If you are buying when unemployment is 4%, you are buying trouble

[Diane G.]

I googled the unemployment history of US, and here is the chart... Out of the past 65 years, maybe 10 saw unemployment at around 4%....All other 55 years were higher.... If you are buying RE in today's enviroment when unemployment is 4% and interest rate is 4%, you are buying yourself trouble, in my opinion....

As a matter of fact, RE in the Bay Area is slowing down already, in my observation... My favorite example - Redwood City listing prices is now 15% ish lower than what properties have been selling at in the last 6 months... Big signal to me...

[Aaron Gordy]

I think SF and Austin are great markets. Its all about supply and demand. There is a reason why SF prices have skyrocketed. Its due to the lack of supply. How many new permits for houses were given out last year in SF? Based upon my recollection it was about 4000. Thus, demand definitely outstrips supply. In Austin, its just steady eddy forever. Nothing wrong with either market if you are in it for the long term. The long term investors see blips in the market as opportunities or at least I do. The short term investors focus on the here and now. If the short term investors can't get out from their position during a crunch then they lose their investments. Real Estate is not liquid like the stock market so one can't get in and out of it quickly. No strategy is fool proof though. The best one can do is analyze and determine if its worth the risk. I know personally, some long term investors that are sitting like fat cats collecting rents without debt and have other folks manage their portfolios for them (me) while they go see movies in the afternoons. I am not a hater though. Good for them. It seems like a darn good pathway to me. 

[Nate R.]

Originally posted by @Justin R.:

Nothing wrong with that investment from Day 1, but of course the real play is driving higher revenue, lower costs, and/or re-financing out his capital.  And, he's got two bonus cards in his back pocket: rental price appreciation and market-based appreciation.

It doesn't sound like Arlen added any value yet. He rode the wave of market appreciation (rising rent, falling cap rates). 

[Justin R.]

@Nate R. Judging from his history of posts on BP, I'm confident he sees the value play and exploited it.  :) He can confirm, but I suspect he adjusted rents or tenants pretty quickly, and that's where his higher valuation came from.  But, that's speculation for @Arlen Chou to clarify.

Maybe I misread his post.

[Arlen Chou]

@Joe Scaparra come on, your arguing for the sake of arguing now...

"If we back up just a moment and take a more realistic approach" the is a real deal, how more realistic can anybody get?

Let me clarify, the value in the property did not magically double in 20 months via MARKET appreciation.  A large part of the value was already in the building at the time of purchase. As an investor, I am looking for hidden value in terms of unseen equity or potential income streams.

The original theme of this thread was about getting into the market at these low unemployment rates was dangerous.  Some how it turned into a Texas vs California debate.  I believe my REAL example addresses both points.  It is 100% true that these deals are not common, BUT they do exist and can be found ON MARKET if investors do some work.  As I had said in one of my previous post, I personally have more examples, this one just happens to be my most recent one.

It is not a Texas vs California strategy debate.  The focus should be Cash Flow + Appreciation = Wealth. It is totally fine to focus on CF with low A if you are in a market that does not appreciate at a rapid rate, it still gets to W.  My point is that a strategy that gets BOTH CF and A will get to real wealth much faster... its just simple math.

@Account Closed made reference to a 6 plex and rent control in Oakland.  The person she is referencing is NOT me.  

However, my property is under RC.  This is a completely different topic, but RC is not as bad as the general population believes.  Just a high level understanding will expose the fact that RC is a political tool NOT a housing solution.  RC protects CURRENT constituents (VOTES) at a cost to FUTURE residents by artificially constraining supply.  Basic economics theory will tell anybody that less supply, creates higher demand, which creates higher prices.  The most immediate issue for investors in RC markets is how to get to those higher prices if there are tenants in place.  This also is a totally different topic then the original topic. But rest assured it can be done and is being done by many people.

But back to the original topic, there are deals out there in this specific market.  I know of 3 that would be close to 1% at time of purchase, if bought right. This market is not for the casual investor but investing should never be taken lightly.  People need to do more research, do more math, and have a plan to high profitability.  The fact is that people are making money in this market with both CF and A.

[Nate R.]

