Investing In The Path Of Progress

The one fact about real estate that never changes is that they don’t make any more of it. You can take a big piece and cut it into a bunch of small pieces to make it go further or you can take a piece and develop it to make it produce more, but you can’t make any more of it. Where it is located has a huge impact on its value.

The term “location-location-location” is commonly used by real estate professionals to describe the three most important factors when determining the desirability of a piece of real estate. Identical homes in different locations can have dramatic differences in value. Proximity to schools, transportation, health care, shopping, recreation, entertainment, jobs, views have a positive impact on the values of real estate. Negative impacts to real estate values can be caused by proximity to commercial/industrial areas, near railroads, freeways or under flight paths, crime ridden neighborhoods, economically depressed areas or close to hazards.

A real estate strategy that savvy investors have used successfully through the years is to invest in the “Path of Progress.” Key areas where cities or towns are expanding or are redeveloping with infill or renewal projects can offer outstanding profit potential. Addition of new infrastructure, roads, bridges, accessibility or convenience can add value to stagnant areas and new life to profit potential.

Vision, knowledge and timing are keys. To be able to see the where change is going to take place and the possibilities it offers, to know the details of what is going to happen and the time frame and to know when and where to act. If you are a developer, getting in when the values are low is a key factor in a successful project. If you are a business owner or investor, going to where the action is and will continue to be is good for long term growth, stability and resale value. If you are a home buyer, investing in the path of progress will increase your chances of making a solid real estate purchase because of the market demand that is created and maintained because of the location. Some people call this Luck, but as Roman Philosopher, Seneca said: “Luck is when Opportunity Meets Preparation.”


Area Lodging Industry Improving

One segment of the economy that has shown improvement in the Billings area is the lodging industry. STR (Smith Travel Research, Inc.) has been providing market data in North-American since 1985. STR and STR Global provides market data for thousands of lodging facilities representing 5.5 million rooms worldwide. They track performance such as Occupancy, Average Daily Rate and RevPar (Revenue Per Available Room) which provides vital management information for the Lodging Industry. The STAR Reports contain summaries and historical data to reflect how your property measures up against a chosen Competitor Set or Market.

The December report for the Billings Area included 50 properties representing 3,991 rooms. In addition to the current month numbers, they track the trailing 12 month period from November 2010 to November 2011 for Occupancy %, Average Daily Rate and RevPar and the percent change from 2010. These numbers are compared to other cities in the area and around the country. Two interesting sets of numbers in the December report were for Billings, MT and Bismarck, ND.

The report showed that in these two markets, the 12 month change has been dramatic. The occupancy in Billings increased 11% from 60.9% to 67.6% and in Bismarck (which already has good numbers) increased 5.9% from 75% to 79.4% occupancy. The Average Daily Rate for Billings increased 6.4% from $74.77 to $79.58 and in Bismarck increased 11.4% from $77.05 to $85.81. The RevPar in both cities increased a whopping 18.2% and 18.0% respectively, $45.50 to $53.76 in Billings and $57.78 to $68.16 in Bismarck. These increases were by far the best compared to other reporting areas including Western Montana, South Dakota, Madison, WI, Springfield, MO and Albuquerque, NM.

What has caused this? The only thing that really changed in our area is the continued energy resource development and the explosion of oil activity. In the Autumn 2011 edition of the Montana Business Quarterly they state that “new technology has opened up 4 billion barrels of oil in the Bakken, arguably the largest inland oil find in the U.S. in the past 50 years.” There is an ongoing effort underway between the Billings Chamber of Commerce and the Big Sky Economic Development Authority to develop Billings as an Energy Development Hub. The strategy is to position Billings as a destination of choice for energy companies, their suppliers and their employees. This past year has seen some of this effort take hold and start to come together with new energy businesses and services working out of Billings. Evidence of this is shown in the increased lodging statistics for the past 12 months in Billings. This is exciting for the lodging industry, for the City and for the Region.


Investment Grade Real Estate

Just what is Investment Grade Real Estate? Real property that is often included in portfolios of institutional investors such as insurance companies. They are of sufficient size, quality and credit worthiness, often $5 million up, and may include Class A Office Buildings, Retail Centers, Industrial Properties, Motels/Hotels and Apartment Buildings.

