Apparently, we haven’t remembered much from the past, especially in real estate and business finance. If you review market history, you'll see the same things occur over and over again, just under different disguises. It’s laughable whenever some real estate or business “guru” makes a statement saying that his or her boot camp, home study course, or other products and services will teach us how to take advantage of these “never-before-seen” conditions and “Why Never Before in History Has There Been a Better Time to Buy Real Estate”, or other such nonsense (disclaimer: I don’t know whether the writer of this linked article is a scam artist or not, I only know that I sure wouldn’t trust him without some extra-careful due diligence on his background). These statements are typically made by people who only want to make a quick sale and who don’t care to cultivate long-term client relationships. These people are not true, ethical practitioners in our industry. They will surely make a few sales just from the sheer numbers of eyeballs they get to read their bold statements, but the information from these kinds of people will most likely be outdated crap that doesn’t work anymore, if it ever did.
I firmly believe that history repeats itself so if I ever make a statement saying that “this is the best time” or “this is the worst time” for anything, I always follow this up with a time frame such as “…in our generation” or “…in the last xxx years”. This being said, it may be unwise to ever say that there is a “best” or “worst” time for anything involving financing, even with a time frame on it. For example, there are now courses, boot camps, and seminars popping up out of the woodwork that teach people how to tap into private-equity financing and private lenders to fund real estate deals now that conventional bank financing is more difficult to obtain than it was several years ago. The organizers and presenters of these events claim that “this is the best time ever to obtain private funds and give your investors high rates of return” since people are supposedly tired of the anemic returns presently paid by bank Certificates of Deposit (CD’s) and money markets.
One such organization that seeks to capitalize on the private funding fad, Cash Flow Depot, even has an online seminar completely devoted to teaching ways to obtain private-equity financing now. One of the presenters claims that people who have 1031 Exchange funds are the most motivated to lend money to you since they are under a time deadline to get this money into other real estate investments and that she will teach you how to get this money to fund your deals. She is correct in that people who have 1031Exchange money are motivated by deadlines but I don’t really think she is in the business of real estate and raising capital anymore, if she ever was, since it is a real hassle to use 1031 Exchange money to fund your deals. If she really is in the business of raising private funds for real estate deals, she would know this well enough to not just blindly use this as the main selling point for her products and services. One of my mentors who I am in a joint venture deal with now, Dave Lindahl, will no longer use 1031 Exchange money to fund his apartment deals because of the hassles associated with it. As you might imagine, I have a great deal of respect for Lindahl and don’t hesitate recommending him to anyone who wants to learn about the apartment investing business. I also have another mentor in Atlanta, Georgia who teaches me to invest in commercial real estate but I am reluctant to mention his name without first getting his permission since he is a very private person.
Teaching just anyone to raise private-equity financing is dangerous. In 2008, one such anyone in one of my target markets, Augusta, Georgia, raised millions of dollars in private funding from other people to fund her deals and she ended up losing over 40 houses to foreclosure as well as about $3.7 million of this private money, which included retirement money (think “Bernie Madoff”).
Back in the 1980’s, also known as The Roaring 80’s, there was a similar surge in private-equity financing that was pioneered by Michael Milken. Milken, also known as “The Junk Bond King”, did prison time for securities fraud and racketeering, but I think he actually did the business and real estate worlds a favor by taking the age-old concept of private funding to a new level and making it much more widely available to companies that couldn’t otherwise obtain the necessary financing to grow or even get started in the first place. Back then, such financing was more commonly known as junk bond financing, i.e., financing that paid its investors much higher rates of return in exchange for them being able to tolerate the much higher risks usually associated with lending to relatively unproven business and real estate ventures. Nowadays we use terms like “hedge fund”, “joint venture partnerships”, and “private-equity financing” to describe this kind of funding but it's just the same thing 30 years later using different names. It’s still considered to be “junk” financing. If you have any doubts as to whether or not we are seeing a repeat of 1980's-type financing, the January/February 2010 issue of CFO magazine points out that companies issued record amounts of junk bonds in the last three quarters of 2009.
I don’t like the term “junk” to describe high-yield financing for projects that carry supposedly “higher-than-typical” risk. In the right hands and under the right circumstances, these kinds of investments can have minimal risks but give the same high returns on investment often associated with “junk” investments. For example, there is a highly-specialized type of funding called “transactional funding” where you borrow funds for no more than 24 hours to flip a property and then return it with an enormous rate of return to the lender. For 24 hours of use, this return often ranges from 1% to 5% or higher, which equals annualized rates of return ranging from 365% to 1825% or higher, depending on the amount of “interest” paid for this 1-day use of the funds. The way this investment is protected is that the investor borrowing the funds must have an end buyer to whom to flip the deal immediately or else the funds never get released from escrow and the lender just gets the money back. Minimal risk with enormous returns…what a concept! This may still be labeled as “junk” financing but I’ll gladly lend on these terms any day of the year and anywhere in the country as long as the person to whom I’m lending this money is responsible enough to know how to use it.
For some reason, just because a blue chip company is large, publicly traded, and has a history of stable earnings, this company is perceived to carry lower risk to its investors than other companies and ventures. This may be true in the stock markets but, unless I have absolutely no interest in following the markets, I‘d prefer having as much control over my investments as possible without relying on some stock broker or other money manager to make decisions that affect my financial future while getting paid whether or not they do well with my money. Let’s not forget about companies that were once classified as “blue chip” companies, such as Enron and General Motors, that went bankrupt and lost hundreds of millions of investor dollars. Direct involvement with real estate is my preferred vehicle for growing my investments. Putting my money into the stock markets and hoping that it goes up in value leaves my finances too much in the hands of people who I don’t know or trust. I have learned, by reading and by personal experience, that the people running the deals are much more important than the deals themselves. If you have any deal to consider, even a seemingly great one, but an idiot is running it, stay away from it or pay the price to go to an expensive “seminar” to learn why you should have avoided it (one of my previous posts tells a little about how I almost got ripped off $160,000 by the smooth-talking developer of the failed Wesley Arms condo conversion in Augusta, Georgia).
Although I’ve posted about some creative ways to finance real estate and business ventures, it’s arrogant for me to claim these ideas as my own since they existed long before I even existed as an embryo. I only remind others that there are alternative ways to obtain financing when more conventional funds are difficult to obtain. But, in accordance with original intent of this post, I emphasize that the cyclical nature of the markets will continue to determine the best kinds of financing and deals to use as they disappear and reappear with amazing regularity with the passage of time. Perhaps the best way to prepare for investing in future markets is to become an objective and diligent student of market history and ignore those who hype things to the extreme.
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