S-NET-INVEST.com The Blog

Stock Market Train Wreck Alternative

S-Net-Blog — Wed, 07 Sep 2011 15:15:49 GMT

The continued train wreck in the stock markets underscores the need for alternatives. Money is hard to make and easy to lose. Years of investment gains can vanish in an afternoon.

To counter the conventional meltdown many now focus on “Alternative” or “Non-Correlated” investments. Simply put these are an alternative to stock market investments and their performance is not correlated with the performance of the stock market, (Aren’t you glad someone finally explained the concept in a simple and straight forward manner?)

An example is a portfolio of institutional grade property with long term leases from national corporations. The value of the investment is the value of the net cash flow and of the long term value of the properties. This type of investment is not traded and its value does not gyrate like stock exchange shares.

Shares in the above portfolio are “real estate investment securities” and are purchased through registered investment professionals via a prospectus.

Real estate investment securities can be structured to exploit a wide variety of real estate investment strategies. Whether it be a long term income strategy or a short term vulture high profit concept these securities offer investors the opportunity to participate in investments that might not be otherwise be possible. They also may offer limited liability. As registered securities they come with a high level of disclosure; an important benefit.

As the wild gyrations in the conventional markets continue the “Alternative” world is attracting interest. Many investors are no longer willing to trust their hard earned money to a one dimensional strategy. For those looking to broaden their investments real estate investment securities offer a compelling alternative.

alternative.

Quality Alternative to Market Turmoil

S-Net-Blog — Tue, 06 Sep 2011 16:06:48 GMT

Buy when prices are low. Simple concept. Owning real estate investment products in the richest economy in the world is smart. Buying when the prices are low is even smarter. Finding high quality opportunities at low prices is the smartest move of all.

This August the stock markets went haywire and investors large and small retreated. The panic spilled over to other investment classes which extended further the favorable market for real estate securities. That a cross wise stock market could impact the pricing of Class A , long term leased properties, is nonsensical but it does. Why? It keeps the speculators and hot trend money chasers out of the market. The effect: good assets at good prices.

Good assets at good prices is a fundamental driver of good long term returns for real estate securities. It also creates sustainable income from the net rental stream. This is the holy grail of retirement investors.

Reliable income can be reinvested to create the classic investment called the miracle of compound returns.

Classic basic investment values can be hard to discern amidst the smoke of market turmoil. For investors savy enough to lift their heads and look around the richest economy in the world has opportunities. Real estate securities are among the nicest.

Hard Asset Perspective

S-Net-Blog — Tue, 06 Sep 2011 15:34:16 GMT

Hard Assets Perspective in Troubled Times

The case for real estate securities is simple. Own hard assets that pay you to own them. Your capital owns hard, tangible, understandable property that produces income. You get the income.

Troubled times provide the opportunity to move up the quality scale. Buying a higher quality property for the same amount of money can be very attractive to the bottom line.

Property appreciation from the current lows and inflation hedging are factors not to be ignored.

Real estate investment securities represent pooled investor capital. This allows individual investors the benefits traditionally available only to large institutional investors. Investment amounts can be as little as $2,000.

Market crash exposes the weakness of conventional retirement investments

S-Net-Blog — Mon, 08 Aug 2011 19:59:07 GMT

The latest of the market crashes exposes again the risk of entrusting retirement assets to one venue. Conventional stock and bond portfolios have failed to protect most investors saving for retirement. Many “sophisticated” strategies have failed even more dramatically.

The traditional, time tested, strategy of institutional grade property investment can provide the income and capital preservation needed for retirement. Used as an “alternative” to the conventional bond/stock world that may retain value when other assets crash.

One caveat is that many “alternative” strategies have paralleled the conventional market. The Wall Street traded REIT market is a good example. While the REITs own real estate, their shares perform more in sync with the overall market. The 2010-11 run up in REIT stocks was substantially greater than any increase in underlying real estate value. Commercial, blue chip, real estate remained cheap.

So why would an investor buy overpriced Wall Street traded REIT stock, when one can acquire institutional property directly and at better pricing? Usually, it is investor who is poorly informed or intimidated by the challenges of owning and understanding this type of investment.

