Why are businesses increasingly attracted to South Bend as a place to invest, grow and succeed? It's easy to see why businesses are standing up and taking notice of South Bend. It's a combination of factors, beginning with affordability, whether it's commercial or residential real estate bargains, or low commercial utility costs. Not only that, but it's strategically located – right at the center of the second-largest overnight, over-the-road distribution zone in North America, reaching more than 41 million residents. Businesses also benefit from South Bend's tech-savvy workforce, strengthened by educational institutions like the University of Notre Dame, Indiana University South Bend, Bethel, and Ivy Tech Community College. And then there's South Bend's favorable business climate, replete with attractive incentives like tax abatements, tax increment financing districts and industrial revenue bonds.
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BIJAN GORJI KNOWS HOW TO think like the biggest minds in real estate.
The California transplant is not quite investing billions of dollars in property portfolios across America, but having spent two decades securitizing loans, Gorji sees the same thing as Wall Street:
The rental market is scorching.
Gorji has gradually picked up some 30 rental properties in greater Sarasota, mostly condo units in appealing communities, which he leases out for monthly cash flow.
The venture has grown faster and more profitable than Gorji ever could have imagined, and he still hopes to pick up another 20 properties -- if their price is right.
Despite the dwindling supply of foreclosures and the rapidly rising home prices, Gorji is among an army of investors who have carved out a niche in Southwest Florida's prolific housing market.
Smaller investors, like Gorji, now account for a growing share of the region's overall home deals, paying cash for their acquisitions and converting droves of listings into rentals to feed demand from those just not interested in owning a home.
It's the same strategy rolled out by giant hedge funds, including Blackstone Group and rival Colony Capital, on the cusp of the recovery.
Now that most of those larger institutional investors have eased back, smaller investment cohorts are capitalizing the remaining opportunities.
"The rental market is very strong," Gorji said. "There is a lot of demand."
Gorji moved from Iran to California to attend boarding school, staying in the Golden State to obtain his undergraduate degree from the University of California, Los Angeles. He also went on to earn his master's in business.
He spent two decades in the financial industry, working in securitized loans -- the practice of pooling debt and selling the cash flow to third-party investors.
Some analysts attribute the subprime mortgage crisis to risky securitization strategies. When unjustified loans were securitized and sold off during the housing boom, it forged a deluge of foreclosures and bank failures.
Gorji himself was burnt out by the crash.
He eventually moved to the Sarasota area to custom build a home and to help launch a startup out of Tampa.
But his focus quickly shifted to real estate.
He snapped up a distressed condo while the prices was still cheap, sensing the booming demand for residential rentals.
Then he bought another.
Soon, Gorji would own units in multifamily developments such as the Serenade in Palmer Ranch, the Village at Town Park and Las Palmas. He now manages 30 properties -- all of them leased -- with hopes of increasing that number to 50.
Unlike Blackstone, which has focused on single-family rentals, Gorji prefers multi-family units for the minimal upkeep.
He also has steered away from flipping -- another popular investment model -- to take advantage of strong rent yields. He said his capitalization rate is typically 8.5 to 9.5 percent.
Others seem to agree with Gorji's line of thinking.
From January through March, investors accounted for 59 percent of all housing sales in the North Port-Sarasota-Bradenton metropolitan area -- a four-year high, according to recent data from industry researcher RealtyTrac Inc.
That was up from a share of 53.5 percent in the fourth quarter. It also is nearly 20 percentage points higher than the region's ratio of non-owner-occupant deals during the same three months in 2014.
But despite those gains, the larger institutional investors are behind fewer deals here, indicating the smaller operations have taken over.
"Some of the larger institutional investors have pulled back on their purchases," Daren Blomquist, vice president at RealtyTrac, said recently. "Now, the smaller investors have a chance, and that's what I think we're seeing here in these numbers.
"This continues to be an investor-dominated market, especially in Sarasota."
When we interviewed Donald Trump a couple of weeks ago, he told us that NOW is a great time to get into real estate – and he specifically pointed to houses.
Fellow billionaire, Warren Buffett, appeared on CNBC a couple of months ago and essentially said the same thing. In fact, he said if there was an efficient way to do it, he’d like to buy 200,000 single family homes!
You may or may not agree with them at first blush, but when two billionaires (neither of whom are trying to sell you houses) both say the same thing, it’s probably worth taking a closer look, don’t you think?
Why are billionaires Buffett and Trump bullish on real estate right now?
1. Prices are low relative to replacement cost.
Rising commodity costs (oil, lumber, steel, concrete, copper, etc.) make it more expensive to build new homes. And even though land and labor are soft in many areas, it still costs more to build a new house than what existing homes are selling for. Until that changes, there won’t be too much building (not to mention the tight construction funding).
Eventually, a growing population (the U.S. is projected to reach 400 million in the next 20 years), should increase demand to where new housing will be a necessity. When that happens, the new houses will pull up the value of existing houses. Or more accurately, competition for existing houses will push prices up until it makes sense to build new ones. Either way, it’s a wave a “value investor” like Warren Buffett recognizes and would like to ride.
2. Rents are high relative to purchase prices.
At the end of the day, rental real estate is an income investment. When you can pay less for more income, that’s a good thing. And with more people entering the renter population, increasing demand is propping up rents in many markets. Robert Kiyosaki’s “Rich Dad” real estate advisor Ken McElroy tells us that every 1% decrease in home ownership is another million people who need to rent. And home ownership is several points down from its peak of nearly 70% just a few years ago! That’s a BIG demographic shift.
Again, the law of supply and demand says that without new housing coming to market, and more people competing for available housing, rents (and prices) will eventually rise. But even if they don’t, RIGHT NOW the rent to price ratio is VERY favorable for income property investors. Great! That means we don’t have to wait for the numbers to make sense. In many markets, they make sense now.
