Ever since the Hedge Fund industry has been snapping up thousands of distressed single family homes across the country, many savvy investors have decided to jump on the proverbial band wagon and follow suit. PHF has been providing some of those independent investors with purchase money for these “fixer/flippers” in the San Diego region for years.
It’s a great business. Distressed homes are renovated thus providing sorely needed jobs and improving neighborhoods. When neighborhoods are improved, all values go up, so investors in these distressed single family homes (whether lenders or renovators) not only are making excellent returns on their capital or efforts, but they are bailing out the neighborhood and this is occurring across the entire country.
As 2013 nears its close, the San Diego market has a shortage of inventory which has led to increased prices and lower margins in the renovation business. This in turn leads to fewer opportunities and lower yields for Trust Deed Investors. The latest quarterly data shows a huge jump in the number of homes that are no longer under water. This is a good thing on the macro level, but it warrants caution and stringent underwriting when it comes to placing your hard earned dollars on the line – it’s just not as easy as it was a year or two ago.
As one reflects on the upcoming year and the standard options available, you must decide if the economy will stay steady next year or fall off another cliff.
If you’re betting on cliff diving, then:
· CD’s or T-Bills are a good choice for ultimate safety, but the yield will not keep up with inflation. They certainly beat a negative return though.
· Real Estate in general will suffer.
· A stock market index fund would not be a good choice. The market is high and buoyed by the Feds cheap money and the Fed is threatening easing off on the money supply. This will drive up rates and drive the market down. Individual stocks are a separate matter; there is always a compelling reason to buy certain stocks that may thrive in a down market.
· Bonds are not a logical choice. Since interest rates are very low, whether you believe the sky is falling or the economy will rocket up, odds are that rates go up and a vanilla bond play would is treacherous.
· A very well secured 1st TD on a property you could stand to own for what you invested is a very good choice. The TD will weather all but the most ferocious fall, and even then, patience should bring back the value and even provide a bonus return.
If you believe the economy will be at least steady, then:
· CD’s or T-Bills will under perform
· Real Estate returns will depend on the “buy”, the type, and, as always, the operator.
o Single Family homes could be good. New single family construction could be excellent. Industrial could be excellent as the economy improves.
o Retail is very foggy since the impact of the internet (Amazon etc.) continues to explode.
o Office is foggy as well. Class A buildings seem to be doing very well in San Diego, everything else depends on a variety of factors and thus an expert investor
o Apartments continue to be the darling, but prices are high and cap rates low.
· 1st Trust Deeds will be a great choice since collateral values will not decrease. These will perform as advertised and provide yields ranging from 6-12%.
· 2nd TD’s always require diligent underwriting and are not for novices in any market, but certain instances arise that can warrant the additional substantial risk for the increased yield.
As you can see from the above, the beauty of a Trust Deed – a 1st Trust Deed – is that it should perform admirably in whichever market 2014 brings. It is never going to match getting in early on a Netflix, Apple, or Amazon, but it’s strength is that it just chugs along relentlessly through thick and thin with a yield that is extremely competitive in the long run.