Most experts agree that blue chip property is attractively priced and well able to provide 6% income with strong capital preservation. This is ideal for retirement portfolios. Retirement strategies should focus on stable income and preservation of value. Frequently, Institutional investors look to blue chip commercial real estate and potential appreciation. As this is a successful solution for institutional, a savvy individual investor would do well to apply the same strategy to achieve their investment goals.

The challenge for the strategy is the size of the investment needed and the competence to create the portfolio. Most lack the means to purchase assets in the $5 million to $100 million range and, even if they have the means, the challenge of management and the evaluation remains. This suggests the desire for professionally created funds and trusts.

Professionally created property investment vehicles may be referred to as “Real Estate Investment Securities.” They should be offered through FINRA and SEC licensed professionals in compliance with the requirements of the regulatory agencies. Comprehensive disclosures are included as a part of these requirements, and are typically far beyond that found in most real estate transactions. Disclosure doesn’t necessarily measure quality, but it does make the evaluation of quality easier.

The offerings must be made via a registered professional. However, not all professionals have the necessary experience to evaluate real estate investment securities. Stock jockeys, bond salesman and annuity hawkers may know their fields well but they usually lack the fundamentals to assist in real estate securities investment. Investment real estate has specific measurement tools and guidelines. It has different risks and requires specialized expertise to determine if it will deliver on the promise of income and capital preservation.

It is the potential of net income and capital preservation that attracts investors. In this time of recurring market losses the case for real estate investment securities can be compelling. Most experts report the pricing is attractive and the income above average. The required disclosures should provide the investor the means to know a potential investment property; and the use of a well-qualified professional should provide the investor with the access and expertise needed for such properties.

Useful Real Estate Securities Terms:

S-Net-Blog — Sat, 06 Aug 2011 19:43:00 GMT

Non Traded Real Estate Investment Trust: A trust that hold real estate or real estate mortgages which is required to distribute 90% of its taxable income to its shareholders. It is similar to a Wall Street traded REIT except that it is not traded and its value is the Net Asset Value (NAV) of its holding as opposed to the market value of its traded shares.
Real Estate Fund: An investment structure, (usually organized as an LLC) that holds real estate, real estate mortgages or claims upon real estate assets. It may have levels of return and risk and may be used for high risk ventures with risk levels allocated.
LLC or Limited Liability Corporation: LLC may be structured in many ways and over great flexibility. They usually "pass through" all tax advantages. An LLC is used to limit the liability of the investors to the amount of their investment.
Pass Through Entity: Investment structure in which investment benefits flow through to the investors.
1031 Exchange: Section 1031 of the Revenue Code allows sellers of real estate to defer taxation provided they purchase replacement property in a timely manner.The rules are strict and inflexible. Use of Section 1031 requires expert assistance. We strongly recommend subscribers contact us for information.
Depreciation: Also called cost recovery allows real estate owners to deduct a percentage of their property value from their income.Depreciation may also refers to the loss of property value over time.
Appreciation: The increase in value of property over time.
Amortization: The diminution of the principal owed on a mortgage through the partial payment of principal. Usually occurs via the mortgage payment in a self-amortizing loan
NNN Income: Real estate income net of expenses, insurance and property taxes.

Commercial Debt Delinquencies... Good Sign?

S-Net-Blog — Fri, 22 Apr 2011 19:52:00 GMT

Those over-leveraged commercial loans contained in the so called “securitized offerings” are defaulting at a higher rate according to the 12-1-2010 Wall Street Journal. This market clearing is good news and presents profit opportunities.

Many solid properties have been laboring under unsustainable debt loads and the sooner the default the better. The losses resulting from the credit binge are real and will not disappear. When the losses are recognized, the property can then return to the market with a price commensurate with current value and that is clearing of the markets.

Clearing of the markets can also be understood as the process in which yesterday’s bad investment bets get called and liquidated. Painful for the bettor but a necessity for proper market functioning. For current investors it means that investments can be acquired at attractive prices…there are profits to be had.

This “deleveraging” is ongoing and may represent one of the best investment opportunities in a generation.

Investors can profit by searching out Limited Partnerships, Opportunity Funds, Non Traded Real Estate Investment Trusts and other securitized investment offerings.

Things to evaluate:

Are the properties acquired after the real estate crash?
Is the Advisor or Registered Rep experienced and knowledgeable in real investment securities?
Is the sponsoring company a true real estate company?
Are cash flow projections based upon current market rents not boom era inflated rents?
Are distributions made from actual earnings?
Does the offering rely upon, or use, high debt leverage?
Are the risks properly disclosed... and do you understand them?

