All Forum Posts by: Aaron Ormiston

Hi All,

I'm wondering if anyone out there has seen an inverse trend between any two types of real estate? Single family and multi-family seem to trend together for the most part -- when single family home prices rise, demand for apartments seems to rise as well because some cannot afford to buy. This relationship seems to cause them to trend together in my opinion, though this may not be the case in every market. 

I'm wondering what tends to do well when multi-families start to drop off and vice versa. Any thoughts?

Does anyone have a good resource for tracking Occupancy rates over time in a given area? Or new construction rates, inflation, rent growth over time? I'm just trying to keep an eye on a few different markets and it's tough to do it all manually.

Thanks!

@Mike Dymski It all depends on your strategy. 1031 is definitely a viable option, but the technicalities make it very difficult in competitive apartment/commercial markets. Lining everything up on both ends (sale and purchase) and being able to close writhin the 180 day window makes it a strategy that is better when there is a market surplus. In my experience, it is more of a "cherry on top" then a go-to strategy for most investors.

And you're right: forcing appreciation and then refinancing is a great option because at the end of the day, you never sold. I see this used much more often than 1031s in my market, but that's just my perspective. 

@Michael Costanzo I guess the easy answer is that when something cash flows, you have the opportunity to get all of the things you're talking about -- tax advantages, appreciation, and principal pay down -- and you make money along the way. The napkin math is discussed in Millionaire Real Estate Investor. Starting with negative cash flow on your first property is a recipe for failure unless you have relatively deep pockets (general rule is to have 10% of the property value on hand at all times). 

Honestly, the "hottest part of town" is a poor choice of area for a rental. It'll be the place everyone flees from in any economic distress -- so you may end up with lower rental prices than you're predicting depending on what happens in the market (which you have absolutely no control over). Plus, if you're buying in the middle of a booming market of the market and counting on appreciation, it's not a great investment strategy no matter what industry you're in. Warren Buffet says to "buy from pessimists and sell to optimists." It's hard to do that if you've got wide-spread optimism in that market. 

Final thought: you can play the market and try to capitalize on appreciation, but if you do, it makes more sense to do that with SF homes. Multi-family investing is built for cash flow. The fundamental strategy of good multi-family investors is simple: never sell. Which is why you get a lot of discussion about cash flow. You're wanting to house-hack, I understand, but it's not a great long term strategy to plan on appreciation in a duplex. They don't appreciate as well as SF, and they don't sell as quickly. 

@Jake Stimmel I think that house hacking a multi-family unit during Dental school is a great idea. In my opinion, the more units you can muster the better. More units obviously means more work in the long run, but it also averages out costs and makes things overall a little easier.

I think wholesaling is a good way to get started -- you'll definitely learn about contracts and working with the different players involved in the industry. If I were you, however, I would make an effort to work alongside someone with experience in the area of your long term goals (i.e. flipping, multi-families, single family rentals, commercial, etc.). IMO, this is more valuable early in your career than a few thousand extra dollars. Good luck!

@Ben Backman Something that helps me is to remember that the more units you have, the safer you actually are. If you've got a duplex and your other renter moves out, you're paying the whole mortgage until it's filled. With four units, you're able to average everything out a little easier. So it's a bigger leap but you have some real cash flow benefits.

As for credit, it's good to have some lending history. Start with credit cards like @Justin Howe said, but it's good to have some kind of car loan or something on your lending history. Just like any loan, an FHA loan will only loan to you if your Debt-to-Income ratio is less than a certain percentage (actually pretty high -- like 50% in some states).

Keep in mind that with an FHA loan you'll be paying a large MIP (mortgage insurance premium) each month. You'll want to make sure to factor all of those costs into your projections. Also with an FHA loan, you won't be able to move out of the home keep renting it to others for at least a year, maybe more. Ask your lender about the details.

All in all, I think it's a great way to get started. Best of luck to you!

@Immanuel Sibero -- Dr. Mueller has some fantastic material on economic trends. Here is a link to some of his work if you're interested in the technical side of market analysis: http://ashworthpartners.com/3-things-i-learned-charting-multifamily-cre-market-cycles/

I would say that if you're buying apartment complexes for the appreciation, however, you're likely in the wrong market. Sure, you may be able to force appreciation in an apartment building by raising rent, having tenants pay utilities, etc etc etc, but when you sell an apartment building, the capital gains taxes and realization of depreciation absolutely cripple any profits you might make on a sale. The best apartment investors I know live by one rule: never sell. For most investors, SF is the vehicle of choice for capitalizing on appreciation and market trends as it will likely result in a higher net worth over time.

My rule of thumb: buy single family if you're interested in playing a more active role in analyzing and capitalizing on market trends (buy high, sell low) and if your goal is net worth. If you're buying for cash flow, then buy multi-family and you can often afford to ignore minor changes in the market. The consolidated management costs and the scalability are far better than purchasing single family homes when your end goal is cash flow (think of all the Six Sigma wastes you eliminate by consolidating everything for 30 units worth of income into a single transaction). 

Also, @Immanuel Sibero, I know some will disagree with me on this point, but in my opinion, if you buy an apartment building with good cash flow, who cares what the cap rate is? If you're interested in cash flow, you're not going to re-sell it anyways. Buy at the market peak as long as you can see a good cash flow from Day 1. There's no real need to sit it out on the sidelines unless you're trying to play the market, which again, is better left to those that are playing with larger sums of money or the SF market. 

@Jesse Chunn, it sounds like you want to gain $20,000/mo of rental income. Since you don't sound like you plan to buy and sell, the tradeoffs you take with SF homes likely won't pay off because apartment complexes are by far the best way to leverage your time and money for cash flow. You're not buying for net worth, you're buying for cash flow. Buying apartment units with slightly lower than average rental prices will shield you in the event of an economic downturn as people always seek cheaper rentals during those times. The SF market will hurt during a recession while a good middle-of-the-line apartment building will likely always have demand (though it depends on your area of course). 

Would love to hear how everything turns out for you!

I'm just wondering how a commission is usually split on flips when working with an agent. Is it usually 3% on the purchase and on the re-sale? Are some agents willing to budge a little there? I just want to make sure I understand how that works. Thanks,

Interesting, are there other metrics that help you determine the health of different markets? Or are those the main numbers you keep a pulse on?

I'm originally from Arizona, moved here maybe 2.5 yrs ago and am still getting to know the area a bit. I haven't taken a hard look at the real estate conditions until recently. 

@Becca Summers thanks for the detailed reply. Just went and drove through Vinyard after reading your post and you're right -- tons of development. I was talking about old orem, because most people seem to already consider vineyard separate. 

How do you personally track rental rates and market supply?