What to Look for in an Investment Property: 3 “Pluses” and 3 Things to Avoid

By Ralph Serrano

So, you’re looking for your first investment property. Before you jump into any ill-advised deals, you’d do well to ask yourself if you really know what you’re looking for.

Don’t take that the wrong way. Plenty of first-time real estate investors know exactly what they want. They don’t need anyone to tell them what to look for and what to steer clear of. One way or another, they’ll learn.

Others need more guidance. That’s okay, too. 

 

“It’s better to weigh that first real estate investment decision carefully and make a choice you can live with for the long haul than to make a choice you’ll come to regret.” 

— Ralph Serrano

 

If you find yourself in the latter camp, you’ve come to the right place. Read on for more about three things to look for in an investment property and three things you might want to avoid.

What You (Might) Want to See in an Investment Property

These three things may signify a favorable real estate investment opportunity:

1. A Location That Sells Itself — Or That You Can Work With, Eventually

“Location, location, location” is the lodestar of real estate investing. Nothing commands a premium price like a premium location. If you’re fortunate enough to find an underpriced gem in a self-evidently amazing location, great; you’ve got your target. Otherwise, look to locations poised to be better tomorrow than they are today.

2. Good “Bones”

Surely, you’ve heard the term “good ‘bones’” in this context before. You’re looking for structure and layout that, even if some improvements are required, appeal to prospective buyers and/or renters. 

3. A Clear Path to (Manageable) Improvements

Be wary of potential money pits. If you can’t see yourself completing necessary or desired upgrades within the allotted timeframe or budget, take a pass. You’re about to bite off more than you can chew. 

What (Might) Give You Pause

These three things can complicate a real estate investment:

1. Prior Insurance Claims or Damage

These conditions aren’t automatic dealbreakers, but they certainly warrant further investigation. You need to know whether what you’re seeing, so to speak, is what you’re actually going to get.

2. Wonky Interior Layout

It’s someone’s dream home — just not yours. A few quirks are tolerable; a bizarre format is not.

3. High Property Taxes

Property taxes can vary sharply over short distances; it’s all about what local taxpayers can bear (and what they’re getting in return). Still, for investors, high property taxes mean a property that’s less likely to paper, all other things being equal.

Some Things Are Non-Negotiable

The foregoing notwithstanding, it’s important for real estate investors to understand that some things are truly non-negotiable in real estate investing. Buying a standalone property without a clean title is a big no-no, for instance. So too is committing to a property that needs more work than you can afford. 

At the end of the day, what matters above all else is that you feel comfortable in your decision. If that means passing on an opportunity that another investor sees as a slam dunk, or sticking with an opportunity that everyone thinks you’re crazy for pursuing, so be it. After all, you’re the boss.

Are you planning to invest in real estate, distressed or otherwise? What’s encouraging you to take the leap? What has you pumping the brakes?

 

Ralph Serrano of Miami-based Safe Harbor Equity, is the founder and managing partner.

These are the 6 Reasons Why Florida Is So Popular With Real Estate Investors

By Ralph Serrano

The dictionary entry for “real estate investing” might as well feature a picture of a glassy South Florida condo tower, its balconies poised like sentinels over Biscayne Bay. For better or worse, Florida — and the three counties that make up what’s traditionally known as South Florida (technically, southeast Florida, but who’s counting) in particular — is the epicenter of the American investment property market.

Has it always been so? Yes and no. Florida has drawn its fair share of real estate speculators since the early-20th-century land rush, which minted plenty of millionaires and bankrupted far more. 

 

“But the conditions that gave rise to Florida’s present real estate investment boom arose more recently, thanks to technological advancements, political decision-making, and a not insignificant amount of luck.” — Ralph Serrano

 

With that in mind, let’s review six things that make Florida particularly attractive to real estate investors.

1. Air Conditioning

Laugh all you want. It’s true. Until the advent of indoor air conditioning in the middle of the 20th century, delicate-complexioned Northerners saw most of Florida as a backwater. Literally — much of the state was all-but-uninhabitable swampland, or at least it seemed that way.

2. Miles and Miles of Beachfront Real Estate

The sky is blue, water is wet, and Florida has hundreds of miles of prime beachfront real estate. From Pensacola to Naples to Miami Beach to Amelia Island, Florida is defined by its sandy expanses. Not coincidentally, these expanses tend to coexist with the state’s priciest lots — or, at least, those most attractive to investors.

3. No State Income Tax

Florida is one of a handful of states with no state income tax. That’s a major motivator for middle-class snowbirds and jet-setting multimillionaires alike; many thousands of people who spend summers elsewhere call Florida their home base. That means more demand for Florida real estate, beachfront or otherwise.