Many indicators suggest the bottom is past and the time to invest is now. While that may be true, that does not mean that all offerings are sound. Find and use an experienced, fully licensed, investment advisor, and read the material. And yes, that does mean the thick Private Placement Memorandum or Prospectus.

It’s your money – protect it and grow it.

2011 Investment Update:

S-Net-Blog — Fri, 22 Apr 2011 19:51:00 GMT

The slow healing in the real estate investment securities world is well underway.

The 1031 Exchange fueled Tenant in Common/Delaware Statutory Trust sector has regained credibility, despite ongoing issues with some old offerings.
Non Traded Real Estate Investment Trusts are seeing steady returns and continue to find attractively priced acquisitions.
CMBS and other Debt Funds report 10% plus investor distributions, although the 15-30% returns of the 2009-2010 market appear gone for good.
Opportunity Funds are finding a steady supply of potential acquisitions but the hoped for ultra deep discounts do not appear likely. Projected total yields appear to be in the 12-17% range.
There may be opportunity in shale gas partnerships but the risk cannot be engineered out of drilling deals.
Energy royalties may have potential depending on the purchase price.
Apartment Development deals are almost non-existent. However, there may be light in that tunnel if some southeastern deals under construction materialize the 20% plus returns.
Office Opportunity and Recovery investments are hoping to ride any office property upside. Should occupancy levels rise, those purchasing at below replacement costs are looking at potentially high profits.

The overall climate is cautiously optimistic. There is value to be had and profits to be made, but only with the guidance from the most experienced and competent firms. Investors with the stomach for high risk will find opportunity to test their mettle.

As always, deal with licensed investment professionals and make sure their expertise is in the real estate investment securities sector.

Fed Stokes Inflationary Winds

S-Net-Blog — Mon, 08 Nov 2010 17:30:00 GMT

On Wednesday November 3, 2010 the Fed announced the long awaited activation of the Fed printing press. Couched as “quantitative easing” it will insert $75 billion a month * into the monetary system by buying Treasuries.

No new hard assets or wealth will be created... just more paper monetary claims. Treasuries are, after all, just government debt. The stated goal is to keep interest rates down by buying Treasuries in the hope that this will stimulate the economy. A more realistic view might be more akin to whistling past the graveyard of inflation.

When markets get flooded with newly printed monetary claims it results in a decoupling of the value of the claims with the values of actual assets. This explains why gold continues to soar beyond its historic highs. Gold hasn’t so much soared as the currencies in which it is priced have become debased.

The fundamentals of inflation start, and end, with a debased currency. The paper is, indeed, just paper. Creating more paper to buy paper can only result in eventual inflation. Investors be wary.

This does not completely mean investors should ignore paper based pricing it just means investors need to look at what is actually owned. For example shares in a real estate trust or fund may be priced in dollars but the value consists of what the hard property assets within are worth. As a corollary the assets need to be understood in terms of their long term value and replacement cost.

Corporate shares should be valued upon the value of the business itself. One metric is simply would you want to own this business model and this company in 3, 5 or 10 years. A strong business structure based upon serving a resilient economic need will reward its shareholders.

Oil and gas investments have current attraction but they remain commodity plays and are, inherently, very risky. If you have an advisor who says otherwise…and you follow them on that basis…then there is a great bridge in Brooklyn looking for investors. This is not to say don’t invest; just understand that high risk cannot be engineered out of oil and gas. There are some good opportunities in energy investment as pricing is no longer at the hyper boom levels….just don’t bet the farm.

Gold remains extraordinarily high, even more surprising as it produces no income. It is seen as a repository of value and an antidote to currency debasement. Investors seeking the protection of hard asset ownership but looking for the added protection of income are moving into ownership of high quality investment property assets and funds. This is not distressed condos or subprime decimated single family homes. Instead it is shares in investments that acquire institutional grade property. (Institutional refers to the type of assets that institutions such as insurance companies buy for their own portfolios)

The economic forecast continues to be for “slog” with inflationary clouds building. The strength to move forward briskly is not there but the extraordinary power of the American economy continues to provide an investment floor.