These are often Single Tenant NNN (often called Triple Net or Net/Net/Net) properties. This means that you have one tenant in a property that pays the Taxes, Insurance, Maintenance and Utilities and you get a check at the end of the month, and you can count on it being there. Frequently, these are properties that are called Build-To-Suit. A company that does not want to tie up their own capital on real estate, will pay to have a building built for them to their specifications and agree to lease it for an extended period of time. The initial term of these leases often times are for 10 years or more and usually include shorter term options to renew. These can be great deals for an investor, but they come with risks. Some of the key questions that need to be addressed are:

Can they make the payments – are they credit worthy?
Can I build what they want and lease it back at a price that works for all parties?
Will this involve financing on my part?
Will we be able to structure a deal that gives me a reasonable Return-On-Investment based on my Risk?
What is the Capitalization (Cap) Rate? (free & clear return – Net Operating Income divided by my Cost = Capitalization Rate) In today’s economic climate an 8% to 10% Cap is common in many areas of the country.
Will the property be rentable to other businesses or uses if and when the tenant leaves?
Is this in a location that offers upside in the future?

Some of the situations that lend themselves to Investment Grade Real Estate purchases are people coming into large sums of money from inheritance, sale of properties, sale of businesses or accumulation of large sums of cash from investments or earnings. This can also come from owning undeveloped property that is desirable for development because of its location often times in the path of progress.

Some of the types and forms of investments are:

Land lease only – you lease the land – tenant puts the structure on it with his money.
Subordination – you lease the land and allow the tenant to put a loan on the property which puts the owner in second secured position on the property.
Fast food franchises and retailers often like to operate out of leased properties.
Medical facilities can be outstanding investments.
Government buildings can also be outstanding investments. They often times have longer term leases, they are backed by the US Government and they very secure. Often times they are sold at a lower Cap Rate (6.5% – 7.5%).

Investment Grade Real Estate can provide a long term steady income stream with no management hassles that is secured by real estate and a contract (lease) to pay for a certain length of time. These leases often times are structured to hedge against inflation by including periodic increases of a fixed amount or based on an index such as the (CPI) Consumer Price Index.

Depending on your situation, Investment Grade Real Estate can be a key and integral part of an investment strategy for many people.

Why Should I Buy Debt-Free Income Properties?

Does it make any sense to buy debt-free income properties? It makes all the sense in the world if you have the cash! It takes away all the “smoke and mirrors.” There are no up-front fees, no long term liability and cash is always king – you get the best deals, especially in markets like we are currently experiencing. What you get is an investment that offers safety, backed by real estate, income, tax benefits and capital appreciation.

For years, insurance companies and savvy investors have purchased income properties for cash in order to maximize income and minimize risk. What it does is eliminate the expense of debt service and all the up-front fees, restrictions and requirements lenders place on the borrowers, risk of foreclosure, and you end up with a predictable cash flow.

What are the best properties to look at? AAA Single Tenants with Triple-Net Leases in which the tenants are paying for the real estate taxes, insurance, maintenance and utilities, with ideally terms of 10 to 15 years with options to renew and rent increases. You receive a check at the end of the month with no hassles. These could be properties with long term State or Federal Government Leases. They could be Fortune 500 or 1,000 Companies. Managed Commercial Multi-Tenant Properties with CAM (common area maintenance) charges which often times include all the operating expenses to the owner like real estate taxes, insurance, maintenance including lawn care and snow removal, utilities and management. These properties often times have shorter term leases and require more management, but if you are hiring it done, you get a check at the end of the month. Other types of properties that work are Triple-Net Leased Restaurants or Bars, Managed Motels and Hotels and Managed Residential Income Properties (apartments or apartment complex’s).

Rate of returns on these properties (capitalization rate) can range from 7% to 10% and higher. Where else can you invest your money to give you low volatility, consistent performance, minimized risk backed by real property, parcel tax shelter from depreciation, predictable cash flow with profits taxed at capital gains rates, and a long term chance for capital appreciation. Pretty tough to find other investment vehicles that can compete with the benefits of debt-free income producing real estate!


Billings Residential Market Picking Up

The Billings residential housing market has picked up in the past year. According to the Billings Association of Realtors Multiple Listing Service statistics, the housing market in Billings has improved in the past year and has shown some interesting trends.

Home sales in Billings have increased $45 million from the period of June 1010 to June 2011 with a volume of $378 million, going to $423 million from June 2011 to June 2012. During the past year, the average price of all units dropped from $209,216 to $205,806. More specifically, the average price a year ago of 2-BR dropped from $152,254 to $151,836, 3-BR dropped from $191,271 to $187,970, 4-BR dropped from $248,793 to $242,425 and the average Condo dropped from $142,924 to $137,536.