Originally posted by @Justin R.:

@Nate R. Judging from his history of posts on BP, I'm confident he sees the value play and exploited it.  :) He can confirm, but I suspect he adjusted rents or tenants pretty quickly, and that's where his higher valuation came from.  But, that's speculation for @Arlen Chou to clarify.

Maybe I misread his post.

 In his earlier post, he stated (paraphrasing) "we didn't even to anything to the building other than replacing a water heater". That's what I meant.

Sorry, does anyone else find the forum editor really difficult to use? I would go back and try to quote him verbatum but it's a PITA and not worth it.

[Nate R.]

Ok, I read his follow-up post after I posted above and he explained he was buying below market. I understand now.

[Arlen Chou]

@Nate R. JUST riding a wave is a novice approach. What I did was what a true INVESTOR should do...  I discovered hidden value and turned it into cash in my pocket.  You are correct in that I have done no renovations.  All I have done is increased rents using the allowed rent controlled rates.  I still have the rent increase step to further increase value.

The real secret is I how did I find so much hidden value when the deal was sitting on Redfin for so long for everybody to see.  I have DVD's for sale for a low low price of $99 that explains this process..., just kidding.

What I and guys like @Account Closed are doing is true investing... just focusing on the 1% rule or 50% rule GRM or a few hundred dollars a month is like walking in the dark with a candle. People need to up the research and analysis, looking around at night with a Q-Beam makes the world much more clear.

[Nate R.]

Originally posted by @Arlen Chou:

@Nate R. JUST riding a wave is a novice approach. What I did was what a true INVESTOR should do...  I discovered hidden value and turned it into cash in my pocket.  You are correct in that I have done no renovations.  All I have done is increased rents using the allowed rent controlled rates.  I still have the rent increase step to further increase value.

The real secret is I how did I find so much hidden value when the deal was sitting on Redfin for so long for everybody to see.  

That's awesome, and I congratulate you on a smart purchase. It is amazing that people overlook value like this, especially in a "hot" market.

[Joe Scaparra]

@Arlen Chou There is more than one way to make money in real estate and it is smart to work with the cards your dealt with.  I like appreciation, as FOR ME it is icing on the cake because my cards for my Cash Flow game.  I get it, Appreciation is your Cake and when if ever Cash Flow becomes significant then it is icing on the cake.  No one way is better than the other, it is whatever the investor wants to focus on.  You got a great deal, your sizzle is that you found a very undervalued property and snatched it up.  The deal was good as it had all kinds of appreciation built into the deal. You did good.   

Let me back up a little as I think you want me to feel Great about your deal. Ok, I feel great if when I bought it for $678k I knew that 20 months later a bank would loan me 60 LTV on $1.2 million and I was going to walk out of the deal with excess cash and it was still cash flow positive after the refi. Hell YES If I had a good feeling that was going to happen then YES I LOVE THE DEAL. If on the other hand I was buying a $678k 1 bedroom six units property with cash flow $5.5 per month with no known or idea of immediate appreciation then I'm not as excited. 20/20 hindsight is PERFECT, I just think you knew a lot more about the property other than it sells for $678k and cash flows @ $5.5 (or whatever) per month.

You did good and appreciation was the factor in the deal.  Not  a bad thing, my only point was in California due to high price of property it is harder to cash flow positive and therefore most investors have to focus on appreciation.  That is the point I'm making.  A generalization yes and I'm sure there are exceptions to this all the time.  In Texas it is very easy to find cash flow deals that would be very hard to find in California.  Properties are cheaper and the phenomena of duplexes abound throughout the state not so much in California.   I'm beginning to feel like the horse is dead, so I'm going to quit beating it.  Peace Out.

[Account Closed]

@Joe Scaparra since you asked, here are the numbers on my most recent deal. This was a deal found on Redfin/MLS. Yes, it's a C class area, but it's one of the better streets in an up and coming area. This is a 4 plex purchased with 30% down and a 3.99% 30 year fixed rate.

https://www.redfin.com/CA/Oakland/8300-B-St-94621/...

Purchase Price $480,000   (listed for $475K)   Purchased September 2016 (1 year ago)

Down Payment $144,000

Rehab $50,000

Total Cash in Deal $204,000 (includes about $10K in closing costs)

It was vacant when I bought it. Rehab took 3 months.

