Thursday, March 26, 2015

Alfidi Capital Inaugural Visit To Bay Area Wealth Builders

I have been on the Bay Area Wealth Builders (BAWB) email list for years.  I have never visited one of their events until this month.  I had to go check them out because real estate writer John T. Reed was their headlined guest speaker at the March 2015 monthly networking meeting.  The photo below has my reflection in the window to prove I was there, way up north in Corte Madera.

The host started with a rundown of the macroeconomic forces affecting real estate valuations.  I totally agree with him that the Federal Reserve faces a very complex interest rate environment, completely of its own making.  I have not located a public source for the relationship between interest rate basis point changes and changes in a borrower's qualifying minimum income for a mortgage, but banks know how to calculate the relationship.  Real estate professionals track the Standard and Poor's Case-Shiller Home Price Indices both nationally and for their metro area.  The St. Louis Federal Reserve Bank's FRED has a convenient Case-Shiller data series for the San Francisco Bay Area.  Crunch that data until your heart's content.  You can also crunch the California Association of Realtors' data and statistics to see if any realtors' predictions about perpetual home value increases ever panned out.  The CAR's Housing Affordability Indexes on that website show how San Francisco properties are much less affordable that those in the rest of the state.

Property owners had time to pitch their investments.  I noted that most of the properties seemed to be outside California.  I don't get the appeal of out-of-state properties for most real estate investors.  I respect sophisticated investors who can afford to research and visit distant locales but most beginners will find it easier to perform due diligence closer to home.  I won't even think about buying real estate outside the nine county Bay Area because I'm not willing to travel any farther than I can drive in a couple of hours.

The most unique financing method BAWB discussed involved using an IRA as a source of funds.  I would not use my own IRA to advance a loan to a third party investor.  There are other ways to capture the value of a mortgage note within a tax-advantaged retirement account, such as by simply buying shares in a securitized mortgage loan product.  There are even ETFs tracking mortgage-backed securities.  Owning liquid, registered, exchange-traded securities eliminates all of the headaches real estate investors face from IRA-funded renovations that add Unrelated Business Income Tax (UBIT) liability.  Owning publicly traded mortgage securities in an IRA also avoids scrutiny of mortgage originators under Dodd-Frank and the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act.  Playing around with loans in IRAs is not the game for me.  My IRA is not a bank and I am not inclined to impair its value with some third party's credit history.  I am also not inclined to fiddle around with wrap-around mortgages; thanks but no thanks.  I guess some real estate investors prefer to tempt fate and play with fire just for the thrill of ownership.

John T. Reed spoke at length about the most common mistakes real estate investors make, with the main ones listed on his website.  I learn something new every time I hear this guy talk.  Real estate investors can read John's free articles so I don't have to recap his main points here.  I am sufficiently impressed with the voluminous legal requirements for landlords that I am deterred from ever investing in physical domiciles for live tenants.  Humans are an inconvenience and most amateur landlords must be masochists if they underestimate the risks John identifies.  I will never ignore PITI components and how they impact ROI.  I always have an exit plan; that's why I would rather own a REIT or ETF than a physical building.  If poor cost accounting fails to identify poorly performing projects, then the multiple derelict buildings and empty lots I see around San Francisco must reflect a whole bunch of landlords who flunked managerial accounting.  John closed out with a recap of his approach to liquid hard assets and other parts of his hyperinflation hedging strategy.

The BAWB session was a success for me because I came away more intelligent about real estate.  I don't envision any physical property ownership in my future but the animal spirits moving real estate investors are compelling.  I would return if BAWB wants me as a guest speaker.  I am certain I could speak at length about REITs and related securities that don't require retail landlording.  I could also talk the audience's ears off about economic statistics that drive markets and investor behavior.  Real estate investors will then bask in the glow of the glory that is Alfidi Capital.

Full disclosure:  I paid $20 to attend this BAWB event.  I usually attend business events for free but I relaxed my cheapskate rule just this once.  It was the correct decision because I got my money's worth in wisdom.  No one paid me to make this disclosure.