Total units sold during that period went from 1,795 to 2,052, an increase of 257 homes closed. Interestingly, with the lower average home price this past year, homes put on the market that sold within the first 30 days increased from 630 sales to 780.

Financing methods have changed somewhat from the year ended June 2011 to year ended June 2012. Cash transactions increased from 285 to 312 during that period, FHA financing dropped from 544 transactions to 519 during the same period, while VA went from 121 transactions to 167. Conventional loans were the most used financing method during those periods, increasing from 723 transactions for the year ended in June 2011 to 883 transactions for the period ended in June 2012.

The housing market in Billings has improved with the new home construction picking up considerably in all areas of the city. The challenges for buyers are with the financing which requires stellar credit, steady income sources and in the case of conventional financing, 20% cash down payment. The real advantage in purchasing a home in Billings is because of the community. This is the “Magic City, Montana’s Trailhead,” truly, “The Last Best Place!”

Looking at Cash Flows

Real estate through the years has offered investors one of the most diverse and most profitable ways of accumulating wealth and income. With real estate, you can see it, you can feel it, you can use it, you can put it to work for you to produce income, it increases in value, it gives tax shelter, it is safe and some is very liquid. It can work exceptionally well and be an integral part of your investment goals.

All real estate has expenses associated with owning it. The operating expenses for income producing properties can include the following: Accounting, Advertising, Legal, Insurance, Janitorial, Lawn Care, Leasing Fees, License Fees, Office Expenses, Pest Control, Property Management, Property Taxes, Repairs & Maintenance, Resident Manager, Salaries & Wages, Snow Removal, Supplies, Telephone, Trash Removal, Travel, Vehicle Expense and Utilities.

After all the expenses of a property are paid from the rents, what is left over is the NOI or Net Operating Income. If you divide that number by the asking price of a property you get the Cap Rate or Capitalization Rate (free & clear return). For Example: If you paid $1,844,000 for a 32 unit apartment building with an 8% Cap Rate, you would be getting $147,520 return on your investment after all the expenses are paid, which is your Net Operating Income. This brings up a couple of questions. Has this been a consistent number through the years? Is this a typical Cap Rate in the area at this time? Are there any deferred maintenance or other large expense issues coming up?

If you are in the process of transitioning cash into other assets, income producing real estate can be an outstanding vehicle to protect your investment and at the same time give you a good return in cash. If you purchase free and clear income producing real estate, historically it will keep up with inflation both with appreciation and with cash flows. By transitioning cash into a hard asset like real estate, you are not only going to maintain the value of your principle, but in many cases you will receive a cash return that is hard to rival with other investments.

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Single Family Homes for Investments

Why single family homes? There are two good reasons. Of all real estate vehicles, single family homes are the easiest to rent and the easiest to liquidate and get your cash out. If you need to get your money out of a real estate investment, it will take the least amount of time with a single family house.

Unlike apartments or commercial properties, there are more buyers for single family homes. Buyers are either looking for homes to live in or they are looking for homes to buy and rent. Buyers looking for homes to live in can make the purchase with 3% to 5% down payment plus closing costs. Investors wanting to purchase single family homes are looking at 15% down payment plus closing costs. With either type of buyer the cash required by the banks is less than what is required to purchase apartments or commercial property.

Generally speaking, the best price range for single family rental properties is in the lower end of the market you are in. Look for two to three bedroom homes listed at a price which will allow you to rent them at a competitive rate in your market and have the ability to pay all its expenses (real estate taxes, insurance, maintenance and debt service) and give a return on your investment. Another big consideration to look at when determining what to buy is how much money and work will go into the property in order to get it in rentable condition.

Two to three bedroom homes are in greater demand, rent easier and get higher rents than apartments. The trade off is the economies of scale, the numbers work better the bigger the apartment complex and the more units involved. If you are thinking about purchasing income producing real estate as an investment, single family homes is a great place to start. They are easy to get into, usually quite a few to choose from, they are a relatively safe investment and you can get out of them if you need to. Single family homes offer real estate investors a solid foundation.


Where Should You Put Your Royalty Money?

Where is the best place to put oil royalty money? That is a great problem to have and there are lots of options and a lot of people trying to help you spend it. I am a proponent of diversity. Don’t put all your eggs in one basket. One basket that you always want to look at and to be a part of any investment strategy is Real Estate.