Total rents $7200/month   (1.35% rule based on purchase price+rehab)

PITI $2550/month

Vacancy, Cap-ex, Maintenance, etc $500/month

Cash Flow $4,150/month, or 24.4% Cash on Cash Return.

This is a life-changing deal, my friend. You living in Texas, could retire on a deal like this. Especially if you live in a $150K duplex (which is somehow worth $100K 10 years later, according to you)

So, here is a real, life changing, 24% cash on cash deal. I invest for cash flow, but I love appreciation. Why?

Because I am now doing a cash out refi. It just appraised for $670,000 (yes I bought it right, and the market has increased in a year). So at 70% LTV, I will be able to take a $469,000 loan, which is about $140,000 of cash out. Yes, in 1 year, I am getting 70% of my money back in 1 year, and I will still cash flow $3,300 a month.

This is why I invest in California, in the Bay Area. 24% cash on cash, get most of my money back in a 1 year, and cash flow forever. I did not bank on appreciation but it happened anyways. Even if prices plummeted, and rents went down by 50% (which you state never happens), I will still be cash flow positive and able to ride out a downturn. 

Is this possible in Texas?

By the way, I'm in contract on a triplex right now with very similar numbers. And it was also found on Redfin/MLS! You asked me to provide with you a small multifamily in the SF Bay Area that meets the 1% rule, and here it is. There are more deals like this.

[Joe Scaparra]

@Account Closed  Your deal looks nice, good job.  Are there deals in Texas similar I suppose but no doubt your deal looks good.   I just closed on a 4plex a year ago Sept 2016  Bought it for 144k rehab 50k and my rents are $2950 with room to grow.  It works fine as well.  Total rents 2950 (1.475% rule based on purchase price + rehab).  

https://www.zillow.com/homes/for_sale/Bryan-TX/50314426_zpid/23862_rid/30.626762,-96.377416,30.624119,-96.380901_rect/18_zm/?view=public

[Adam M.]

@Scott Trench Are you buying these solid, cash flowing properties in the Denver area?

[Shawn Clark]

Originally posted by @Diane G.:

I googled the unemployment history of US, and here is the chart... Out of the past 65 years, maybe 10 saw unemployment at around 4%....All other 55 years were higher.... If you are buying RE in today's enviroment when unemployment is 4% and interest rate is 4%, you are buying yourself trouble, in my opinion....

As a matter of fact, RE in the Bay Area is slowing down already, in my observation... My favorite example - Redwood City listing prices is now 15% ish lower than what properties have been selling at in the last 6 months... Big signal to me...

Depends what you are buying for. Cash flow? Rehab equity? Wholesaling? For appreciation, you could be correct. But it's very local. Appreciation is speculation, and I try not to do that anymore. The other methods will make money in almost any market if done correctly (and sometimes quickly lol).

[Helen Zhang]

@Account Closed, thank you for sharing (since I asked).

I cannot fully agree with you that your 4 plex is a C class area (obviously everyone has their own definition of what is considered as C class area). It is a decent deal, but not great only because I have been exposed to Texas. 

When you asked the question of "Is this possible in Texas?" I am uncertain if you are asking in a challenging way, or you are asking as you are seeking for information. But I will take it with the benefit of doubt that you are seeking for information =) 

With 140k to leverage the same way as you did, it is much easier to achieve in Texas (as you don't even have to look hard to those deals, they are just everywhere). To achieve the same level of appreciation in Texas, that will take a lot more effort (IMO, it is almost impossible). So in terms of appreciation, I think your Oakland deal is def better. 

[George Smith]

The unemployment rate is a farce. I believe that you have to start either labor participation rate.

[Account Closed]

Originally posted by @Helen Zhang:

@Account Closed, thank you for sharing (since I asked).

I cannot fully agree with you that your 4 plex is a C class area (obviously everyone has their own definition of what is considered as C class area). It is a decent deal, but not great only because I have been exposed to Texas. 

When you asked the question of "Is this possible in Texas?" I am uncertain if you are asking in a challenging way, or you are asking as you are seeking for information. But I will take it with the benefit of doubt that you are seeking for information =) 

With 140k to leverage the same way as you did, it is much easier to achieve in Texas (as you don't even have to look hard to those deals, they are just everywhere). To achieve the same level of appreciation in Texas, that will take a lot more effort (IMO, it is almost impossible). So in terms of appreciation, I think your Oakland deal is def better. 

