All Forum Posts by: Aaron Knoll

Welcome Isabelle!

While I'm not sure I'll be investing there anytime soon, I'd love to learn about RE in Thailand, Singapore, Malaysia. My family owns property in France, and I'm looking for ways to move that into better long-term investments.  

Are most investors in your area local? A lot of Chinese investors? What are cap rates and appreciation like in Bangkok? How challenging is it to navigate property investment in southeast asia if you're completely naive and don't speak the native language?

-Aaron

I've only been through two cycles before, but here's what I've observed last time:

After a crash, it takes up to a year for people to lose jobs. 

After job loss, it takes up to another year for them to fail to sell homes and start to default. 

After defaulting, it takes another year for the bank to foreclose and auction off your home.

It's not like property values tanked immediately in 2008: it's just that no one was buying and no one was selling because no one could get a mortgage. It took until 2011 when foreclosures were flooding America for the MLS prices to start to come down.

Before we get hasty, this may not be the "big crash" everyone's been waiting for. Yes, everyone knows stocks are overvalued and China is having trouble. But the US is (currently) the lone bright spot in the world economy (aside from places like Switzerland), and we're still recovering from the last recession...

That said, a foreclosure is a foreclosure. If you can get a good deal in CA, numbers work and vacancy isn't a huge risk, go for it regardless of what the stock market is doing.

If you don't mind my asking, what are typical cap rates for your properties in Petaluma? Do you do SFR's or multis? If you're going for conventional financing, do you need jumbo loans (and can you recommend a good lender?)

I probably won't be investing in the Bay Area anytime soon, but I might be looking into Boston and will have some of the same issues...

Thanks! 

 To be fair, Chicago in February is pretty rotten. I'd rather sleep in a tent in south bay than shiver through another polar vortex. But as an investor, yes, Chicago any day!

How about Salt Lake City? 45 minute flight from San Jose or SFO, 15 minutes to the airport from the city, $300k will buy you a 3k sq ft house with mountain views, 20 minutes from world-class skiing and hiking, and there's a burgeoning high-tech and finance industry. 

Maybe I haven't invested enough in stocks to have a good feeling for it, and I've certainly never *actively* invested in individual stocks. 

Let me give you an anecdote with my Vanguard Roth IRA, which an S&P 500 index fund. This is widely considered to be a "safe" investment, and nominally it's averaged 7.8%. I've invested roughly $35k in that since 2000 (contributing every 3 years... saving for downpayments or paying for a move the rest of the time). In 2015, it is now up to $55k. True my Roth started with a smaller amount, but it hasn't even doubled what I've put into it over 15 years! I am not impressed.

Compare this to real estate. Even going through the worst housing downturn in US history, my home in Utah appreciated 60% over 12 years, an average of 5% a year. I paid full, MLS retail price for it in 2003, and had the fortune of being able to put half down on it, so cash-on-cash was closer to 10%. That's just appreciation. Account for the fact that I didn't have to pay rent, and for many years (when I became an accidental landlord) I rented it out (well below market value, I might add). Even *after* tax, under-rented, and not yet understanding that I could take depreciation as a deduction, I was netting $12k/yr, about a 5% cap rate. Any serious RE investor would laugh at these numbers and slap me, but this was "playing it safe" as a homeowner, not an aggressive RE investor. Even then, if you count for both appreciation and the "roof over your head", and subtract out actual expenses (new windows, furnace, etc.), homeownership has been about a 14%/yr investment. A high-growth fund won't come close to those numbers over 10 years.

It's safe to say that the lions share of increases in net worth all came from real estate. My "conservative" primary home appreciated $140k. My home in Austin (boy am I glad to be out of that hipster-ridden hellhole) appreciated $80k over 18 months -- even after fees I pocketed $40k, a 100% return on a cash investment of $40k down. I used this to finance a large under-market investment property in SLC, which I bought for $470k and immediately appraised for $630k. With that one purchase, my net worth increased 30% overnight, and my net income increased by 45% thanks to rental (which again, most serious RE investors would laugh at). 

What's great about real estate is not just leverage (that's huge), but that you yourself choose to make a deal or to walk away. Compared to stocks, this is really powerful. Most of the people I know who went underwater or foreclosed are guys who seriously overbuilt/overbought, never really had the income to support their mortgage, or had a messy divorce or death, or were wage slaves who didn't have the luxury of buying and selling in the right place at the right time. Investors have those luxuries. Not to say it's fool-proof, but I feel much better about RE than any other investment.    

I suspect if you're a licensed equities investor, or have options to exercise, you can play the leverage game with equities and get similar (or better) returns than in RE. But for most of us, equities are a suckers game that are only marginally better than putting money in bonds, and in the short term can be much worse. 

