This post first appeared in the June edition of: Cirios Trends: Finding Real Estate Opportunities.

“Mow much should I pay?” is about the most common question we get here at Cirios. Unfortunately (or fortunately), the answer to this question is never black and white. Depending on a buyer’s desired use for a property, there are many ways to determine value and what the right price to pay is.

An investor looking to rehab and sell a home quickly may put a different value on it than an investor looking to buy and rent for several years. Since each investor has different profit targets and time horizons, formulas that determine what price the investor would pay nearly always differ.

Still different is the price a regular home buyer would be willing to pay after accounting for mortgage payments, tax breaks, upkeep expenses, etc.

This piece covers a couple different methods for valuing a property, and is at best a cursory examination of these topics. Each one contains many further levels of complexities and nuance.

Many investors that purchase and hold income generating properties use the Income Method of valuation to determine an attractive purchase price. If an investor wants to earn, say 6% on his money, he would use the annual operating cash flow generated by the property to calculate what purchase price would achieve that level of return.

This type of investor often uses the concept of a “Cap Rate” to figure out how much properties are worth. A Cap Rate (short for Capitalization Rate) is the rate of return generated by net cash flows – that is, rental income minus all operating expenses associated with owning the property. For example, if a 6-unit apartment building bought for $400,000 generated $30,000 in net operating income, the Cap Rate would be 7.5% ($30,000 / $400,000).

If a nearby 6-unit building generated $45,000 of income, applying the same Cap Rate you would arrive at a value of $600,000 ($45,000 / .075). In general, as markets improve and property values go up, Cap Rates go down. This makes sense: When times are good, there are usually more buyers than sellers, so sellers can demand high prices which push down rates of return.

The reverse is true when prices fall and markets tighten up. Investors demand a higher rate of return for taking the risk of buying a property in a hard environment, which drives down the prices they are willing to pay and thus pushes the Cap Rate up.

For home buyers, the decision of what price to pay is determined by two primary factors. First, the buyer’s ability and willingness to pay. Monthly income and savings will often dictate how much a buyer can pay, then more emotional factors kick in to determine how much he or she is willing to pay. The confluence of hard numbers and soft feelings creates a price range where the buyer can be satisfied both economically and emotionally.

Second, recent sales, other listings and general market conditions will determine what a fair price for a given home is. Subjectivity plays a huge factor in comparing like properties, so valuing single family homes is much more an art than a science.

Often, relative affordability between different cities is evaluated using a “Rent Ratio.” A Rent Ratio is exactly what it sounds like, a ratio between the cost to buy and the cost to rent. If a $200,000 home would cost around $16,000 per year to rent, the Rent Ratio is 12.5 ($200,000 / $16,000). According to Rent.com, which compiles rental data nationwide, a Rent Ratio around 15 means the buying and renting are roughly equivalent options. Below 15 and buying may be the best route, while above 15 and it may be best to hold off.

According to the most recent data, San Francisco is actually ranked as the best city to rent, with a whopping Rent Ratio of 37. That’s higher than New York at 21 and Honolulu at 24.

So, does that mean it’s a terrible idea to buy a home in San Francisco? Far from it. There may be plenty of valid reasons not to buy in San Francisco, but a broad metric like this doesn’t tell the story of individual neighborhoods.

What this high ratio does tell you, is that if you are lucky enough to find a property in San Francisco where buying and renting cost roughly the same, you are probably getting a pretty good deal.

This post first appeared in the February edition of: Cirios Trends: In Search of Real Estate Opportunities.

CalPERS Licks Wounds, Eyes Real Estate Investments
(San Francisco Business Times)

CalPERS, California’s public workers’ pension fund, isn’t sitting idly by to licks its wounds. Fresh after confirmation that it would lose $500 million on a botched deal to develop Stuyvesant Town on Manhattan’s east side, CalPERS is on the prowl for opportunities in the battered housing market. In conjunction with seeking new opportunities, CalPERS chief investment officer Joe Dear said the massive fund is also looking unload losing bets. There should be options aplenty, CalPERS’ real estate portfolio sunk by 47% in the first nine months of 2009.