*Average maturity of the Treasuries to be purchased is reported as 6 years. Fridays 10 year Treasury closed at 2.538 %

Dangerous Waters for Bonds?

S-Net-Blog — Tue, 21 Sep 2010 19:25:00 GMT

Treasuries are the latest financial canary to suggest the bond party may be endangered. The yields are rising which means the value of existing treasuries are dropping. To simplify- it now costs less to buy a specific dollar amount of income. That means what you already own is worth less. Adding insult to injury is that investments based upon similar debt products are similarly affected.

You can pay more, get less..... and face unexpected downside risk.

The ten year treasury yields are trading in the super low 2.6% to 2.7% range after lingering below 2.5% for much of the recent past. This doesn’t seem like a large change but, seen in percentage terms, it is a major change.....and a disturbing trend. As low yields represent high prices this trading fluctuation is flirting with price declines....another worrisome similarity to the real estate crash.

The impact on investors who “fled to security” by purchasing bond products could be severe especially if competing investments continue to offer substantially higher returns. The August double dip scare proved unfounded. The economy didn't double crash to new lows as some predicted.

Today many investors are no longer willing to accept the meager returns, or the erosion of value, from so called "safe harbor" investments. While the economy is far from healthy there are investments structured to perform well in troubled waters. Smart investors are finding them and buying.

Some newly formed Real Estate Investment Trusts are providing 7% dividends. Many of the Non Traded Reits purchased high quality properties at the current low prices; the quality of these properties should provide a buffer against capital loss. Should property prices rise as predicted then these REITs have the potential to create attractive capital gains. Many investors find these new Non Traded REITs particularly attractive.

Real estate focused LLCs and Note programs are offering 7-12% yields but most are only open to “accredited” investors. These products require substantial due diligence and should only be purchased through firms and advisors with deep industry knowledge. The old truism “it’s all about the property” applies.

The current bond and annuity market has dangerous parallels with the real estate bubble. Bonds and annuities may continue to have a place in portfolios but investors should be very careful to understand the inherent risks in a bond bubble market.

Bond/Annuity Bubble?

S-Net-Blog — Wed, 25 Aug 2010 16:05:00 GMT

Investors in real estate investment securities often have interest in other income investments. It is worth looking at the "hot" income investment products of today; bonds and annuities. However, the question arises: Are they the new "bubble"?

Remember when investors paid $1,000 for each $50 of real estate income? Looking back we all call it the real estate bubble. Yet today bond investors only get $30-$40 income for their $1,000 invested, while investment grade property easily pays $70.

One is forced to wonder where the investment bubble is today? Bonds and annuities are purchases of income streams – write the check and get the income. If the issuer (that's the company or government that guarantees the income) is strong, investors pay more for the income. Certainty of payment is important and investors pay higher prices for that strength. That is why in troubled times investors will accept under 3% for ten year government treasuries – Even less for tax free municipals.

The dangerous issue with high prices and the resultant low yield is when overall interest rates rise, not only is the old, lower, rate less attractive; but the bonds lose value. No one will pay $1,000 for $30 of income when new bonds pay $50. Let's look at it another way. One can buy $30 of income for $600; and, for the sake of simplicity, that is what the old $1000 bond is worth – $600. (Trading prices will reflect the term of the bond and complicated yield adjustment formulas are employed)

The other bond value is the value of the bond when held to maturity. In that case, the investor gets the face value of the bond. While that has the appearance of security the purchase power of that face value may be substantially less. Even with low inflation of 3% after ten years the inflation adjusted value of bond investment is substantially less... another unanticipated blow to the investor. Should inflation rates rise substantially due to huge government deficits the effect on bond values held to maturity is devastating.

Another factor affecting bond and annuity values is the performance of alternative income investments such as net income real estate related securities. Currently it is commonplace to find real estate securities producing income streams of 7% or more. Many of these securities contain provisions providing for value increases should the underlying assets increase in value.

The real estate investment securities are perceived by many as risky due to the hangover from the bursting of the real estate bubble. That fear is an important element propping up bond and annuity values. If that fear is not justified then the bubble nature of the bonds becomes even more dangerous. Investors thinking they are buying safety through bonds and annuities may end up owning a time bomb.

(Note while many bonds and real estate securities have tax advantages the principles determining risk and value remain).

Copyright Sourcenet Financial Corp. all rights reserved 7-1-2010