© 2002 Society of Industrial and Office REALTORS® Wealth Building Robert J. Nahigian, FRICS, SIOR,...

© 2002 Society of Industrial and Office REALTORS®

Wealth BuildingWealth BuildingRobert J. Nahigian, FRICS, SIOR, CRERobert J. Nahigian, FRICS, SIOR, CRE

© 2002 Society of Industrial and Office REALTORS®Wealth BuildingWealth Building

This session is sponsored by:

Landon R. Wyatt, III, Partner


WEALTH BUILDINGWEALTH BUILDINGin the 21in the 21stst CENTURY CENTURY

ROBERT J. NAHIGIAN, FRICS, SIOR, CREROBERT J. NAHIGIAN, FRICS, SIOR, CRE SIOR 2006 FALL SIOR 2006 FALL AUBURNDALE REALTY CO. CONFERENCENEWTON, MASS.

INVESTMENT CHOICES

STOCKS REAL ESTATE

BONDS

MUTUAL FUNDS

COMPANIES COMMODITIES

BTSBTSEXISTINGEXISTING

SPECSPEC

REAL ESTATE CYCLESSECULAR

PEAK?? PEAK

BID-ASK SPREADS

“Denial Phase”“YIELD CHASERS”

RECOVERY

BOTTOM

BUY LOW/SELL HIGH


Why Real Estate?

• Why do people invest in real estate?

• TO MAKE MONEY?

• Really?


MILLIONAIRE PROFILEIdentifying the RE Investor

• MILLIONAIRES = $1-10 ML

• AVER. HSHLD NET WORTH = $3.7 MILL

• AVERAGE HSHLD INCOME = $131,000

• MANY BETWEEN = $50-75,000

• Source: Money Fall 2002, Millionaire Next Door/


U.S. AVERAGE MILLIONAIREU.S. AVERAGE MILLIONAIRE

• Aver. Median Hsehld Income Aver. Median Hsehld Income = $ 131,000= $ 131,000

• Aver. Income Aver. Income = $ 247,000= $ 247,000

• Aver. Hsehld Net Worth ’05 Aver. Hsehld Net Worth ’05 = $ 2.2 Million= $ 2.2 Million

• Total Hsehlds Millionaires ’05 Total Hsehlds Millionaires ’05 = 8.9 Million= 8.9 Million

• Total Hsehlds ’05 Millionaires w/o RE = 2.5 MillionTotal Hsehlds ’05 Millionaires w/o RE = 2.5 Million

• Source: Wikipedia.org/Millionaire Next DoorSource: Wikipedia.org/Millionaire Next Door


ALL U.S. NET WORTHCAN THEY INVEST?CAN THEY INVEST?

• Median Income 2004 = $ 44,389

• Aver. US Salary ‘06 = $ 17.00 / Hour

• Net Worth 2004 = $ 100,894

• Aver. Median Hshld Net Worth 2005 = $40,200

• Source: US Census Bureau/CNN Money 8/20/04


BIG HAT, NO CATTLEBIG HAT, NO CATTLE


Wealth BuildingWealth Building

• Biggest Consumption Category

• Income Taxes

• Lifestyle


HOW DID THEY GET HOW DID THEY GET THERE?THERE?



• Income Taxes: 2003

Income FederalEarners Revenues

1% = 34.27%

5% = 54.36%

50% = 96.54%Source: TaxFoundation 2/2/06; IRS 2003



• Lifestyle

Feds 33 38%

State 5.0 –9.0 %Self-Employment 12.4 %Medicare 2.9%Deduction Phaseouts $_??_______

60%/92%


BUILDING WEALTH

• INCOME IS NOT WEALTH

• BEING RICH IS NOT BEING WEALTHY

• CONSUMPTION vs. ACCUMULATION


Investing

• Discretionary Income (Surplus)

• Placing It/ Commodity

• Future Consumption


U.S. MILLIONAIRES ’05 U.S. MILLIONAIRES ’05 INVESTMENTSINVESTMENTS

• Investment Real Estate Investment Real Estate = 46% of mllnres= 46% of mllnres

• Investment Real Estate ’04 = 13% of portfolioInvestment Real Estate ’04 = 13% of portfolio

• Stocks and BondsStocks and Bonds = 70%= 70%

• Mutual FundsMutual Funds = 68%= 68%

• Source: CNN Money 3/29/06/6/9/05Source: CNN Money 3/29/06/6/9/05


ReturnsReturns

Double Your Investment

• 2/10 Rule

• 14 7/8 % compounded


WHAT YOU NEED TO SAVE

• T.ROWE: NEED 15% OF SALARY

• FIDELITY: NEED 14% OF SALARY

• THE OLD 10% MAY NOT WORK

• SOURCE: WALL ST. J 7/1/06


After Tax Household Savings RateAfter Tax Household Savings RateWHICH COUNTRIES CAN INVEST?WHICH COUNTRIES CAN INVEST?

