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A Return To Risk

That’s Mr. Risk to You, Real-Estate Investor

Whether you are looking to invest in commercial property or a new primary residence, the opportunities in the current real-estate downturn are nearly everywhere you look, even Detroit. The pressure to lock in low mortgage rates has many investors champing at the bit. Plus, the approaching December 1st deadline for obtaining the American Recovery and Reinvestment Act tax credit is pushing first-time home buyers off the fence and into the game. But, as investors return to the real-estate market and the inventory of existing homes shrinks, a race to capture the last of the low prices may soon inhibit investors from executing adequate risk management.

With all of the current real-estate investment opportunities, it is crucial to not become blinded by the seductive home prices and appealing tax incentives. Investors with all levels of experience can protect their investments by recognizing and preparing for risk. While some precautions may be required by your lender, such as homeowners insurance, many others are going to be your responsibility. There are three primary ways you can help to prepare yourself for the majority of risks that come bundled with real-estate investing.

First, examine the current market in which you are looking to purchase property. Assess what is available and for what price. Also, what is the current level of buyer interest in the area you are considering? These questions will help you get your bearings within the local market and also increase your negotiation power later on in the process. Only a few cities are investing heavily in improving their infrastructure, but this might help persuade your decision if there are finalized plans for improvements in your considered property’s vicinity. Remember, since real-estate is a long-term investment, it is important to consider the area’s future. With adequate research you can identify some signs that can help you make a wise investment decision.

Second, aim to understand the laws and regulations involved with your considered property. I am not suggesting you become an attorney to make a wise investment, but being well-versed in the legal documents that are involved will behoove you. No matter how seasoned of an investor you are, few things can help you better prepare for risk than understanding the rights and requirements of your property’s regulations.

Third, consider your payment options. When considering your funding options, consider how long you intend to keep the property. The days of no-documentation loans and 100-percent financing loans are behind us, for now. So, thankfully, the trickery exercised by lenders in the middle of the decade should no longer overwhelm you or persuade you into signing something you do not understand. However, it is still crucial to do your homework. Knowing which type of loan you are comfortable with and which is most affordable will help throughout the loan-approval process.

When treating real estate as a long-term investment, it proves to be one of the least-risky options. However, real-estate is still not immune to risk. By taking the precautions mentioned in this article and continuing to be proactive in minimizing risk after you acquire the property, you will allow your investment to work for you. More importantly, you will avoid the tense, nerve-racking roller-coaster ride that comes when you are sideswiped by costly risks you could have prepared for.

Too Old For Risk?

We have all heard the old rule of thumb that states 100 minus your age should be the percentage of your portfolio that is comprised of stocks. This is meant to serve as an attempt to keep your amount of individual stocks manageable. After the recent market meltdown, however, many experts are recommending that even that number may be too high … and major stock funds are adapting.

With the onslaught of baby boomers set to retire, fund managers at major firms have been aiming to develop a stable stock program for older investors. The idea is to keep baby boomers investing in stocks instead of in a safer alternative with lower returns, such as Treasury bills. The various funds have been trying to develop an investment vehicle that combines the stability of T bills with the higher returns offered, sometimes, by stocks.

Older investors are primarily interested in a steady stream of income. Therefore, mutual fund managers have been designing funds that will occasionally hold more bonds to ensure they protect their ability to keep providing an income even in down markets. For example, last year Deutsche Bank created a series of mutual funds aiming to turn volatile stocks into stable investments. Deutsche’s fund managers spent more than a year developing the mutual funds for retirees. However, in the midst of the market meltdown, the fund was forced to abandon all of its stocks for bonds. They were then buckled by poor market performance. Plus, because of a warranty they gave their investors in order to originally entice them, they were then unable to switch back to stocks and had to return their investors’ money.

If an idea is too good to be true, it usually is. A number of mutual funds are aiming to provide stable investments with high returns. Furthermore, they are looking to do so while not tying up the money for years. Alright, so maybe by applying gigantic up-front costs, these fund managers may be on to something. However, they are also attempting to provide investors with the perk of low costs, which renders the creation of such a fund outside of the fundamentals of investing.