2 questions,

1) Are you insinuating that my property is in a D class area? debatable, but ok

2) Are you saying there are plenty of deals in Texas with 24% cash on cash returns? I don't think there are, but I could be wrong. If there are that many deals with 24% cash on cash returns, then it's pretty safe to say there is very little appreciation potential. 

[Jason Ong]

Read a book titled "What I Learned Losing a Million Dollars" few years ago that defined the following profiles.

- Better

- Gambler

- Speculator

- Trader

- Investor

The gist that I got was the difference between investors and speculators are hold period and leverage. The following matrix from a Nobel Prize Stanford professor Dr William F. Sharpe seems to suggest so too.

By his definition, it seems like unless one buys assets in full cash without any leverage and can afford to lose it all, most of us RE "investors" are really just living in the grey area between "investor" and "speculator"...

[Amit M.]

@Nate R. was I in diapers? WHAT!?!?  Look kid, I own RE in SF since 1994- and prior, during and after 2008. I've made a lot of money here. You used to live in LA.  you should of invested back then or in 2011-13, but you chickened out. You missed the boat and consequently your anger towards CA is palpable....it sounds like bitter lemons to me.

As for your "answer", of course using high leverage is risky, but it's risky everywhere. And in SF you don't need to use high leverage. The appreciation is so high you can still keep plenty of equity and pull out cash for your next deal. You conveniently ignore the disproportion of up years (5-7) vs 2-3 down years each cycle that chart shows. That's a safe investment environment if I ever saw one. 

Austin has been expanding very fast with too much new construction. I predict it's gonna boom and bust like Phoenix, vegas, Miami, etc. tend to do in the next downturn.  Austin is (finally) a city in TX that has shown actual appreciation, so I see where your cockiness is coming from. But for the last time, appreciation in a well known, highly desirable and impacted market like SF is not speculation; it's an established reality. (It's a tough market to break into; but once you're in it's a great wealth generator.) That chart shows a long history of appreciation, and for many reasons. But if you think for a minute that you can make more money investing for cash flow in TX vs SF, then please pass your pipe over...cause you must be smoking some good sh*t!

[Joe J.]

@Jason Ong Thanks for the chart!  I have to say, the Investor profile looks incredibly boring.  Should I be concerned that the Gambler profile is by far the most appealing?

[Amit M.]

@Arlen Chou and @Account Closed "prognosis" or "analysis" seriously (my personal fave, her correlating 4% unemployment with 4% interest rates. That's ripe :) Her proclivity for talking out of her *** has demonstrated itself over and over again. Just enjoy it as a popcorn thread. 

[Nate R.]

Originally posted by @Amit M.:

@Nate R. was I in diapers? WHAT!?!?  Look kid, I own RE in SF since 1994- and prior, during and after 2008. I've made a lot of money here. You used to live in LA.  you should of invested back then or in 2011-13, but you chickened out. You missed the boat and consequently your anger towards CA is palpable....it sounds like bitter lemons to me.

I owned a condo in Pasadena in the early 2000's which I sold because of my fear about a bubble market, and it turned out to have been much too soon. I wish I had had mentors back then because I probably would have made a better decision at that time.

I left LA in 2010 after a series of short, high-stress jobs and the 2nd set of layoffs I experienced in a 2 year timeframe  -- the first one occurring at the beginning of 2009 during the global financial crisis, the second one occurring a year later at a very well-known media/tech company that has since shuttered. Austin was like a safe haven beckoning (it was also where I was born and spent part of my childhood), a place where I could easily find work and be comfortable.

I did look into real estate around 2005-2007 in SoCal and almost got involved with a vendor from Marshall Reddick, but I'm glad I didn't, since that organization went bankrupt and many members ended up losing money in investments out of state during the collapse in 2007-2009.

Anyways, I had a hard time getting any traction in LA due to the unstable job market, generally stressful lifestyle and high cost of rent, which made it difficult to save significant money. Being busy with working and commuting and short on savings (outside my 401k), RE always seemed out of reach. Looking back, I wasn't in a good position to invest.

