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THE
ECONOMIC MOMENTUM SHIFT
I'll take this concept futher and point out that you can even look at other
markets, such as real estate to identify and trade sector rotation and momentum.
In the '90s many real estate markets were booming along with their localized
economies/cities. Other real estate areas that were outside these booming cities
did not participate in those real estate gains in the same fashion. I'll give
you one clear example that I witnessed firsthand. Atlanta in the 90s was a boom
town. Real Estate prices were rising at 8-10% "on average" in the greater
Atlanta area. Some niche neighborhoods were seeing 15%-30%++ gains per year.
Meanwhile some sleepy beach towns in
Florida and surrounding states that were well outside of metropoliton areas were
only appreciating at 2-4% a year. Their localized economies were not driven by
the technology and internet revolution and their towns did not see money flowing
in and as one would expect, prices of real estate moved slowly. Because Atlanta
was spitting out dotcom after dotcom, the money in Atlanta was flowing like a
river. You may recall the king of internet consulting firms iXL communications,
well it went bankrupt after the bust and for years now the building they
occupied still sits vacant in the middle of mid-town.
Many of the trendy restaurants that
popped up in Atlanta have gone under and it is weird to see so many unoccupied
buildings as you drive busy roads through the city and the surrounding counties.
Foreclosures in Atlanta were averaging only 700-800 per month during the boom
times. By the time the bubble burst sending dotcoms out of business, out of town
and their employees with them... people couldn't make their mortgage payments
and the demand for houses started to fade.
Today we are approaching 4000
foreclosures per month in the Atlanta area and higher end houses that sold for
600K to 1+ Million dollars in 2000 can be had for 400K to 700K now in certain
neighborhoods. It is a creepy thing to have witnessed over the last 6 years I've
been here.
THE
BABY BOOMERS DID IT AGAIN!!!
It was interesting to watch this divergence of momentum building in the real
estate as well as the stock market. As the stock market continued down in 2001
money started leaving the stocks and it started to find its way into coastal
real estate. It took me by surprise at first, but it really made perfect sense.
Many economists suggested the main reason for the stock market boom of the '90s
was that the baby boomers were at full employment and were throwing their money
at the stock market in hopes it would help fund their retirement savings.
When the stock market started to
slide, many of those boomers started shifting their money to real estate. Many
of the publicly traded REITs (Real Estate
Investment Trusts) have done very well over
the last few years, but have significantly lagged private investing in those
coastal beach towns. As it turns out Joe sixpack and family started cashing in
their stocks and funneling new money at their retirement beach home sooner than
was forecasted.
Just like in the stock market,
momentum shifts and sectors gain and lose investor dollars driving prices either
higher or lower. Atlanta was shrinking because of layoffs and companies going
under and many could not afford their house payments and as a result the
pressure of massive foreclosures has kept prices from appreciating. In many
areas of Atlanta, prices have not moved higher or have declined over the last 3
years. Like all real estate though (always a localized event) certain
neighborhoods have continued to do well and have continued to see prices move
higher because they are "desirable" places to live. Just like in the stock
market, being a good stock picker can make you money in a declining market if
you know what you are doing.
Here we are in 2004 and as I said,
Atlanta has seen very little price appreciation in housing and the commercial
office space market here is dismal. You can drive by some of them off of I-75
and you can see right through 70% of the floors which are totally unoccupied and
have been that way for a couple of years now.
Meanwhile in many coastal towns such
as Florida. With boomers buying beach homes and putting their retirement dollars
to work buying rental homes, prices have been flying higher.
REAL ESTATE "IPOs" FOR THE LITTLE GUY
My sister first got me interested in Florida pre-construction investing when I
saw her put a $10,000 "reservation fee" down on a piece of dirt that the
developer priced at $209,000. It was just dirt. However, she was the one
laughing with someone offered them $170,000 to step in as buyer and for them to
assign their contract to them. Do the ROI. $10,000 to $170,000 in less than a
year. My sister started with roughly $30,000 in 2001 and now has a seven figure
bankroll AFTER TAXES three years later in 2004.
I had to see for myself what was
going on down there and after weeks of driving the coastal areas of Florida and
inverviewing three dozen realtors I kept coming up with the following "trend".
The number one buyer was the younger "baby boomer". Many realtors flat out told
me that many of them were buying now to rent out for the next 5 to 10 years
before they move to Florida to retire.
I could bore you with more stats and
more statistics, but the bottom line was that not only were the boomers moving
the real estate prices, but the investors, wall street pools and sharks showed
up in force in 2003. Many of the pre-construction deals are very VERY difficult
to get into now. Back in 2001 it would take a few weeks to place (find)
investors to buy all the lots of a new beach development by the water. Now in
2004 because of the gains that have been seen and the growing number of players
wanting in on the action. The lots sell out in under 24 hours because they have
almost all gone to a "lottery" situation.
Many of the best properties and
locations for pre-construction are now seeing more than eight investors to one
lot. So when there are say 100 lots offered for pre-sale, there are 800 or more
investors in the lottery going for those 100 lots. Because of this prices are
immediate and quickly moving higher as sales start to happen in the second
market. I liken this action to "hot IPOs" of the '90s. What I am about to share
with you is amazing, and TRUE! It is a real life example of momentum and trading
the trends. Trading is about taking action once you've done your due diligence.
Beleive me I have. I am not afraid to swim in shark infested waters because I
have escaped every momentum trend because I am always very VERY close to the
action. When it begins to show any signs of weakness that can be sustained...
I'm out. With that let me share with you this pre-construction momentum boom
that is still building steam.
REAL
ESTATE OPTIONS
The bigger appeal to these deals is that it is more like buying a call option.