3. The foreclosure inventory remains high.
Why does this matter? First, the people living in those houses haven’t yet joined the renter population. As they do, there will be more demand for rentals. And as those properties work their way into the market, they’ll keep prices down. That’s good if you want to acquire properties at good prices (value investing). If you’re a buyer of investment real estate, how long do you want the sale to last? We hope the sale lasts awhile, so we can stock up!
Interest rates are at record lows. The biggest expense a real estate investor has is the interest on the mortgages being used to control the property. Low interest rates and solid rents mean better cash flows. Right now, the cash flow on many properties (the capitalization or “cap” rate) is higher than the cost of the mortgage (the interest rate). If you can borrow money at 5% and invest it and earn 8%, how much 5% money do you want to borrow? How about ALL of it!
And last but CERTAINLY not least…
4. Inflation benefits real estate investors.
Donald Trump told us that “real estate and inflation get along very well.” Great!
What does that mean?
When the Fed “eases” more money into the system, it causes interest rates to drop. In fact, lower interest rates are a major reason the Fed “eases”.
But easing also means that the dollar falls — that is, it takes more dollars to buy the same stuff (which is why gas, food and almost everything costs more in dollars).
Hey! Don’t tune out now! This is where it gets interesting. Trust us, a little understanding of real estate macroeconomics can go a long way. There’s a reason Donald Trump likes real estate when there’s inflation.
Real estate is one of the items that eventually goes up in dollars because of inflation. But that’s not the reason to buy property. Because whether the property goes up or down in price over time, as long as it cash flows, you win. I’ll say that again: As long as it cash flows, you win. Let’s take a look…
For example, if you put $20,000 down on a $100,000 property and it throws off positive cash flow of $200 a month, you’re getting over a 10% return on our your $20,000, plus tax breaks! That’s pretty good.
But what if (gasp!) Buffett and Trump are wrong, and the house goes DOWN in value?
Let’s say that after 30 years, you wake up and discover your property is only worth $50,000. A 50% decline over 30 years! Ouch. But did you really lose?
Grab a cup of coffee and let’s do some math! C’mon, it’ll be fun.
First, let’s say you paid cash. Not that you’d want to (for reasons to be described), but you may have to. Not everyone is running around with a pristine credit score.
So you pay $100,000 today. Without a mortgage, after expenses, you pocket $700 a month… for 360 months! That’s $700 x 360 or $252,000. Now the property is worth only $50,000 and it still generates cash flow. So you get ALL your money off the table, still have a property that’s paid for, and it’s paying you each month. How are you doing?
But, you say, if the price drops, wouldn’t the rent drop too? Take a look around. We just watched properties lose half their value in many markets. Did the rents go down by half? Maybe in certain isolated markets, but that’s certainly not been the norm. And if home prices are dropping precipitously, are builders adding new supply? Probably not. So unless the population shrinks as much or more, then demand should prop up rents.
However, for sake of argument, let’s say that rent dropped over time so that on average, your take home income on your free and clear property was reduced from $700 to $350. What’s $350 x 360? Survey says… $126,000. Have you lost yet? Isn’t this fun?
But let’s go back to our 20% down scenario…
So you put in $20,000 (down payment) on a $100,000 property and earn over 10% a year for 30 years ($200 a month = $2,400 a year income on your $20,000 down payment). That’s less cash flow than if you paid $100,000 cash. But we can think of about 80,000 reasons why getting a loan is a good idea. And more than a 10% cash-on-cash return is pretty strong. Good luck getting that in a CD.
Plus, at the end of 30 years, the tenant has completely paid off your $80,000 loan and you now own the house free and clear… PLUS, it’s still supplying you with monthly cash! There’s no bank account or mutual fund that can match that deal. We know. We asked. They laughed so hard, they… well, let’s just say they laughed real hard.
Now if Trump and Buffet are right, and today you’re buying houses below the future value, in 30 years your investment property might be worth $200,000 or more. Nice, stable, steady long term inflation of 2-3% per year — just like Bernanke and the Federal Reserve target. The Fed is COMMITTED to inflation!
Warren Buffett's real estate forecast for 2012 and beyond is extremely rosy, with the so-called Oracle of Omaha even recommending buying them over investing in a diversified group of leading companies.
In an interview with CNBC on Monday, Buffett said single-family homes, along with stocks, are cheap and attractive investments. By contrast, investments in Treasury bills, gold or simply keeping money in cash are not as attractive.
Buffett said if he had a way to buy "a couple hundred thousand single-family homes" and easily manage them, he would "load up on them" and "take mortgages out at very, very low rates."
However, he said that managing "a couple hundred thousand single-family homes" is an impossibly Herculean logistical task.
This line of reasoning likely holds true for many brilliant investment minds who choose not to bother with buying single-family homes -- even though they are undervalued -- when buying and owning stocks is as easy as a few keystrokes and mouse clicks on a computer.
Because of the absence of many of these big institutional investors in the U.S. residential real estate market, it is less competitive than the stock market, Buffett said. When institutional investors of size do enter the residential real estate market, they usually go for apartment buildings, which leaves the single-family homes segment even less competitive than the general residential real estate market.
When asked if a young individual investor should buy stocks or his first single-family home, Buffett recommended buying a single-family home with a 30-year mortgage.
"It's a terrific deal," he said. "It's a leveraged way of owning a very cheap asset now and I think that's probably as an attractive an investment as you can make now."
In fact, if the young individual investor is "a handy type," he could "buy a couple of them at distressed prices and find renters," said Buffett.
Buffett is famous for only investing in assets he believes are undervalued. He must, therefore, believe that the U.S. residential real estate market is undervalued.