4. Rapid Population Growth

What came first, the chicken or the egg? For Florida’s property market, it’s difficult to tell. What we can say with certainty is that Florida real estate investors love the state’s brisk growth, which puts a floor under demand even in tough economic times.

5. Great Business Climate

Florida perennially ranks in the top five states for entrepreneurs. That’s no accident — it’s the natural outcome of decades (with some interruptions) of pro-business politics up in Tallahassee. 

6. Not Perfect, But Pretty Close

Florida is not perfect. No state or region is. Indeed, Florida is best understood as an amalgam of multiple distinct regions: Caribbean-facing South Florida (the greater Miami area up to the Palm Beaches); slower-paced (and retiree-heavy) Southwest Florida; the great mass of suburbs and exurbs stretching through Central Florida from Tampa to Daytona along I-4; and North Florida, which is closer culturally and economically to Alabama and Georgia, the states immediately to its north, than Miami and its environs.

Still, Florida is a great place to live and work. And that makes it a great place to invest in real estate — if you know what you’re doing.

So, are you sold on Florida real estate? 

 

Ralph Serrano of Miami-based Safe Harbor Equity, is the founder and managing partner.

6 Tried-and-True Tips for First-Time Real Estate Investors

By Ralph Serrano

We all start somewhere.

For real estate investors, “starting somewhere” generally means buying that first investment property. Unfortunately, for one reason or another, far too many first-time real estate investors end up as one-time real estate investors.

Want to avoid that fate? Follow these six tips for first-time investment property buyers. How many are you following right now?

1. Work With Someone Who Knows What They’re Doing

When in doubt, find a partner.

You’ll hear this advice from veteran investors time and time again — because it’s sound advice. You’re not going to strike gold on your first foray into the market; better to work with a senior partner on your first deal than flail about until you fail.

2. Understand the Difference Between ROI and ROE

One letter makes a world of difference. 

 

“Return on investment (ROI) is your return on the cash you actually put up to seal the deal; return on equity (ROE) is your return on the actual equity in your investment property.” — Ralph Serrano 

 

If you buy in cash, these numbers won’t be too far apart to start (though that’ll change once you begin making improvements). If you’re leveraged, it’s a different ballgame from the get-go.

3. Think Twice About Borrowing From Friends and Family

Do you really want to be beholden to people you see socially — or, worse, at Thanksgiving? Perhaps your answer is “yes,” in all seriousness, but it’s more likely to be “no.” Think carefully.

4. Don’t Bite Off More Than You Can Chew

If it seems like too much work to take on yourself, it probably is. Have patience and you’ll encounter lower-key (and perhaps even turnkey) opportunities. Save the high-risk, high-reward projects for later, when you’ve got your real estate investing sea legs.

5. Choose Your Market Carefully (And Know It Well)

Chances are good that you already know which market you want to play in. It’s probably the market you know best.

That’s great. Stick to it for as long as it can hold you. There’s more opportunity here than you might realize.

More importantly, the threats beyond your market — the known unknowns and unknown unknowns — may also be more numerous than you realize. As you scale, you’ll have the luxury of focusing on new markets. Until then, stick to what you know.

6. Tread Carefully, But Don’t Be Shy

They say that fortune favors the bold, but that isn’t quite right. The bold very often make ill-advised moves that do more harm than good.

Here’s an amendment: Fortune favors the assertive. Assertive real estate investors know how to pick their spots — and how to pounce once they’ve sized up a can’t-miss opportunity. 

Perhaps assertiveness can’t be taught. But it’s fair to bet that, with enough experience, you’ll earn it. 

Here’s to those first-time real estate investors bent on becoming many-time real-estate investors — and the assertiveness to get them there. It won’t be easy, but it is possible.

 

Ralph Serrano of Miami-based Safe Harbor Equity, is the founder and managing partner.

Investing in Distressed Commercial Real Estate Assets – 8 Things To Know

By Ralph Serrano

According to the St. Louis Fed, the delinquency rate on all commercial real estate loans (excluding farmland) was 0.72% in October 2018. That’s down dramatically from a peak of 8.75% or so in 2010, in the aftermath of the global financial crisis (and far lower than the 30-year peak of about 12% during the savings and loan crisis of the late 1980s and early 1990s).

Meanwhile, office construction is decelerating as vacancy rates remain flat. In other words, while the market for commercial real estate does not presently appear to be distressed, it’s not showing any real signs of frothiness.

This isn’t to say that commercial real estate investors can’t or won’t find distressed assets that meet their investment criteria.

