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If you are buying when unemployment is 4%, you are buying trouble
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...
People say, the main difference between (5+units apartment buildings) and (any residence below 4 units such as SFH/townhouse/condo) is forced appreciation.
If buying a property with cash flow only and without appreciation, I would prefer to buy a SFH/townhouse/condo instead of an apartment building that don't have force appreciation anymore.
During an upward momentum market, the SFH/townhouse/condo can still appreciate regardless rent is increased or the property is upgraded.
But an upgraded top dollars rent apartment building cannot be appreciated anymore even though the market is on an upward momentum, because the cap rate is fixed (such as 5.5%) at the top dollars rent already.
It is true that cash flow provides a cushion for REI, help us to leverage and multiply quickly. But that has nothing to do with coastal vs inland. Both can generate cash flow and appreciation.
One mistake I made when I first started investing in 2009, is to put too much emphasis on cash flow. Retrospectively, if I can go back to 2009, I would buy less cash flow with greater appreciation potential. That would be a better strategy to get higher return. Of course, nobody can foresee the future.
In 2009, I focused mainly on cash flow in Bay Area, and neglected those negative cash flow areas, e.g. Pala alto, wood side, atherton. I looked at a REO in woodside listed for 850K, but did not move on it. It would be over 3-4 million now. I looked at dozens of REO in hills borough, Palo Alto, athertom, none of them cash flow. So I bought better cash flow areas in Redwood City, south San Francisco, San Mateo. I would be a lot better off if I know that that time cash flow is less important than appreciation.
I looked at a nice unfinished new construction in Portola valley, listed for 900k. Did not move, even I liked it very much. The reason is no cash flow. It would be 3-4m now.
I am saying this based on my own mistakes. Cash flow is only one of the many considerations, and may not be the most important one.
@David Song Wake up David your dreaming . By your standards there is no difference between a speculator and an investor. Your the one who brought up risk as if I said there is no risk with investing. However just because there is risk doesn't mean it is speculative. Walking across a residential street to pick up a dollar might be a wise action, however walking across the street for $100 bill while they are Running the Bulls might be consider a little more risky. Both actions have risk, one might say going for the $1 might be wise and going for the $100 might be a speculative move. Now if you have great eye sight and are very athletic you might have the skills to go for the $100...no problem. I'm a fighter pilot by trade and I have been know to take a risk or two but there is a saying among pilots, " There are bold pilots and there are old pilots, but there are no old bold pilots."
Lets take your points one by one shall we.
1. You are speculating that rent will not drop significantly. What is significantly? I've been investing in duplexes for 15 years and I have never lowered rents....never. But that is not to say it won't happen, but I ask you what is significant? I've seen houses drop 50% or more but never have seen rents drop 50% or more, have you? I'm talking about low income rents say $1200 and below as that is the market my duplexes are in.
2. Tenants will be nice to your properties? I hope so but a lot will not. However, have you seen apartment complexes in your home town? I've seen thousands upon thousands in this great land. You know those places are full of renters, can you believe that! Most apartments don't even charge a full months rental deposit....I do! While they are looking for hundreds of renters, i'm, only looking for a few. If your an efficient landlord like myself you have no problem handling problem tenants with a profit....thats just what we do.
3. Major appliances won't all go bad suddenly. Usually when they go bad they do go bad Suddenly! So what, I buy most if not all my appliance used from craigslist. Remember this is rental properties for $1200 or below . We aren't buying new stainless steel! Refrigerators @ $200, Stoves @ $150 etc. Here in Texas its really the Air Conditioners. With 17 units I replace at least one entire unit a year, at least one at $3500 each. Still no problem cash flow handles it like a champ!!! It is built into the plan!
4. Furthermore, you are speculating Texas property will stay flat or appreciate. This is where you are wrong my friend and this is where I understand you don't get cash flow positive properties. To make money, I don't need the property to stay flat or appreciate even one dollar. We generally don't even care one way or another. Lets say I buy a duplex in 2003 for $150k and I sell it for $100k today. On paper I lost 50k, that is what a strict appreciating investor would say eh. But a savvy cash flow investor would say NO SO FAST. I would have paid $35k (downpayment and closing cost) and my renters over the next 12 years would have paid all cost including paying down the loan to zero. I sell for $100k my only out of pocket was $35k so I made $65k. In a down market where I sell the property for 50k below what I paid and I still make $65k. Wake up from your dream as this is real but hasn't happened to me yet because in my market the property is worth more like $250k but who really cares about appreciation I want the cash flow!!!!!