I'm glad I am where I am now, as I've made some good money in Austin and more recently, San Antonio multi-family. I probably never would have discovered these opportunities and my mentors if I hadn't moved here in 2010, so while I have some regrets about missed opportunities in California (I'm not bitter towards CA or anyone who is succeeding there), I am glad I came to Texas.

[Joe Scaparra]

Hey everyone opinions are like a@@holes, everyone has one and sometimes they stink.  Don't make it personal, state your position back it up with rationale or facts and let people make their own conclusions.  This thread alone has somewhat changed my perception on real estate investing in California.  Because I am from Texas and my RI experience is from Texas it is easy to formulate OPINIONS that may or may not be sound.  So what, its a good exchange of ideas and my thoughts have shifted after I read this thread.  I have gained some great insight here.  Peace out.

[Jason Ong]

Originally posted by @Joe J.:

@Jason Ong Thanks for the chart!  I have to say, the Investor profile looks incredibly boring.  Should I be concerned that the Gambler profile is by far the most appealing?

 Just ask any folks in Vegas... the house always wins but we're delighted by the surprises once in a while. :P

Gambling isn't bad if one uses play money and treats it as entertainment... Like my folks who visits casino every year betting a low hundreds on slot machines... Entertainment fee... kinda like me repeatedly spending $12 on movies that I have no clue what it's about.

[Helen Zhang]

@Account Closed

1) I dislike the word insinuating, and if Palo Alto is considered as A class neighborhood in my opinion then the property you have purchased in Oakland is indeed falling into F-. I hope you are not offended as we are grading the land value. As I previously mentioned, everyone has a particular scale on how the gradings work. It is all relative. I read that you mentioned that you like to invest in the bay area, and thus I am giving my grading for the property relative to the rest of the area in Bay Area. Obviously, if the grading scale is simply just within Oakland, it would be a D. The gentrification seems to be occurring in the north of the Oakland and probably will be coming to south someday. This is all debatable and relative. I once remember the tenants in Oakland are very difficult to deal with, but that might no longer be the case. If that is changing, then the grade should be significantly improved as I actually grade based on the tenants =) Please feel free to correct me if my information is no longer up to date. Afterall, it doesn't matter if the property is in what neighborhood, as long as we are making money. 

2) Yes if you are seeking for rental money, I do believe suburbs surrounding major cities are probably better options. I am not a fan of leverage money as I have no interest to deal with housing market bubbles. Even with cash purchases, I am still scoring 13-17% return (I probably won't be able to do this anymore for any new properties in the same area if I purchase more since Texas really has appreciated a lot since last year). But you are likely to earn way more than 24% if you are leveraging. Sadly, these texas suburbs are not the D neighborhoods in Oakland where you can bet on gentrification for huge appreciation. The best way I can describe these suburbs in Californian is probably Fresno or Riverside -- small town, relatively low density, box houses, quiet, safe. Because they are suburbs, they appreciate as the city that they are surrounding appreciates. As I was reading your thread, I remember you once said you were not betting on the appreciation anyways. So it is likely that you might be interested in Texas. 

I'm not an agent or anything, and I am not looking forward to convincing anyone. This is purely for discussion and information sharing purpose as I appreciate you are sharing with me your Oakland portfolio. =)

[Gus Ross]

@Diane G. seems to be getting beat up here when on a macro level (excluding the unemployment rate argument which I think is moot), her train of thought is correct. There are systemic changes coming in the world of finance which present headwinds never seen before by markets. The fed unwinding their balance sheet and normalizing interest rates are clearly going to push asset prices (i.e. real estate) down and drive up interest rates. In Howard Marks' book, The Most Important Thing, he touches on markets like the one we are currently in (incredible book fyi). Compressed cap rates, cheap money and competition has been pushing asset prices higher chasing yield. On any REI podcast you hear the "lack of deals" and extraordinarily low cap rates in markets. Is there an impending crash coming? I tend to think not. But the pendulum is clearly weighted on the overpriced side. Deals financed on sketchy terms (5yr fixed etc) will face a tough period of refinancing in the coming years as a period of historically low interest rates end.

On the same token @Scott Trench is also correct in that you have to be playing in the market to even have a shot at winning in this game.  The key is to reduce risk and be frugal.  My understanding is that Mr Trench cultivates a frugal lifestyle which lends perfectly to successful investing.  All things equal it seems like I tend to agree with both the original poster and Scott.