While taking on high risk rarely equates to high returns, no risk never translates to high returns. Markets fluctuate and any fund that guarantees high returns all the time cannot survive. Eventually, down markets will affect the fund and the guarantor will be forced to pull the plug or significantly cut returns. Older investors may not have the same appetite for risk that they had in their 20s, but that does not make it any easier to create the world’s first no-risk, stable-income-producing mutual fund.

Come On Risk, I Can Take It

After the recent positive signs presented by stock and bond markets, herds of investors have been lining up to sink their money into what could be the beginning of a rebounding market. Fed up with national performance, many investors have started looking to foreign stock markets for an opportunity. Eager to recoup the massive losses experienced over the last 18 months, investors are anxious to have financial markets, either domestic or foreign, once again work for them. Investors are also impatiently waiting for the bottom of the market to rear its head in order to purchase assets at their lowest possible price. The two schools of behavior have investors opening their arms and welcoming more risk, even if their money has to perform overseas.

Risky emerging-market mutual funds have attracted eager investors in massive swarms. According to Morningstar Inc., investors have dumped $4.9 billion into emerging-markets mutual funds over the first five months of this year, after only pulling out $2.6 billion in all of 2008.[i] While some foreign markets have been on a significant rise as of late, pouring loads of money into any one type of investment still brings about significant risk for investors. Doing so takes investors’ concerns off of their long-term investment goals and they become caught up in chasing short-term performance.

Thanks to positive performance in the stock markets of developing countries, investors are becoming more optimistic about dedicating a larger part of their portfolio to emerging-markets funds. According to The Wall Street Journal:

Not only do investors have a greater appetite for risk these days, they’re also more optimistic about the economic outlook for some of these countries. In China, the world’s third-largest economy, the government’s massive stimulus is starting to take effect. While exports are still down, internal growth is gaining strength. Meanwhile, commodity prices have been on the rise, improving confidence in Brazil and Russia.[ii]

While emerging- markets funds have experienced an average of 33 percent returns, experts are predicting a bumpy ride ahead. Many financial experts are predicting that emerging-markets economies will grow at a faster rate than the U.S. for the next several years. But, the recent rally by investors in emerging-markets funds is not expected to continue for long, which will calm the spike. Therefore, investors should continue to keep a well-balanced portfolio and calm the urge to shift large portions of money into emerging-markets funds in an effort to quickly recoup last year’s losses.

[i] See http://online.wsj.com/article/SB10001424052970204005504574231710838821166.html

[ii] Ibid.

About TomPowell

Senior Managing Partner of Resolute Capital Partners. As chief strategist I combine my education and proven expertise in raising private capital, innovative deal structure, risk mitigation, portfolio management, and distressed debt recovery to lead the Resolute Capital team in building a cross-pollination program of Foreign Direct Investment between Asia and the United States. In 1999, I founded and led the growth of ELP Capital, Inc, a mortgage banking investment company. In addition I served as the Senior Managing Director for ELP Capital’s affiliated investment company - ELP Capital Advisors, a Registered Investment Advisor for the ELP Capital Family of Funds, Institutional Investors, and wealthy individuals. I began my career with Wells Fargo Bank when I was recruited in 1988 for a management position in business banking for the Silicon Valley market. I was instrumental in the architecture, development, and initial application of Wells Fargo's Officer Sales Training programs, led two separate branch offices to top 5 overall rankings, and in 1990 was named as one of the youngest Vice Presidents in the Company’s 140-year history. I am a widely sought after speaker, international guest lecturer, and am an Instructor in the Office of Executive Education at Harvard University. In addition, I publish a weekly economic newsletter and podcast The Powell Perspective. I am involved in numerous community and industry groups. Specialties:An innovative investment manager with particular expertise in credit risk analysis, distressed debt recovery, and deal structure. I understand the practical application of money management in response to risk on both Wall Street and Main Street.
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