Is Real Estate in Turmoil?

Editor’s Note: This article first appeared in the August 1973 issue of the R.E. News Observer. If you change a few dates and numbers, it could just as easily have been written today.

Have you been asked recently what you think the future of real estate is in the next two years? To youngsters in the real estate industry this two-year period can be a large percentage of their future. Why? Because during the first couple of years beginners attempt to establish cash flow and a solid foundation for their practice.

The answer to the two-year forecast will be a heavy consideration for the rookie as an investment broker. The old timers have ridden the storms of recession, phase I, phase II, phase III, high interest, tight money, and no money, and they do it well because they have spent a few years learning the creative end of the business to ride the storm. However, the youngsters are quite concerned about the immediate future. Here then, is the prognosis of the real estate business, put forth with careful thought as to the responsibility of this report.

Firstly, the Real Estate News Observer feels that the Federal Government will almost shut down all programs known as “tax-sheltered” investments. We feel the government will make some massive revisions in our present tax laws that will make the 1969 Tax Reform seem like no changes were made at all. Those who have been hanging their hats on tax-structured real estate transactions had better forget about offering property under the guise of “The primary benefit of real estate ownership comes from taxation.” The climate of the government and its advisors indicates that we are in for some massive changes and the up-to-date practitioner should brace himself for the worst.

Secondly, the money market will remain tight for a period of up to twelve months. Some predict the period will last through 1975, but money will loosen in areas where lenders can receive maximum returns. They will not look toward areas where we are presently overbuilt. Lenders are business people and desire to make the maximum amount of money. Thus, we will see the lenders hold out for the better yields.

Anyone studying creative techniques will find many transactions, including the large ones, available in the market place. These creative people will make handsome profits because they are equipped to handle transactions with a combination of techniques, including small office syndications for seed money in development, the hypothecation and syndication of leaseholds, the use of as much as 20% of the fair market value of properties (not for principle payments, but for option considerations), or any combination of these techniques. Selling or exchanging the land and not the improvements will become more common for the sophisticated brokers.

A lot of newcomers as well as old bulls in the real estate business will ask where they should place clients in the next few years. Having tested your imagination on the potential problems of tax oriented real estate it leaves properties structured for cash flow. The west and east coasts have spoiled sellers and there are not many properties on the market offering healthy benefits for good cash flow. This is the result of listing properties at any price, and packages being purchased without the benefit of total homework. Cash flow properties are usually handled by those representing cash buyers. It follows that if you do not have a stable of cash buyers, stay out of that market.

Most financial guns are looking to the conservative Midwest. West coast investors are not afraid to pay high interest rates on carry back loans and the conservative sellers are taking these deals-a trend that will eventually spoil the market area. You can still buy units in Wichita, Kansas City, Omaha, and Denver that earn a 9% to 10% return (sometimes even better) for each equity dollar invested.

Many investment counselors will lead investors into land transactions believing current inflationary trends will continue, despite the government’s efforts to curtail it. International money, the price of gold, changes in the silver market and the Watergate confusion, have convinced many that this is the time to move directly into real estate and take advantage of the inflationary trend. The big problem of land ownership-ecological problems-are not improving either.

Most investors feel that in the next twenty-four months they should slip out of marginal investments or investments hinging on speculation. The idea is to convert marginal holdings to a liquid position so they will be ready for the next economic cycle.

Everyone is getting into condo conversion and the mini-storage business. Many of these investments will be overdone and some investors will be hurt because they did not rely on a basic real estate principle and think of location, location, and location.

Finally, creative investors will structure transactions taking into consideration a “no cost” holding period. This is similar to the exchangers’ transaction where he offers a portion of the total equity as principle down payment and the balance of the equity as pre-paid payments past the two-year holding period. However, it still comes back to the fact that the biggest changes we can look forward to are changes from the federal government.

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