In many of these deals you only need to put up $1000 to $10,000 for the
"reservation fee" initially. In fact in many of these deals your money is
100% REFUNDABLE if you don't want
to proceed and close on the property when the developer is ready to begin
construction!!! You can't ask for your premium back on your call options if the
stock has dropped in the stock market, but you CAN in this game!
Once the developer has received
reservations on all the lots (or condos) then things can start to move forward
with getting zoning and a ton of other things passed before development can
begin. I'm not going to get real technical of the actual construction process.
In some cases it is months before
things ever go to a "hard contract" (whereby you then have to put up a full
10-20% of the value of the lot/condo and then usually have to get financing for
the balance within 30 to 60 days after). Every deal is different, but they are
so leveraged in time and with so little out of pocket money, that the ROI is out
of control.
GET
READY TO PUKE
Recently (February 2004) my sister was lucky enough to get into a
pre-construction deal where the lots were $70,000 apiece. This was a property
that was way back from the beach which is why the lot prices were so much
cheaper than normal. She got two lots in the lottery (she knew the developer in
this case which is why she got two... she has made some great contacts down
there which has been key to getting into some deals which would otherwise be
impossible to get into).
She only had to put down a $1000
reservation fee for each lot ($2000 total out of pocket at this point). As of
the end of May they were still working out the final details of the community
and she has still only been out of pocket $1000 per lot with no loan needed yet.
The very same lots are being "flipped" back and forth between second and third
party builders and investors at a price of $140,000 per lot. Many of these
pre-construction deals allow for you to "assign" your contract to another
individual/company/builder, etc. However you do have to pay 4-6% real estate
commissions being the seller. Even with that what I'm going to layout will make
many of you puke (I know I did).
You may think... WOW from $70K to
$140K, that's a 100% gain in 3 months! However, her capital investment was $1000
per lot. So if she sells one of the lots to another investor she could today get
$140K minus the 4% real estate commission ($5600). So she walks with $64,400
($140,000 minus $5600 minus her cost of the lot of $70,000 = $64,400). That is
$1000 to $64,400 in three months. Do the annual ROI on that!
MOMENTUM IDENTIFIED, BIG PLAYERS MOVING MARKETS
As I said, I did my due dilegence and I have now participated in six
pre-construction deals of which I am only still holding one lot. This by the way
is one of the reasons you have not received any newsletters from me in the last
5 months!!! I'm not going to frustrate you and tell you the details of each of
the deals I've completed. Instead I will share with you another opportunity that
my sister participated in that I wasn't able to get in on...
She paid a $5000 reservation fee in
March for a pre-construction lot. Her lot price was $108,000. Just last week one
changed hands at $260,000 and she was upset she didn't wait a few more weeks.
Here's the kicker. My sister is upset with herself because she sold hers at
$205,000 in early May. That was a $5000 "reservation fee" (capital outlay) and
she got back the difference of her sale price of $205,000 minus 6% real estate
commissions on this one ($12,300) which netted her $84,700 off her $5000
investment.
INSIDER TRADING (LEGALLY)
Here is the "catch". We all knew this one was coming right??? In many cases you
have to be in the immediate area or have done business with one of these
developers before to get in the game. Some of these guys operate under the "good
ole boys network" principle. So some of these deals are only able to be had if
you have the inside scoop as to when they are going to happen and who you need
to contact to get in the lottery. Many of these developments are only made
available to prior investors first and if there are any lots left over then they
go into the lottery game.
Because of my sister's contacts I've
been able to get up to speed with the area and what is coming up in the pipeline
in the next 6-12 months. I have decided to continue this newsletter only on a
QUARTERLY basis from now on because all of this "pre-construction" momentum
trading is taking up a large amount of my time. In fact I am moving full time to
my beach house as of the end of this month until this momentum in coastal real
estate cools off. I liken this to sector trading, you trade the hottest sector
as long as it is hot.
I of course am focused on the
hottest area of Florida where the price appreciation is the fastest (and not
surprisingly) the most underpriced compared to local markets. From what I can
see, even with interest rates moving higher over the coming months/quarters.
This baby boomer real estate binge with big investment money from LLCs and other
REIT pools from wall street and up north could sustain itself for another 2-5
years given the demographics. However, I will only focus on things from a month
to month basis as I do everything.
TAX
FREE REAL ESTATE INVESTING
Most people don't even realize that you can buy, sell and trade real estate in
tax free accounts just like you can stocks, bonds and mutual funds. Half of all
of my transactions in these pre-construction deals are completely and totally
tax free. Now I'm not talking about 1031 tax exchanges here. I'm talking about
fully self directed accounts where you can trade stocks, bonds, mutual funds,
options AND real estate. Everything from creating notes, funding deals, funding
down payments, you name it. I can tell you that when I was on Wall Street they
never told us that you were fully able to use your IRA and other retirement
funds to buy and sell real estate tax free.
I argued with folks about this when
I was first told about it until I was blue in the face. I had to eat my words
when I was shown all the legal documents that existed and were created in the
80s to allow this to take place and I met many folks who have grown their ROTH
IRAs to seven figures just investing in real estate. The one major rule is that
you simply can not "live" in a property you invest in. It all has to be for
investment purposes only.
Anyway, it may sound like I am not
even trading, but that is not the case at all! I love trading the markets and I
am always searching for patterns and sectors to trade. What all this real estate
investing has done is simply fatten the retirement account to do more real
estate deals and trade more gartley and butterfly patterns.
TICK
TOCK TICK TOCK
Like all good trends this one will someday come to an end as well. I wish it
wasn't the case because I used to be excited when I turned $10,000 into $30,000
in a few months and in this current day I can do it in a few weeks in
pre-construction deals.
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