All Forum Posts by: Charles Granja

Wow, it seems every day there is a new issue. I wonder what will happen next. 

I mean, you might be better off taking the case on yourself.

You can break a management agreement whenever you want, but there are fees associated with that. I would imagine the best actions would be to immediately fire the management company, pass the keys onto a new one, sue the old one in small claims court for the listed damages. This is assuming that you can prove that the issue was their fault, and not yours.

The problem is that the cost of litigation is very high, likely not worth it. It is also risky when you consider that if you lose, you do not get reimbursed for legal fees.

If you feel that you will win rather quickly, why not represent yourself? The process is rather straightforward. It is just a headache to learn.

Would love to hear what others will say. When I sued someone for breach of contract it costed probably around $1500, but I filed, did majority of the work, and had my attorney there for negotiations. Another time I sued someone for breach of contract and it costed around 12-15k, this was a complex and much longer case.

I wouldn't recommend investing in real estate with that amount of money unless you are buying a primary/house-hacking with a VA/Fha loan. You could place it in a REIT.

I'm sorry to hear about your negative experience, and you're not alone. I think one of the reasons BiggerPockets has lost some of its popularity is due to the concerns you've mentioned.

Don't listen to any of the capitalist counter-arguments posed here, you are not wrong in the things you're saying.

For the sake of providing a counter-argument:

The real estate market has overperformed since 2010, the Fed also started QE during Covid, so saying that you have made more in equity shouldn't be much of a surprise, considering this is one of the fastest run-ups in history.

When you say "Cash-flow" investors, you are really saying investors who want "20-30%" of their total cashflow distribution to be during the hold-period, rather than at the end. You are arguing that investors should want even less, in a very speculative market

Sure, investors could buy bigger and better in upmarket, but how will they service their debt when they are new investors? They don't have enough money. 

If investors buy upmarket and have low or no cashflow, they have access to amazing tax breaks, but how will they use them when they are young, and just starting out? The value of those tax-shields are 1/2 as valuable as a high W-2 earner.

If you invest in an asset, would you rather receive cashflows today, or cashflows 10 years later in bulk? Would you value those cashflows the same, because I wouldn't

The fed plans to solve the housing crisis over the mid-term (I dont believe them), lets say they succeed at building 3 million housing units each year, do you think your assets will hold their value? Or do you think there is exorbitant amounts of price sensitivity in residential considering the run-up in pricing?

This will be my last comment. If you are a new investor please make sure you read all of my comments.

I believe that the statements being made are incredibly qualitative/philosophical and show a massive lack of understanding of both finance and real estate. This is showcased by how experienced investors here are unaware of what the risk-free rate is.

To be clear: I am not saying to invest your money in the SMP500 or that real estate is a terrible investment. I am saying that anyone who has a basic understanding of financial modeling and real estate finance knows that yields for real estate are dramatically lower due to quantitative tightening. (an objective fact) By comparing yields across different investment vehicles, for many investors real estate is no longer worth: the capital, the work, the risk.

You can be bullish in real estate today by saying: I believe the Fed will not increase the supply of new builds to the market over the next decade. I believe that shelter inflation will remain at or above the current rate of 6% over the coming years. I believe this inflation trend aligns with the 1980's inflation trend. In this, highly leveraged real estate will benefit.

-When discussing real estate as a whole, no other argument makes mathematical sense. Any argument being made as a market-specific argument is not relevant in the context of the conversation.

The only ways the typical investor (defined as a middle-aged adult with 4-5 properties, generating around 60-75k annually) will generate similar yields in the current state is (1) taking advantage of senior debt (assumable debt/seller financing), in this you are improving bottom line NOI via the spread between active and par interest rates. (2) Value-add or flips (Higher risk and not typical) (3) Investing in developing areas that will see high amounts of rent growth over the coming decade due to population changes. (Im not going to include niche strategies that likely don't apply to investors on the average, because that is the topic of discussion).

When you look at prices and interest rates together (so everyone is aware, comparing historical interest rates literally makes no sense), and take into account the effects of inflation, real estate is 20-30% more expensive than it was in 2008. To add more context, the cost of a mortgage has doubled over the last 4-5 years across most markets.

Prices are objectively high.

Deals are not flying off the shelves, but it is true that real estate is local. If you look at the market as a whole, transaction volume is objectively down.

If anyone says that comparing risk between investments and assessing principal risk is not wise, they do not have an understanding of finance. This is literally the basis of investing. They should refer to Mogdigliani and capm if they have no idea what any of this means. 

If anyone discusses leverage as a tool (especially without expressing the risk of leverage) and is unaware how interest rates increases over the last 2 years have utterly destroyed net yield, they aren't familiar with how interest rates impact total return. Again, a very obvious thing for anyone who understands finance/real estate.

