Suffice it to say, I’m not going to miss 2009 with regards to my business and investments…. From a family standpoint it was absolutely fantastic. Emmy hit 4 this summer swimming like a fish and Max at 7 is growing out of my concept of ‘my little boy’…. Oh, they just grow to fast.
2009 (and partially 2008) was a year that I allowed myself to get caught by the seat of my pants -although preservation was the goal of 2009. I advocate diversity among investments, maintaining cash reserves, diversified cash flow streams, and here I felt as though I was put on my heels and had the inability to take action in an offensive mode in just about all quadrants of the money game. Of coarse I’ll state that the goal of not going under was achieved. For those that play in the world of real estate investments, 2009 was a year of seeing alot of people lose everything. I ,like Bernanke, threw out all the stops to maintain liquidity to handle any wave that came my way. While I’m ecstatic that I achieved my goal I’m somewhat disappointed that I simultaneously missed on taking advantage of opportunities that surrounded us: whether it be in stocks, bonds, or real estate.
So here’s my take on 2010…..
As a generalization I will repeat what I’ve often stated in 2009. We will continue to see a jerky go & countered pullback in all modes of investments. Focus on diversity and do not stack the cards on any single bet as the volatility is great despite what the pundits state.
The Bond Market and Interest rates in general….
This is not a category I’d advocate a novice play around much in; however, there are even modest moves we can all do that can both hedge and lock in long term gains -gains you must think about earning today with today’s moves that you’ll cash in down the road.
I’d stay out of playing in any high yield (aka: junk bond) and/or emerging market bonds as a generalization as they’ve certainly been run up beyond valuation and a bet on continued prosperity -odds are its run ahead of itself. Municipal Bonds -which are starting to be touted more than ever. I think its a good play but one where you should look at bond funds more than ever (just like junk and emerging market) because of the uncertainty of individually analyzing any government entities financial statements. 2010 could be a year of other shoes to drop and I certainly wouldn’t rule out a city or county municipality running into severe cash flow crunches with the possibility of default. If you have the flexibility, call your lender to see what terms are available to refinance your own home! I said call! Look into it to see what is available and if you qualify. Don’t rule out the discipline that a 15 year mortgage has to offer. Financing on investment properties will continue to be a challenge. If you’ve borrowed private money, look at the rates and terms. I would recommend that you attempt to see if the lender would consider lowering any rates above 8% and extending the term of the loan. I would also seek new private lenders that are looking for a passive investment who’s expectations of a good yield are lower than the expectations of your fellow real estate investors whom like to get paid to lock up their money.
Truthfully, if you can show an uncle that he can achieve a stable 7% rate for the next 5, 10, 15, 30 years where that meets his cash flow goals and is provided clear cut safe collateral, your providing an opportunity not available to him. I would state that he would be challenged to find a fairly safe yield above 4-5% via the diversity of a fund. Don’t forget the use of creative financing via self directed IRA’s too. I believe home mortgage rates could softly go up to 6% by the year end to our present 5%. So the goal for 2010. Seek better terms on existing debt, diversify from single debt issuance into multiples, and find new avenues to borrow for future growth.
The Stock Market…. Oh what an animal! In the fall of 2008, i went 68% cash when the DOW was at 10,500. Here it is the end of 2009 and we are back at 10,500 on the Dow after seeing a low back in March, 2009 at 6470. This was my greatest disappointment for 2009. I always advocate leaving cash available for opportunity (no matter what the level or amount) -need I say more… While I had no idea where the market was going (nor do I in the future)…., my goal was preservation. That was achieved. For 2010 I intend to take my present 65% cash level down to 10-20% depending on the winds of the economy. Starting in January, I intend to make diversified investments in medium yield large blue chip stocks (which includes utilities, telecoms, oils, agriculture’s, and chemicals), master limited partnerships (centered on oil/gas transports and the Canadian tax-trust play), and foreign opportunities (with more of a bent towards large cap value and some emerging market after dips from today’s highs). I will continue to advocate being paid to wait folks!!! Do you here that!?! I really would like you to focus on some dividends -it is often stated that 7% of the 12% return of the life of the large cap stock market since the great depression was achieved through reinvested dividends.
Get paid to wait!!!