(Read more here: http://tinyurl.com/ciriostrendsfeb102)

Obama Ponies Up $2.25 Billion for High-Speed Train
(San Jose Mercury News)

As part of a nationwide $8 billion high-speed rail initiative, the White House is allocating more than $2 billion to support plans to connect Northern and Southern California with a high-speed train. The highly politicized project is being developed alongside the San Francisco Transbay Center, which also picked up some cash last week. The US Department of Transportation will provide a $171 million loan to speed up construction of a state of the art transport hub beneath what is now the city’s Greyhound Bus station. Proponents laud the plans as essential to promoting public transportation and controlling carbon emissions, while opponents lament what they believe is yet another round of government spending gone wild.

(Read more here: http://tinyurl.com/ciriostrendsfeb103)

Who Says Commercial Real Estate is Dead?
(San Francisco Business Journal)

Commercial Real Estate has been called the “next shoe to drop” …. For what seems like years now. But despite the abysmal fundamentals still facing most segments of the commercial market, opportunistic investors are starting to dip their toes in the water. Loja Real Estate LLC plunked down $44 million on a Dublin, CA shopping center anchored by Safeway grocery store that abuts a 390-unit apartment complex. The deal, the investment group’s first in the Bay Area, marks the launch of a series of investment funds aimed at well-priced commercial real estate opportunities, according to Tom Engberg, Loja’s CEO.

(Read more here: http://tinyurl.com/ciriostrendsfeb104)

Silicon Valley Unemployment Below California … Barely
(Silicon Valley Business Journal)

Unemployment in Silicon Valley ticked down to 11.5% last December, 0.4% below November’s tally of 11.9%. Overall California unemployment stands at a lofty 12.1%, almost 2.5% higher than the national figure of 9.7%. The broader Bay Area, however, is faring a bit better. Joblessness in the metro area stretching from San Francisco to Redwood came in at “just” 8.9%, down from 9.2% in November, but up almost 50% from this time a year ago.

(Read more here: http://tinyurl.com/ciriostrendsfeb101)

This post first appeared in the November edition of Cirios Trends: Getting to the Bottom of the Housing Market

This piece first appeared on Minyanville.

By Andrew Jeffery

Reality, it appears, is a dish Washington believes is best served, never.

Late Friday evening on October 30th, long after most Americans had shut off their computer screens and turned their attention to more important things — namely, Halloween — banking regulators dropped a silent, rotten egg onto the financial system.

Despite an alarming increase in the number of troubled commercial real estate loans gumming up bank balance sheets, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency issued new guidelines Friday easing the burden this souring debt will have on lenders. Regulators are encouraging banks to modify loans, rather than foreclose and repossess property, even if the value of the building has fallen below the amount of the loan.

Loan workouts, regulators argue, can be beneficial to both lender and borrower, and are preferred to foreclosures, which drag down prices. But one look at the earlier-to-crash residential real estate market quickly proves this notion as a fallacy.

In many of the hardest hit real estate markets, ones which imploded well before ill-fated mortgage modification attempts were launched, true price discovery was given a slim opening to take hold. Now, as prices have fallen back to more affordable levels, traditional homebuyers and real estate investors have stepped back into the market, helping to stabilize prices.

Sure, there’s still a healthy dose of government intervention propping up the housing market as a whole, but only through these fresh starts can markets begin a genuine healing process.

Well-to-do markets, on the other hand, have not yet had their requisite dose of price discovery, as corrective market mechanisms are being prevented from functioning. Foreclosure moratoria (ongoing) and modification efforts (floundering) are simply kicking the proverbial can down a long proverbial road.

So too in commercial real estate, as landlords face increasing vacancies, falling rents, and, according to the Wall Street Journal, $1.4 trillion in maturing loans over the next five years. Around half of these are said to be underwater, and thus cannot be refinanced at current price levels.

Regulators’ answer, not unlike the failed mortgage modification programs introduced by the Bush and continued by the Obama Administration, is to allow big banks like Citigroup, JPMorgan, and Bank of America to forestall the recognition of losses, trying to delay the inevitable bursting of the commercial real estate bubble.

With Wall Street’s collective eyes focused on Monday’s headlines — CIT’s bankruptcy, Goldman Sachs picking up tax credits from Fannie Mae and Freddie Mac, and of course the Yankees a single win away from their twenty-seventh World Series title — regulators are hoping investors will ignore the stench of this well-timed announcement as just another holdover from Halloween revelry gone awry.

And while the new guidelines may bolster efforts to make the banking system look healthier than it actually is, it’s further proof that rumors of a legitimate economic recovery are, in fact, greatly overestimated.