Real Estate Advice from the Billionaire Behind Michael Jackson
R.I.P. Michael Jackson. We'll miss the music, the costumes, the dancing -- but we still have Neverland, Michael Jackson's ranch of a few square miles, because the ranch was saved from foreclosure in 2008.
The guy who protected Jacko's home was a Forbes-listed billionaire named Thomas J. Barrack, Jr., a private equity investor who learned the real estate ropes while working for Texas mogul Robert Bass. To Jackson, Barrack was "the suit," Barrack said recently in the Los Angeles Times. And, like many a tycoon, Barrack -- the chairman of Colony Capital LLC -- hasn't been quiet recently on the subject of real estate. He's a modern billionaire: he goes on CNN, he sits still for interviews with newsletters, he blogs. Here's his recent published wisdom:
On defaulting on your mortgage:
"My feeling has always been that it's almost always better for that owner {on an house that's underwater, i.e., where the mortgage balance is greater than the value of the home} to leave the house on which he's upside down and go rent -- that renting is the best option at the moment, anyhow. If you really want to buy a house, buy another house, not that house." From Welling@Weeden {May 29}On using leverage:
"We have learned that leverage adds dramatically to scale, but minimally to yield.... Real estate returns over 15 years are about 8 percent levered and close to 7 percent unlevered. The utilization of leverage for us simply gave us more buying capacity not necessarily higher risk adjusted returns. Consequently, it is much better to utilize higher amounts of equity and less scale to reduce risk over any specific spectrum. The use of aggressive leverage, even if available, is a mortal wound in a deflationary cycle." From "It's About the Vault, Not the Gold," a Colony Capital publication. {June 23}On buying real estate debt:
"This is the era of unprecedented opportunities in the arbitrage of real estate debt ... CRE loans from commercial banks and various tranches of CMBS debt will provide additional opportunities especially for those which had been storied and sequestered. These investments will provide short-term gains, some interim cash flow, greater amounts of liquidity, and require value-added techniques and specialized troops, as opposed to financial engineering. There will be a moment for accelerated real estate equity acquisitions at scalable levels, but it is most likely not now." From "It's About the Vault, Not the Gold," a Colony Capital publication. {June 23}