Credit is cheap, and there are plenty of properties for sale, but no one is buying. Are properties overvalued in their historical context? Are artificially low interest rates and subsidies driving up the price in terms of real value?
Yes.
So how is the entrepreneur to acquire and use real estate without putting himself over a barrel with nominal prices? Are there any solutions?
Depends on what your goals are. What do you mean "use" real estate?
Without getting too specific, I am trying to open a manufacturing facility. I dont want to borrow money because I dont want the debt. I would rather buy when the market fulky corrects. Lease rates seem to be derived from the sale price anyway, I am no expert but I have called around. Do I just habe to hit up venture capitalists until I find someone who can buy property that is going to correct itself later or what?
Are you kidding? What are you worried about debt for? I've never heard an entrepreneur talk like that. I'm pretty confused. Based on that and the rest of what you've said I would guess this is your first entreprenurial venture. But then again...you're talking about acquiring manufacturing facility...for cash, no less.
a) interest rates are among the lowest they've been in history (haven't you heard of the fed funds rate of 0%?) and they're not going to get any lower.
b) as much of the printed dollars come home to roost (and even more are printed), enormous inflation will inflate away the obligation of debtors.
So what's the deal? Is this your first rodeo or what? If not, how is it you're so worried about debt at all, let alone now, in what is probably one of the best times in modern history to be in debt...And if so, where did you get the cash for an entire facility...and more importantly, are you at all worried you may be starting off a bit out of your league?
""What are you worried about debt for? I've never heard an entrepreneur talk like that. I'm pretty confused. Based on that and the rest of what you've said I would guess this is your first entreprenurial venture. But then again...you're talking about acquiring manufacturing facility...for cash, no less.""
Actually I didnt mention cash. I dont want debt because I dont want to borrow money and buy a property for $300k and then the real estate market keeps going down and suddenly I owe $250k at 15% on a property that is worth $90k.
Also, I have access to some funds. I am not a high roller but that doesnt mean I couldnt cash out my 401k.
You are correct, that as the dollar inflates the nominal price may stay the same and the dollar adjust so that the property that is currently overvalued at 300k becomes a fair deal at 300k. I had forgotten that. My concern is that interest rates will rise first, forcing real estate prices down, and buying now just seems foolish because of that.
""So what's the deal? Is this your first rodeo or what? If not, how is it you're so worried about debt at all, let alone now, in what is probably one of the best times in modern history to be in debt...And if so, where did you get the cash for an entire facility...and more importantly, are you at all worried you may be starting off a bit out of your league?""
How did you know I want to start a rodeo? I thought I typed "manufacturing facility"
I dont need a big facility, my business partner has some cash, I am starting a small business so I dont want a massive loan repayment, i may be out of my league when it comes to loans, real estate, and anticipating those markets, but I know my craft, so I believe that if I can launch my business with minimal overhead I will be fine.
However this is my first entrepreneurial venture and I understand your puzzlement. Thank you for the feedback.
Malachi:Actually I didnt mention cash. I dont want debt because I dont want to borrow money and buy a property for $300k and then the real estate market keeps going down and suddenly I owe $250k at 15% on a property that is worth $90k.
Okay you're going to have to educate me. If you're not going to buy something and pay for it in full (cash), and you're not going to buy something utilizing some form of credit (debt), how exactly are you supposed to acquire it? Someone's going to gift it to you?
My concern is that interest rates will rise first, forcing real estate prices down, and buying now just seems foolish because of that.
What difference does it make? If prices are a function of rates, why is a lower price preferrable to a better rate? Depending on the item, typically a better rate gets you out ahead...especially in an inflationary environment...which is what we'll be seeing.
I'm Batman.
I dont need a big facility, my business partner has some cash, I am starting a small business so I dont want a massive loan repayment, i may be out of my league when it comes to loans, real estate, and anticipating those markets, but I know my craft, so I believe that if I can launch my business with minimal overhead I will be fine. However this is my first entrepreneurial venture and I understand your puzzlement. Thank you for the feedback.
Obviously knowing your field is paramount, but knowing business is too. (Why do you think Sergey and Larry hired Eric?) I'm not too sure how "minimal" your overhead can be if you're talking about needing a manufacturing facility, but the bottom line is (a) if you need the facility, well...you need a facility. And (b) it doesn't matter what the market value of the facility does, so long as the property is cashflowing. And if you're really as good as you say you are, and your economic model and marketing plan are both up to snuff, then being profitable shouldn't be a problem.
But if you're so worried about it, why can't you lease something?
""Okay you're going to have to educate me. If you're not going to buy something and pay for it in full (cash), and you're not going to buy something utilizing some form of credit (debt), how exactly are you supposed to acquire it? Someone's going to gift it to you?""
Thats /my/ question. If it is a bad time to buy, and lease/rent on commercial property is basically a large fraction of that, meaning overvalued as well, how am I supposed to get a place to set up my business without getting myself in a bad situation when the market changes? You are telling me it isnt necessarily a bad time to buy, thank you.
""What difference does it make? If prices are a function of rates, why is a lower price preferrable to a better rate? Depending on the item, typically a better rate gets you out ahead...especially in an inflationary environment...which is what we'll be seeing.""
Well I suppose you are right, free money, why not lol? I just dont want to be part of the herd with the garbage bullshit loans. I thought interest rates changing was part of what is going to ruin people who borrow money now? Pardon my ignorance.
""But if you're so worried about it, why can't you lease something?""
I can. But I wanted to see if there were any other options.
Malachi:Thats /my/ question. If it is a bad time to buy, and lease/rent on commercial property is basically a large fraction of that, meaning overvalued as well, how am I supposed to get a place to set up my business without getting myself in a bad situation when the market changes? You are telling me it isnt necessarily a bad time to buy, thank you.
No prob
The only bullshit loan is one you can't pay back, for an amount you don't need. The "garbage" people got caught up in were "adjustable rate mortgages" (ARMs)...which essentialy meant that they got a really good rate in the beginning (called a "teaser"), but after a certain amount of time their rate adjusted, meaning their payments were higher. You had people taking out loans to where they knew they couldn't afford the payments after the reset. As in, they made $1500/mo, and the loan payment ended up being $1700/mo. That's it. Well, that and the fact that there was so much money out there (Greenspan lowered the Fed Funds Rate to 1% by 2003) that if you had a pulse, you could get a loan....which meant prices sky-rocketed.
So yes, you had suckers who took out loans they couldn't afford, and suckers who bought houses at prices that weren't real...and a lot of suckers who did both.
Housing definitely still has room to go down, but commercial property is a different market. This isn't to say it can't come down too, I'm just saying things aren't as simple as "real estate prices". Just as with residential, it really depends on your market...the location, and even the building itself obviously. You could find something over-priced a block away from something that's a steal. It's really just a matter of knowing what you need, what you can afford, and running the numbers. Obviously a good buyer's agent should be able to educate you a little on the area.
Shop around for someone that specializes in your kind of property, and have a chat. Get them to explain cap rates and market valuation. Have them tell you what's going on in your area, ask what they would recommend you do and get a couple more opinions. The most valuable would be from someone who's done exactly what you're trying to do. There's nothing more valuable than wisdom, and the only two ways to gain that are through mistakes and mentors. The latter are usually a lot less costly, and a lot less stressful.
They can teach you things like The 100 Rules for Being an Entrepreneur
Thanks, John.