Everyone is touting emerging markets as a generalization -I would be careful as I think its a bit overbought -buy on dips. I’m going to systematically invest that 45-55% cash over the next 6-10 months (not all at once) with the goal of averaging in while throwing more in on dips. I think the odds of a 1000-1500 point pullback is 80% and the odds of a 2000-2500 pullback at 40% over the next 6 months…. The market is probably going to run sideways if not slightly up through the spring when 1st quarter numbers start coming out. I won’t access the 2nd half of the year till the spring. Remember we’re in a jerky economic environment right now. It’s going to be stops and go’s with some quick panics and euphoric moments thrown in for good measure. Where will the DOW be at the end of the year? I have no idea nor care to guess. In the short term I don’t want to focus on that. I want to focus on good investments that pay me to wait and systematically place those investments as the opportunities present themselves.
Real Estate. You don’t think I forgot it did you? After-all, this is supposed to be the point of this blog. Remember real estate is more localized then any of the other sectors so its important to look at real estate from both the macro and micro level. As a generalization, real estate is still facing choppy waters and I think the key we may see in 2010 is a moderate level of stabilization (with the thought level being on residential real estate -commercials another topic itself). All we need as real estate investors is stabilization. As investors, our greatest long term investments occur from dysfunctional and stabilized markets. Of coarse, we must remember that in order to get from point a (beginning) to point b (end goal) we must be able to handle the cash flow issues in between. This is were failure occurs. Again, focus on cash flow and cash availability whether your into rentals and/or merchandising (short term rehabs & flips)……
I continue to assert the play in real estate is focused on long term rentals and short term rehab to retail in the First Time Home Buyer Market. Locally, I’d like to sell entry level homes priced in the $135 to $235k home buyers market. I want to buy rentals (including rehab) at 60% of the retail market value (AT TODAY’s LEVEL) to insure cash flow. So what has caught my eye as of late? I’ve seen multiple deals out there where an investor can buy a home for $20-30k, put $5-7k into rehab, and rent out for a solid $600/month. That’s pretty good for a single family home!?! These homes have a retail value of $65-80k in today’s market assuming there is a buyer. Did you hear that? In the lower price range, there is both an absence of buyers (both at the investor and home owner) due to the tight bank financing environment. This can be both a blessing and a curse. If you need to sell a property in this market, you will be challenged; however, its a great time to lock in (buy) undervalued homes. Again, you need to focus on how you get from point a to point b. I think this is a great time to buy -no rush of course. I think the opportunity to buy real estate investments in the Charlotte, NC market will continue throughout 2010. Just remember not to overextend yourself in buying/holding to many properties at once. I am also buying with the mindset that I may have to hold onto these rentals for at least 5 to 12 years before I’m able to take advantage of any appreciation. Remember you want to get paid to wait.
As far as the retail home selling market goes….. This will be challenging. One needs to focus on the niches that occur in their individual real estate markets. I really don’t want to be selling homes for a greater retail price then our local FHA financing cap of $303,750. Focus on the supply of homes in each pricing level, school districts, neighborhoods, and the individual attractiveness of the home. The day of buying just any home anywhere, throwing paint on it, and making a nice sum are long gone: one needs to focus on what buyers are looking for. Believe it or not, there is alot more work then meets the eye in achieving that. I think we’ll find that Congress will have to extend the Home Buyer Tax Credits and the continued support of the mortgage market (thus keeping interest rates down) will continue at a somewhat more moderate/lowered level. Remember: focus on your niches but keep an eye open for absolute no brainors. They will pop up due to the dysfunction that’s out there.
So there it is…..
Nothing magical in my thoughts -certainly no magic bullets. I’d say its a year of going sideways and stabilization for all markets. There is opportunity in that; however, diversify as there are landmines too. 2009 was a year of solid 100% defense for me. I intend to make 2010 a year of 80% offense and 20% defense especially since i’ve got to redeploy capital. I will also continue to deleverage. I would recommend anyone with personal financial debt to make it a goal of unwinding at least some of that personal debt. For those with alot of business/investment debt -focus on making it work for you. If it’s unproductive work at shedding it.
There are opportunities all around us folks! Open your eyes and look! Don’t blindly invest though -you’ve got to analyze each investment.
I look forward to the challenges and plan to build a few new piers in the foundation of my investments that will create a more solid house in which to live…..