5.No hurricane will hit you, no flood will get to your properties. If you know Austin, you should have said hail storm as there is a greater chance than an hurricane causing damage. Nonetheless, isn't that is what insurance is for. Hail is far more of a threat, but hey I've had three roofs replace with insurance, I like hail. I've got a duplex that has outlived its roof, I'm just waiting for a good hail storm.
6. Will you still invest in Texas, if we know it will drop 80% next year? What kind of a question is that? Now I know your still dreaming.
Come to the light, Peace Out.
@David Song, So I have the same exact regret as you! If I had a time machine, I could have earned 2x-3x what I've done during the same time frame. That being said, looking back, can you think of any indicators that would have caused you to make a different decision assuming you had a little bit more local real estate knowledge? For me, I think if I just knew a little bit more about the historic cap rate levels in the area, that might have made me somewhat less stingy on my cash-flow goals.
The fact of the matter is that the Bay Area is a different investment game than most other places whether you are buying for cash-flow or appreciation. There's a lot of money here, and there's a lot of highly educated investors competing for limited product. That means that every little advantage you can gain in terms of knowledge or niche will help someone be successful.
At the time when I got into multifamily, I certainly didn't know that rents would almost double over a few years. However, I DID know that rents could already be pushed up $100-$150 before most landlords were onto the scent. That was one advantage that allowed me to jump in and react faster than the next guy.
And YES, you have to consider the timing of the market here. Even if you don't have a crystal ball, you need to adjust your strategy based on your best guess about the market, which is why (going back to @Diane G.'s original post), taking an unemployment figure is a perfectly valid indicator to either double-down or sit on the sidelines for awhile. It's all nice and good to talk about how great places like Texas are for cash-flow, but that's not what we have here at our fingertips. You have to play the cards you're dealt if you're going to stay local.
@David Song I get it, I too wish I had 20/20 hindsight, when they were handing those glasses out they ran out when it was my turn. Hell in 1997 I would have invested 10k in Amazon stock and it would be worth 15 million today and that is with absolutely no cash flow. David the reason you didn't put all your chips in 2009 is that you didn't possess the cojones....neither did I.
There are people today speculating here in Texas as well as California. There are people buying 400 sq ft 1 bedroom, new condos overlooking Town Lake here in Austin. Along with their buy they have the privilege of paying $500 condo association fees each and every month and this is not the annual property tax in the neighborhood of 10k per year. Now if the property doubles in 5 years they will be writing a message to me just like you above, and I would have to say nice job you got some nice looking cojones.
Arlen's property he mentioned has tenants in there that are rent controlled judging from the distribution of rents. Appreciation here in Oakland happens when a tenant moves out and you get to raise the rent to market rate.
It becomes a waiting game, but he will probably see ~$500/month increase re-renting it.
I don't see a lot to criticize in the deal knowing the rental market, housing shortage, and difficulty adding inventory to the area.
@Ryan Scott Isacksen Rent control for me is another reason not to invest in Oakland if your goal is cash flow. But I do see how someone would bet on the increase in rent over time . I get it but it is not for me. That might be because I live in Texas and cash flow is boring but effective. I've heard of rent control situations in New York City where dead people are still renting the unit, crazy! In Texas we don't like government intervention. However, the fear for me is Austin is the liberal bastion for this state and I absolutely can see some of that crap come here as well.
About raise rent to get appreciation after tenant move out in rent control area:
A real story from my friend’s friend.
The landlord has a 6-plex in Oakland, CA.
She wants to kick out her tenants so she can raise rent to market price for new tenants.
However, she cannot kick out her tenants because of the rent control.
The landlord inspected the property and found properties very old and many things are broken. She took the damages pictures and spent thousands dollars hiring an attorney to try to evict the tenants because she claimed that the tenants damages her property. I think the damages are from tear and wear, so the landlord didn’t win the case. The tenants are older couple rent it cheap and are not moving out.
If I were the tenant renting the place cheap in a rent control area, I would not move out until I die since the rent control protect me.
The landlord may need to wait many many years (20 to 50 years) until the tenants die, then raise the rent to market price many many years later.
@Account Closed let me know the risk of investing for appreciation in SF based on this long term graph. And btw, rents go up (a lot) when property values go up. So stuff I own is cash flowing very strongly.
I am not a big fan of rent control overall, but it sounds like your friend's friend is why the rent control laws got put in place. There is a method for buying people out and there is a poor system of doing increases to help pay for capital expenses.
Claiming wear and tear items as 'waste' and trying to evict an older couple just makes it harder to make the case that we need less regulation.
There are some places where tenants become 'lifers' and I certainly wouldn't buy expecting someone to move out to cash flow.
I can't afford this market now and do invest elsewhere for cash flow, but I manage here and understand why people buy and the kinds of returns you can get.