According to a Professor G. William Domhoff, UC Santa Cruz in his publication, Wealth, Income, and Power 2005 revised in 2012, in the Wealth Distribution by Asset Type in 2007, 77% of the non-home real estate is owned by 10% of the people. People with money invest heavily in real estate.

The US economy since 2007 has taken a real pounding. Any time this happens, opportunities come with it. In the case of real estate, values have adjusted dramatically downward in most parts of the country. In Williston and the Bakken region, values have gone up. It is said that with real estate, you make your money on the “buy.” In other words, buying at a good price going in gives you your best chance of making a good investment. Your best chance of making a good “buy” is not where values are going up, but where values have adjusted down.

Look 283 miles south west to Billings, Montana, referred to as “Montana’s Trailhead” and as the “Magic City.” At 104,000 people, it is the largest city in Montana. Billings has a diverse economic base including agriculture, energy, transportation, tourism and recreation. It is a major hub for retail and wholesale outlets, education and medical facilities for Montana, the Northern Rockies and the Northern Great Plains. The city’s primary trade and service area is one of the largest in the U.S., 125 miles serving 250,000 people with a secondary trade area serving over 385,000 people.

Billings has not suffered nearly as much as the rest of Montana or the country from the recession. Real estate values have adjusted to the market which means there are good deals to choose from. It is said that once a city hits 100,000 population, 200,000 comes quickly which means Billings is in the “Path of Progress.” Getting an 8% or 9% rate of return on a quality income producing piece of real estate in Billings is happening right now. Buying raw land in areas where the city will grow is well priced and available. Billings, Montana is a great place to invest your money, be able to come see it working and enjoy the hospitality and the wonders of the city and the area.

Bars in Montana

Bars in Montana offer some unique opportunities when it comes to owning and operating a business. Although there are a number of types of licenses in Montana, the two most frequently used are the All Beverage with Gaming and the Beer & Wine with Gaming. Since the mid 80’s Montana has allowed holders of both types of licenses to operate a combination of up to 20 video poker & keno machines (starting in 2012, Video Line Games – “Las Vegas style Slots”) per license. The two major differences in the licenses are: 1) All Beverage can serve full liquor as well as beer & wine whereas the Beer & Wine is limited to just beer & wine, and 2) A person can hold only three All Beverage in their name (effective 10-1-13), but can own multiple Beer & Wine licenses.

In the mid 80’s when video gaming started, All Beverage Licenses in Billings were selling for around $100,000. In the larger communities in Montana (Billings, Bozeman, Helena, Great Falls, Missoula and Kalispell) license values began climbing to a point before the recession in 2008 when All Beverage Licenses were selling as high as $1,000,000. This increase was due primarily to gaming and the fact that each community is set up on a quota based on population which meant the market and availability dictated the value.

Why the increase? Gambling revenues for the state peaked in 2008 at $423 million gross income on 18,350 machines ($23,042/machine) which the State of Montana received 15% tax on amounting to over $63 million. Revenues had dropped to $358 million by 2012 on 16,649 machines and license values in Billings are currently running around $600,000 for All Beverage w/gaming and $350,000 for B&W w/gaming.

Here’s how the numbers work. The key number on a 20 machine operation is the weekly Drop (the total amount of money going through the machines every 7 days). What is left at the end of each night is the Hold (the money left after all payouts have been made). This is the number that the State of Montana Taxes 15% of on a quarterly basis. The Hold fluctuates but for this example we will use 25%. Example: 20 machine drop @ $50,000 per week = $2,600,000/yr x 25% Hold = $650,000 Gross Revenue Less 15% State Tax ($97,500) = $552,000 Gross Profit for the license holder. If the license holder owns the machines, they keep it all. But, if the license holder uses a vendor, the vendor owns the machines and splits the Gross Profit with the license holder 80-20 to 60-40 (negotiable) with the larger % going to the license holder.

Drops around the state for 20 machine operations vary greatly from $25,000-$30,000 per week to a few at $75,000-$95,000 per week. To utilize the full potential of a license, successful operators serve beverages, food and operate a casino. In the case of a All Beverage License, you can operate a full bar, serve food and operate a 20 machine casino with each area providing it’s own income stream and profit center. Good operators can make a very good living by maximizing the potential of their license, keeping their costs in line and providing quality food, beverages and service.