 Hah! Actually, the boat idea came from my experience in the SF Bay area. I noticed most of my coworkers who took jobs there were renting for upwards of $4k/mo, which was half their take-home pay. Starbucks and In-N-Out Burger ate up the rest. I postulated that if they lived on illegal live aboard boats in the yacht club, they'd have shorter commutes, higher quality of life, and would pocket an extra $3500/mo.

A lot of Bay Area couples have done exactly that and (at least in the 90's) were flipping houses in Salt Lake in their spare time.

Utah is different -- there's no need to live on a boat here! It's relatively affordable, $2k/mo will get you a huge house in a good neighborhood, and commute time is almost a non-issue. It's even better to be a landlord than a tenant in this state. Utahns are always going bankrupt because the majority religion tells them to pay 10% of net to the church and have 6 kids. As a result you have a steady stream of large families that will always need to rent from you when they're well into their 30's. That said, the markets can be bubbly, rents are always depressed (because so many locals have big family networks and lots of basements to fall back on in tough times), and competition is high from out-of-state investors and a very entrepreneurial population. 

I had an especially bad day when I wrote the boat post -- but I'm faced with the reality of no career advancement, no meaningful ability to save or to lower my standard of living, a wife with a stalled career and two kids to raise, and RE investments being the only light at the end of a long, dark tunnel. My point is that living beneath your means when you're young is key. This means not blowing money at bars but also not having kids until you've made it. If I could go back in time, I would have acquired 50% equity in roughly $2M in property, with positive cash flow, before having kids. That way, when they're nearing college age debt service is over and you can sign the deed over to your kids and teach them how to invest. As it is, my oldest is 6, I'm only halfway there and have a lot of catching up to do.

This is not the sort of property I'd be able to invest in (in the foreseeable future) but I like numbers so here goes :)

From the numbers you gave, I have total yearly expenses at around 42k, so NOI is 160k/yr. For a project this scale (and assuming flat or low appreciation), I'd guess a 10% cap rate which would mean a purchase price of $1.6M. If you have multiple mouths to feed (i.e. syndication) I'd look for a 12% cap rate, i.e. a purchase price of $1.3M. If it's in a hot neighborhood in NY or CA with Chinese investment pouring in as they flee their home economy, a 6% cap rate ($2.7M!) would be just fine. Huge difference!

But without knowing a bit more about the market, the building, potential for appreciation/depreciation and long-term needs, it's tough to say. Do you know why it's on the market?

Let me tell you how I decided to get into investing.

I was looking to buy a secondhand sailboat off craigslist. I called the guy running the ad, who said the boat had all its pieces, but they were scattered across his various investment properties in greater Salt Lake City. So, I visited 3 different properties (two SFR's, one multifamily) which could best be described as seedy. The tenants were not exactly high-class, but had all been there for years, and paid more in rent then I would have ever considered charging. They had nothing but disdain for their landlord, who they said was the most useless flake ever, and only ever came by to camp out in the basements with his kids and occasionally sail. I ended up passing on the boat.

But it was at that point that I realized: this guy probably picked up these properties 15 years ago for next to nothing, nets close to $5k/mo off of them, plus whatever his properties in Florida give him. Meanwhile, with my PhD and non-tenured academic position, I'm fighting in the rat race for the same salary, barely putting away any savings other than what I had from previous jobs and sale of my Austin home at the right time. From a career standpoint, slum lord or not, he has the right idea. And from that moment on I wanted to be a slum lord. 

Granted, I don't have the patience for bad tenants, and I like taking care of my property. So my business model mostly involves class A properties and high-earning professionals who don't want to commit to purchase. But that's a business decision, not a career decision. If you have the patience and balls to remotely manage many low-end units, and you're in it for cash flow, then more power to you. "Slum lord" is not a pejorative in my book. 

The RE world really needs a comprehensive visual analytics tool. 

I saw this, but it doesn't even come close to what *could* be done:

https://www.mashvisor.com

Can anyone think of a good way to scrape the MLS (both sale and rental), AirBnb, VRBO, and others? In fact, actual listings could (should) be anonymized: the tool would be mostly for investors and policymakers to understand long-term trends.

Who has thoughts on this? Where would one start?

A lot of foreign investors like Chicago, for the following reasons:

+ both cash flow and appreciation, lots of direct international flights, an affordable "world city"

- the state of Illinois is in debt, taxes are high, building boom could dent cash flow + appreciation

I can also recommend Salt Lake City:
+ solid universities, great vacation rental market, great potential for growth, not as crazy as Denver,

- weak cash flow, competitive RE market