
1) not overleveraged
2) located in a high demand area
3) well managed!
Here are some of my thoughts in light of current events:
a) Now is not a good time to sell assets including real estate... but it means opportunities to buy are more plentiful and prices more reasonable.
b) Canada’s CMHC mortgage bond is available at roughly 3.5%, and as such, 5 year mortgages are only in the low 4.2 to 4.6% range... with plenty of money available – a great time to hold an asset with a fixed rate mortgage!
c) More people chose to rent... either because they do so freely due to falling house prices or because the market forces them to rent due to tightening credit.
d) CAP rates (or yields) are going up (or prices are going down) for commercial strip malls, office towers, commercial REITs and industrial land because historically they were always higher than apartment buildings due to higher risk and higher vacancy potential. Owning a strip mall or an office tower is riskier now with potentially much higher vacancies on the horizon. The yield/CAP rate has to reflect that. It didn’t over the last few years... and now the market is correcting prudently to reflect that additional risk. Investing in resorts, development, industrial or retail real estate IS more risky than owing an apartment building.
e) All our assets are located in high demand areas with in-migration or rising rent levels still affordable for “the average Joe”... as opposed to high end condos or 2nd homes or discretionary real estate. Again, we are well positioned to weather a deteriorating economic climate.
f) Our overall loan-to-value in the PrestProp group is around 50%, although usually higher in initially acquired assets with upside rent potential. This means we are in good shape.
g) Any lending on our assets has been done or will continue to be done on an income (as opposed to value) basis... showing prudent underwriting by lenders.
h) Rent on an apartment is not discretionary spending. Buying a new dress or flowers or a new car is... thus rent levels for industrial or commercial real estate will fall along with values even if our assets stay flat or most often, grow in value due to higher demand and at the very least, inflationary rental upside.
Hence, the PrestProp approach remains a relatively safe and high yield investment class!
Worst case for us: we keep the asset a while longer, we ride out the storm, we tighten our expenses a wee bit more, we improve the rent levels and cash-flow over time, we pay down the mortgage. Where is the risk ?
Hence we say: Invest with Certainty – In Uncertain Times .. and have actually trademarked this phrase: “Don’t wait to invest in real estate – Invest in real estate and wait !”™
Yours Sincerely and Succesful Investing,
Thomas Beyer, President
Prestigious Properties Group
> Next page in Current Events section: Who Benefits From Rent Control?
