Best and worst of Capital Appreciation Many people are interested in commercial real estate they move towards what is familiar, something that they are somewhat familiar with. At one point most of us have lived in an apartment complex and some investors simply consider them large houses. Multi units are very popular right now, in the real estate cycle where many people have lost their homes and people that owned house are living in apartments and apartment renters have moved to mobile home units the rental property has become a strong growth area in a downward economy. So many investors flock to apartment complexes especially in areas that are popular, Los Angeles, NYC and major markets in Texas. It artificially drives prices up and sharply decreases cap rates. In Dallas, and most major markets in Texas, the real estate for both commercial and residential real estate are still at the peak prices of 2007, price have not increased but they sure have not come down. Speculators from both California and New York have helped to keep price high. As most know, I am a student of Robert Kiyoskai, and we never invest where everyone else is, we invest where everyone else is not looking.
As investors we want results that are far different than everyone else. We desire different things in life and we are willing to do different things to achieve them. Right now we are on a verge of a tremendous opportunity; commercial real estate will have peak foreclosures in 2014-16. Many interest only and negative amortization notes will balloon over the next few years, this will provide an opportunity for all investors that understand that purchasing properties at a low price is going to reap a huge harvest. In some cases the discount might provide cash flow in a mature market such as Texas. We have to all become versed in the acquisition and operations in commercial real estate over the next few years or lose on this golden opportunity.
I am certainly interested and participate in the cash flow oriented apartment complexes business. As a group we have over 1100 apartment complex units. But my real passion is the hotel business. Where a good C level rental might collect $500/mo. in rent, a hotel room can do this in 3 days. I love hospitality. Because so many people involved in the commercial aspects of real estate, prefer apartment complexes, I am looking for a different result and enjoy hospitality. Do this and you have a whole lot less competition. Many apartment complexes in Texas sell inside of 1 week in key markets. Hotels come in both cash flow and also capital appreciation. Assets in this part of the real estate market can do well on cash flow in less mature markets and can sell for very high prices in more mature markets. PnL's are not written for cap rate. You can easily spend $200M for a 5 star luxury hotel property that can only produce about 2% NOI. Most of the gross income that is produced goes back to the operations of hotels. But they also sell for a whole lot more than condos, houses and plex units.
Case in point the Ilikai hotel; you know the famous one that in the 1970s was the back drop to Hawaii Five O. The previous owner purchased the property prior to the last real estate boom in the 1980's this is a massive property about 1000 keys and located right on the beach in Waikiki, great location in a capital appreciation market. Brian Anderson purchased the luxury hotel on the beach in 2006 and was a concept created by Chinn Ho a real estate investor. He ran the hotel portion, but as time progressed and lending eased up, he started to sell. He did not sell the whole property at once, he did it smart. He converted many of the hotel rooms into condos and back when lending was easy he converted the most coveted beach rooms into luxury condos and sold them for $5M a piece, he sold the more average rooms for $2-3M a piece. He did so well at this that when he gave up the property for foreclosure he had sold nearly 500 of the 1000 rooms. Just do the math 500 x $3Million is a lot of zeros. This is the best capital appreciation market example of doing it right. Buying prior to an up cycle and making the best use of lending for the buyers when money is easy EVERYTHING sells at a high. Unfortunately most people don't have the fortitude to purchase assets when everyone else is fearful. If you want a different results then do something different.
Wealth earned is far different than wealth inherited. Did you not read the news today? Who buys a 4br condo for your college pad at $13,000/ sq. ft? Yes all cash purchase $88M, this is the most expensive purchase ever of any home, good for Ekaterina Rybolovleva, she did not earn her money she inherited it, so there is definitely no sense of appreciation. At 22 years old we can all see her social responsibility. She needs a part time place to stay while studying or partying or is this part of hiding assets for herself while her parents get divorced. At least buy something that appreciates or create a business that makes people lives better. $88M would certainly cure cancer see my view at http://longfininvestments.com/loans.html, what an absolute waste. She will definitely have a hard time selling this property for more. Good for Sandy Weill, I hope the seller acts socially responsible with the huge profits that she makes. We should all answer to a higher calling, something that defines our purpose and makes us far better people contribute to a better world and exceeds the lives of those around us, this is the true definition of leadership.
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