“Distressed commercial assets are always present: in every market, in any business cycle. Opportunity abounds, if you know where to look.” —Ralph Serrano

Let’s take a closer look at some of the basic concepts commercial real estate investors need to know before purchasing distressed assets directly or buying into a professionally managed commercial fund.

1. Institutional Investors Tend To Ignore Smaller Assets

Institutional investors with hundreds of millions or billions in investable capital usually overlook opportunities that come in under strict principal thresholds — generally, $10 million to $20 million, depending on the institution. That Class B medical office building in an up-and-coming suburban submarket might look great on paper, but if it’s only worth $5 million, your typical blue-chip life insurer isn’t going to bother — unless it’s part of a larger basket of similar properties in the same market.

Institutional players’ lack of interest in smaller commercial assets means more opportunity for independent investors and boutique funds that specifically target opportunities at the lower end of the market.

2. Loan Position Matters

Many distressed debt investors exclude all loans that fail to meet first lien criteria. A first lien mortgage holder has priority over all other debt holders, meaning they’re first in line to be repaid should the borrower default. Investing in first lien loans only is a crucial principal protection strategy.

3. Occupancy Isn’t Everything

It’s tempting for novice real estate investors to focus on occupancy rates above all else, but that may be shortsighted. Occupancy is of course a crucial indicator of near-term cash flow, and an important factor in determining the asset’s value.

That said, it’s not immutable: This month’s occupancy rate is merely a snapshot in time, one that may change with effective marketing and shifts in market conditions. Even if the asset’s near-term cash flow isn’t where you’d like it to be, lower occupancy means it’s likely to be offered at a discount, with long-term benefits — e.g., appreciating value — should occupancy increase.

4. Opportunity Is Always Market-Dependent

National delinquency and vacancy rates are instructive indicators of overall market health, but they don’t say much about what’s happening on the ground in individual metropolitan markets.

Indeed, every commercial real estate market has its own quirks and patterns. Some consistently present delinquency rates well above the national average, while others are counter-cyclical — exhibiting elevated delinquency and vacancy rates in defiance of national or neighboring market trends. Whether you plan to purchase distressed real estate assets directly or invest in a private equity fund that does the same, it’s important to look beyond the headlines.

5. Diverse Portfolios Tend To Perform Better Over Time

Diversification is the lifeblood of any sound real estate investing strategy. Prudent commercial real estate investors target a range of collateral types to ensure they’re not overly exposed to sector-specific weakness.

That said, every diversification strategy is different. A fund raised specifically to invest in office debt by nature excludes retail and multifamily — but it’s not likely to focus wholly on, say, medical office or flex space in a single submarket.

6. Every Submarket Is Different

Every market is different, as they say. In South Florida (Palm Beach, Broward, and Miami-Dade) for instance, the residential mortgage delinquency rate is significantly higher than the national average: over 12% in October 2017, compared with just over 5% nationally during the same timeframe. (Commercial delinquency rates were lower.) Both trend lines were rising, but South Florida’s from a far higher baseline.

But if looking at the national picture tells you little about the state of play on the ground, gazing through a wide-angle lens at a region of 6 or 7 million people isn’t much better.

Examining what’s going on in individual submarkets is far more instructive. In fact, it’s essential for anyone who’s serious about investing in distressed commercial real estate assets. Knowing whether an area where real estate assets are broadly undervalued is due for a rebound, or where they’re likely to depreciate further.

And that leads to our next point.

7. Local Expertise Matters

There is no substitute for on-the-ground expertise. There’s a reason why major institutional investors maintain dozens of branch offices across the United States: Local market knowledge is extremely difficult to replicate from one’s perch in New York or Los Angeles, no matter how sophisticated your risk models or thorough your due diligence.

If you’re just getting your feet wet in the world of commercial real estate investing, you’d do well to stick with the market or markets you know best. Bear in mind that you’ll find more opportunity in a market with above-average delinquency and foreclosure rates, like South Florida, than a market with below-average delinquencies — but distressed assets exist everywhere. You can always partner with local market experts to achieve geographic diversification, though you’ll of course need to apply your own risk models and due diligence processes to any opportunities in less familiar markets.

8. Your Network Is Your Net Worth

The most attractive distressed debt opportunities very often aren’t advertised publicly. For this reason, it’s crucial for serious investors to develop relationships with financial institutions and property owners, who have far more insight into the local market — and knowledge of off-market opportunities — than publicly available sources of information.

Are you interested in real estate investing? What would you most like to know about distressed commercial real estate assets and debt instruments?

Ralph Serrano of Miami-based Safe Harbor Equity, is the founder and managing partner.