@Account Closed , in CA there is something called the Ellis Act. The only way to really evict/remove rent control tenants is if you want to 'get out of the rental business' , for example developing the property into condos or townhomes.
You have to make big payments to 'relocate' the tenants , in Oakland they just raised the fees.
It does sound pretty shady what your friends friend did and I could see that turning into a big lawsuit.
@Joe Scaparra seriously you don't like the deal? Did you do the math, with some basic general numbers. Should show you that it cash flowed from day 1.
But lets get more transparent and get into more of the details:
The initial $678k was all borrowed via a HELOC. The rate that we have is prime minus 1%... Just for the sake of argument lets say the rate is 4% (totally higher then the actual rate on the HELOC). Our actual new rate will be 3.9% fixed for 10 years with a 30 year am.
Property taxes + Insurance = approximately $1000/month.
For arguments sake lets say prop management is 7% of gross rents per month and round up to $390/month.
Lets add cap/ex at 10% month and round that up to $600/month.
Using the BP mortgage payment calculator we get a monthly PITI of $3320.20, lets round to $3325.
So we have $5559 - $3325 - $1000 - $390 - $600 = $244 per month with no money in the deal. That is totally free money with nothing parked in the deal.
This is nothing to write home about. But the fact is that the ROI is INFINITE because we have nothing in the deal.
In this real life example we get BOTH cash flow and appreciation. The appreciation is massive. Yes, I got a smoking deal and they are not all like this, but you asked for an example. Obviously the research I did on the particular property/owners and negotiation to get that price point is a key factor in the final purchase price. But if I can find and execute deals like this part time, I am pretty sure that there are others that can too.
You asked for a real example and here it is. How many "mom and pop" deals do you know in Texas that have infinite ROI from day 1, and $40k in your pocket in under 24 months?
Cash flow + Appreciation = Wealth
This is simple addition, so either cash flow or appreciation can be zero and still equal wealth. But having positive numbers in both CF and A will get you a bigger W...
I gave you all of my numbers on a recent California deal so people can see that it really can be done even at historically low unemployment rates.
I don't mean to sound condescending, but there is no other way for me to ask, how about you give me the same transparency on a recent Texas deal? I have been looking at the North Dallas region and the Austin area for years and I just do not understand how anybody creates large wealth without the appreciation piece. I would honestly like to better understand this market/strategy.
At the end of the day the original post was not about Texas vs California. It was about waiting for unemployment rates to rise before getting into/back into the market. My point is not Texas vs California. It is just to show people from the original thread that real deals can be had in hot markets.
It was said earlier that this property is subject to rent controls. I don't know if it is or not, I don't know much of what the city of Oakland can impose. However, I will say this, anytime you can buy a property and have it double in value with no significant rehab is truly a rare find. Good for you. I've had two duplexes in Austin found that way but they were essentially off market and I was able to take advantage of good luck and timing. Your cash flow is close to the 1% rule that i use here in Texas but not there. Good for you, however I don't think you will find too many of those. If we back up just a moment and take a more realistic approach. Would this be a good deal if your value of the building did not double in a year? You see I still see the investment goal as appreciation verse cash flow. Somehow I don't think you have let on to the whole story of this transaction, but that is ok.
There are exceptions to every rule but out here in Texas, I tell people there are generally two ways to make money in real estate. The California method of price appreciation and the Texas method of cash flow. That is a generalization I realize that but I think it has a good dose of reality in it.
Diane G. Please don't let your distorted political views about the new tax plan gauge your investment activities. Real Estate is not a market by definition because different properties that are of like parameters can sell at the same time for different prices on the same street. Why, do you ask? It's all about timing and motivation.
No offense, but your soliloquy about the proposed tax plan is so off base I am supposing you never read it. I guess you are taking direction from your Starkist queen.
"The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time... Cash is a bad investment over time." - Warren Buffett
In my opinion:
- When unemployment is low and the economy is doing well, its a sellers market and a great time to be flipping property IF you can find good enough deals. Also with lower interest rates available its a good time to refinance, locking in the low rates, and do some upgrades and repairs to your rental properties, allowing you to get higher rent rates in the future.
- When unemployment is high, and economy is doing bad, its a buyers market and a great time to acquire great deals.
I had seen this thread 8 days ago at the start. I took a deep breath, and started typing, then I deleted it all... In the time it took you all to argue over ROI, Equity, Cashflow, Forced appreciation, Peaks, Dips, Rent Control, the impending California zombie apocalypse, and whatever else you all cooked up in that time, I did 3 deals. Go make hay!
Levi T. Well said.
I read about a third of the posts. While I believe it is good to be conservative and cautious when investing, one still has to pull the trigger.