U.S. 2000 = - 1.3% LBYM

U.S. 2005 = - 0.5%

Japan 2004 = 7.7% = $117,000

French 2004 = 16.0%

Your Client: 15-20% = $ 2.24 Tril. 9/06

Source: US New 2/10/03; 3/24/03; MSNBC 1/30/06/Las Vegas Journal 3/2/06


NATIONAL SAVINGS RATE

• US: 2004 13.6% OF GDP

• JAPAN: 2004 25% OF GDP

• CHINA: 2004 50% OF GDP

• Source: Boston Globe 1/30/05


U.S. CONSUMER DEBT

• 2004 U.S. Average Credit Card Debt: $9,312

• Aug. 2006: US Households at Record Debt

• 2006 Consumer Debt = $2.17 Trillion

• Source: Smart Money 9/05MSNBC 8/9/06


U.S. CONSUMER DEBTU.S. CONSUMER DEBT

• June, 2006 = 90,000 Homes Foreclosed

• June, 2006 = 17% higher than June, 2005

• 2006 AMR To Reset = $1. 0 Trillion

• A House = ATM • Source: Investor Business 8/24/06


ENTRANCE STRATEGIESENTRANCE STRATEGIESWHEN INVESTINGWHEN INVESTING

PERSONAL GOALS/OBJECTIVESPERSONAL GOALS/OBJECTIVES RISK THRESHOLDRISK THRESHOLD AGEAGE MARITAL STATUSMARITAL STATUS RETIREMENT ($1,300,000.00)RETIREMENT ($1,300,000.00) TUITION ($200,000 per child)TUITION ($200,000 per child)


RETIREMENT v. TUITION

• Life Expectancy 1935s = 61 years• 1950s = 65-68 years

• 2004: Aver. 76.2; Man = 74.4/Female = 79

• If 70, then Man = 81/Female 84

• Source: FT Winter 2002, 1060AM 10/25/02, 5/12/03


COLLEGE TUITION

•2001-02 Aver. College Tuition = 5.8%

•2004: $ 28-38,000/Year

•2017: $ 239,576 Private 4 Year Cost

•Source: Barrons 4/21/03; Money 1/03; US News 1/01


WEALTH BUILDING WEALTH BUILDING SECRETSECRET

• IT’S SLOWIT’S SLOW

• IT’S BORINGIT’S BORING

• AND IT WORKS……AND IT WORKS……

• BUT FEW DO ITBUT FEW DO IT


BenchmarkBenchmark

• 10 Year Treasury Note

• S&P 500/FHMA: Safe?

• Why 10 Years?


REAL ESTATE OWNED

• 1999: 8.3 YEARS• 2000: 7.7 YEARS• 2001: 8.5 YEARS• 2002: 8.6 YEARS• 2003: 8.5 YEARS• 2004: 8.0 YEARS• Source: RERC W’02,F’03,W’05; US World 5/9/05


BENCHMARK

• Risk v. Reward

• What is Risk?

• Year 1654

• “Dead Capital”


RISK DEFINITION

• PROBABILITY OF NOT

• Achieving the Return One Initially Expects

• Investors Dislike LOSSES MORE Than Gains

• CRE: Fall’03


BEHAVORIAL RESEARCH

• Humans Are Risk Averse When It Comes to Gains

• BUT RECKLESS When Trying To Avoid Losses

• SO….They Lock into Profits Too EARLY And HOLD Losers Too LONG

• Barrons 6/28/04


REAL ESTATE RISK

• Above-Aver. Gains = Above-Aver. Risk

• SUBJECTIVE

• Or Need More Risk And Longer Capital Market Line


INEFFICIENT INVESTORSINEFFICIENT INVESTORS

• Investors Pay a Premium and Investors Pay a Premium and Receive LESS IN RETURNSReceive LESS IN RETURNS

• CRAZY! But The Tide Is Turning!CRAZY! But The Tide Is Turning!