It comes down to one simple idea, buy low. If bought properly, one can do whatever he/she wants after that. Don't get caught up in the bs and make sure the numbers make sense. Buying purely based on possible appreciation is a suckers bet (that said, suckers can still win). But, they are usually the ones holding the bag at the end of the day as well.
I love that there are so many passionate people in the real estate game. Keep it up.
Diane G. ,
I think you might be confusing causation with correlation. I thinks it's more likely that low unemployment, low interest rates and a strong housing market are symptoms of a robust economy than that unemployment has a direct impact on housing.
All real estate is local. Even within regions and cities, there are areas and neighborhoods that outperform the others.
It's really important to understand local markets before investing. A low unemployment rate certainly bodes well for finding good tenants, but if you're putting your money in the right properties, they'll remain good investments regardless of employment fluctuations.
@David Song I always invest in things that can go up in value, but they have to cash flow.
Now, I don't want to confuse the issue but I will mention the new construction residence I bought in East Austin in a gentrifying neighborhood. I bought it as a residence, and I was nervous about paying what I considered a high price at the time. It paid me nothing in cash flow, obviously, but I made a significant profit when I sold. I wouldn't have bought it as an "investment", because the rent did not cover the expenses. That one purchase and sale gave me the seed capital to do other investments.
But how many times can one flip a house like this without adding any value? What happens if the market peaks and you're left holding the bag?
Without appreciation, real estate is a mediocre investment. In every multifamily deal I do I require room to add value and force appreciation or I buy in an appreciating market, or ideally, both.
DUPLICATE POST
Originally posted by @Amit M.:
@Account Closed let me know the risk of investing for appreciation in SF based on this long term graph. And btw, rents go up (a lot) when property values go up. So stuff I own is cash flowing very strongly.
@Nate Reed let me know the risk of investing for appreciation in SF based on this long term graph. And btw, rents go up (a lot) when property values go up. So stuff I own is cash flowing very strongly.
@Amit M.: The risk is if one is highly leveraged during one of the downturns (let's say they own their personal residence and a couple of rent houses and they've taken most of the equity out of their home to invest), they lose their job, then they can't pay their mortgages, so they lose everything.
There were plenty of people during the last recession who had their houses foreclosed on or just walked away. Were you investing at that time? Do you remember? Or were you in diapers?
One of my friends I used to work with in Los Angeles also moved to Austin with his family. He and I were laid off at the same time, but he was later in his career, so it was difficult for him to find work. They lost their houses and cars, and it took them a decade to get back to where they were financially. They just recently bought a modest house in a neighborhood not too far from me.
If you're putting 40% down, then you're "buying" cash flow. If you can still make it work, that's great. In less volatile markets like TX, we can put 20% down and still make excellent cash-on-cash returns.
Also, we're not foregoing appreciation in TX. Housing price appreciation in Dallas, San Antonio, Austin and Houston has been strong in recent years due to strong demographic/population trends. In the multi-family deals I'm in, we're benefiting from market appreciation as well as the opportunity to add value and generate forced appreciation.
I've been in one deal for less than a year and our equity is up 200%. I'm expecting a refinance and return of 80-100% of my capital in the next few months, with 7% cash-on-cash returns after that. We did that by acquiring a complex at a discount, operating it smartly and raising the NOI. Market appreciation has nothing to do with it.
At the height of the recession in 2008, self storage properties delivered a total return of 5% while general real estate dropped 38%, based on REIT performance. Might want to consider alternative assets at this point.
Diane G. Does the Class B Multifamily need to be in the Bay Area?
Originally posted by @Joe Scaparra:
If indeed the property is worth 1.2 mil then at 1% the property would need to bring in 12k a year to meet the 1% so I guess this property for the next buyer would certainly not be a good cashflow property eh.
When dealing with $1M+ 4/5/6-plexes, Arlen (or the future buyer) doesn't care about the 1% rule - it breaks in high-rent areas. He needs about 0.8% monthly rent-to-cost to get a CoC return of ~5% with 30% down. And, that's after he reserves $1200/m in CapEx.
I don't know Arlen or this property, so I'm projecting based on properties I own. We've discussed this topic, with graphs and specifics, in other threads.
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.
I'm sure I'd like example deals that Joe could produce as well.
A common practice when adding value to a multi-family is to only add some of the value that is possible. Maybe rehab a few units, raising the rent on those (thus increasing the value of the property), then selling to another investor who can do more rehab and also force more appreciation. The term I often hear is "leaving meat on the bone" for the next buyer.
And, as a few have mentioned, not everyone wants to turn around a property. It can be challenging, and it's risky. Some want to buy a stable, performing property that will provide reliable cash flow, even if the ROI is lower.