• Demand Returns Are Demand Returns Are INCREASING OVER RISKINCREASING OVER RISK


Risk v. Reward: 2005Risk v. Reward: 2005Total ReturnsTotal Returns

• (100% Cash)

• 10 Yr. T-Note + 400 BP = 8-10%

(Leveraged Equity 25% Cash) • Cost of Debt + 600 BP = 12%-13% Source: RERC ‘05


Rates of Return to BeatRates of Return to Beat

• Inflation (SURPLUS)

• Cost of Money

• Index of Goal


INVESTMENT RETURNS

• 2002: T-Note = 3.8%

• 2002 R.E. IRR= 11.5%

• 20 Yr. Record Spread = 770BP


REAL ESTATE RETURNS

• 2003: 4Q T-Note = 4.3%

• 2003: 4Q R.E. IRR= 10.5%

• Spread = 620 Basis PointsRERC: Winter04


REAL ESTATE RETURNS

• 2004: T-Note = 4.26%

• 2004: 4Q R.E. IRR= 10.1%

• Spread = 600 Basis PointsSouirce RERC W’05


NCREIFNCREIF1995 – 2005 1995 – 2005

Required v. Reported Returns• R. E. : 11.46% v. 10.4%

• S&P 500: 9.1%

• Stock Market: 11.1%• Nasdaq: 8.1%• Dow: 9.8%

•RERC: Winter’04; Morningstar1/05/Wall St. Journal 4/19/06

Source: LM Annual 2002 Report


1995-2005 US RE RETURNS

• APTS. = 15.4% PER YEAR

• OFFICE = 14.7% PER YEAR

• STRIP MALLS = 14% PER YEAR

• WAREHOUSE = 13.7% PER YEAR

• Source: Wall St. Journal 4/19/06


U.S. 2005 CAP RATES

• US RE Aver. Cap = 7.8%• Hotels = 9.53 % • R&D = 8.3%• Warehouse = 8.01% • Office = 7.7%• Retail = 6.8%• Moringstar 1/06; Integra W’06; Marcus/Milichap’06


U.S. PROPERTY RETURNSU.S. PROPERTY RETURNS

• 1Q 2006: COMPRESSION !

• WAREHOUSE = 7.5%

• RETAIL = 7.1%

• OFFICE SUB. = 7.0%

• APT. = 6.0%• Source: Com. Prop. News 7/06


Why Real Estate?Why Real Estate?

• Inflation - Hedge

• Cost of Capital

• Leases in Place

• Expenses

• Escalators


WHY REAL ESTATE?

• No Taxes on Appreciation

• Less Volatile

• It is Cyclical: Bubbles


WHY REAL ESTATE?

• Stable Return

• Diversification

• Hard Assets vs. Financial

• High Yields

• No Scandals


WHY REAL ESTATE?

• It is Trust-Worthy

• Easy to Understand

• Positive Leverage

• Other Choices Still Stink !!! Source: CRE Dallas Convention-2002


DOWNSIDE: 2005

• Too Many Buyers

• Values Up/Cap Rates To 4.9-5% (1960’s/1981)

• Look at Tot. Returns/Not Caps• Source: Ken Riggs, 4/05 CRE; Sam Zell CRE Chicago ‘05


WHY?

• EUROPE Pays More PSF

• US Real Estate is Cheapest in World

• Reproduction Cost (with tenants) is still higher

• Source: Sam Zell/Hugh Kelly ’05 CRE Chicago; H


DOWNSIDE: 2005

• THERE IS DISCONNECT BETWEEN:

• PRICE AND

• TRUE VALUE

• Source: Tony Downs, CRE Chicago ‘05


FORECAST

• Smart Money Is Selling

• But Also Buying Smart

• Some Say: LAND IS THE NEXT FRONTIER


Commercial Lease Yield Model: 14.5% (DEFLAT.):1999

– Cash Flow 44/80%

– Mort. Reduction (13%)

– Tax Benefits 6%

– Appreciation 63/20%

–Source: Herb Krunsick, SIOR, CRE, CCIm


COMMERCIAL YIELDS: 2005

• Total Return = Cap Rate + Growth

• TODAY: = 9.5% Unleveraged

• Rental Income = 6.5% or 70%• Tax Benefits = 0%• Appreciation = 1.5% or 20%

• SOURCE: Ken Riggs, CFA, CRE, FRICS, RERC CRE 05


INVESTOR’S CAP RATE

• HIGH CAPS = Investors Want Heavy Dividend Income Play

• LOW CAPS = Investors Are Buying Futures

• Expect Rent and Value to Rise• Source: SIOR Prof. Report S’04 Hugh Kelly


DISCLAIMER

• CHAOS

• WAR

• GOVT. INTERVENTION


HAPPINESS DEFINED:

• EXPECTATION = REALITY

• OR

• REALITY IS GREATER THAN EXPECTATION


THANK YOU

SIOR SIOR

© 2002 Society of Industrial and Office REALTORS® Wealth Building Robert J. Nahigian, FRICS, SIOR,...

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