If anyone states that someone should buy cheap real estate, they do not understand how fixed costs impact total return due to limitations in top-line revenue. While the learning experience might prove valuable, it will likely cause years of suffering and a net loss.

I do agree with the idea that people should do rather than sit on the sidelines, but you have to be crazy to think that the real estate market is in a great place.

Quote from @Bruce Woodruff:

Quote from @Charles Granja:

Hello Bruce,
It's not about interest rates, its about yields and principal risk.

In investments you have market risk and idiosyncratic risk.
When we think on quantifying these risks and assigning a discount rate, we can look at 2 components. Risk-free rate and risk premium

This is an informal way of showing you that what you are saying is incorrect:
If the risk-free rate is 5%, then an investor should not invest in anything with risk at 5%. That would mean real estate, stocks, literally anything.
-Why would I invest in anything that has risk when I can get the same yield risk-free?

If the SMP 500 gives an average return of 7% return each year, and has minimal risk, then we do not want to invest in anything that has more risk for the same yield.
-If a value-add project/flip/start-up also give a 7% return, why would I invest in those projects when they are giving the same yield as an index fund? 

Interest rates could be 50% right now, but if we are getting a 20% IRR it doesnt matter.

Real estate prices have increased considerably in recent years due to low interest rates. Now that we are in a high interest rate environment with high prices, real estate yields have been compressed, and are generally not worth it given their risk profiles.

Thank you for taking the time to reply with your opinion. We think very differently about this apparently.....

It's really not about either interest rates, yields or principal risk when you get right down to it. It's about can the investor make enough money, in whatever amount of time they feel comfortable with, to make them happy (with the perceived ROI and other factors that make people happy).

You are assigning a risk rate of 5% (or whatever) to RE. That's an assumption. Lots of people :-) can find properties, fix them up a little and double their money in a couple years. Then you have a different ball game, eh?

You do say that RE is 'generally' not worth it, so you got that right. Kinda, sorta..... But with your inside-the-box thinking, I would definitely not recommend that you purchase Real Estate anytime soon.

I agree with your statement about investing in profitable real estate. I also think you are misunderstanding what I am saying because your argument about making money, value-add, directly aligns with what I am saying.

The problem today: Majority of SFR properties are selling at prices where they do not give yields that compensate for their respective risk profiles. We can see what the market thinks by observing transaction volume in real estate private equity. We can also see it in residential/commercial real estate sales. These types of deals are still possible, they are just very difficult to find given our low housing inventory.

When I refer to the risk free rate I refer to government bonds. As an investor you should consider how your investment compares to other potential investments, like government bonds and the SMP500, because if not, you could be doing way too much work and taking on too much risk, for no reason.

Real estate is very difficult and capital intensive. It is much more difficult than buying government bonds and investing in the SMP500. If we are getting the same yields investing in real estate, why are we working so hard, why are we dealing with less predictable cashflows, and why are we dealing with eviction/property management risk?

Hello Bruce,
It's not about interest rates, its about yields and principal risk.

In investments you have market risk and idiosyncratic risk.
When we think on quantifying these risks and assigning a discount rate, we can look at 2 components. Risk-free rate and risk premium

This is an informal way of showing you that what you are saying is incorrect:
If the risk-free rate is 5%, then an investor should not invest in anything with risk at 5%. That would mean real estate, stocks, literally anything.
-Why would I invest in anything that has risk when I can get the same yield risk-free?

If the SMP 500 gives an average return of 7% return each year, and has minimal risk, then we do not want to invest in anything that has more risk for the same yield.
-If a value-add project/flip/start-up also give a 7% return, why would I invest in those projects when they are giving the same yield as an index fund? 

Interest rates could be 50% right now, but if we are getting a 20% IRR it doesnt matter.

Real estate prices have increased considerably in recent years due to low interest rates. Now that we are in a high interest rate environment with high prices, real estate yields have been compressed, and are generally not worth it given their risk profiles.

Quote from @Samuel Diouf:

Quote from @Charles Granja:

Quote from @Samuel Diouf:

Quote from @Mike K.:

Quote from @Charles Granja:

It's definitely tough out there right now! Best of luck.

 I'm gonna make some money with a local or web business and wait until we get some blood in the water in the housing market. It's coming and there will be good investment opportunities.

 I think this is the best time to start investing in real estate. Plenty of people are sitting on the sidelines right now.

How I see it: When you buy real estate, you are buying a stream of cashflows. Due to high interest rates, those cash flows have become less attractive when you consider their respective risk profiles. If we compare levered real estate against the risk-free rate/SMP500, there is too much work for too little yield. The cost of debt has simply become too high. To get a break-even net yield with current interest rates you have to allocate 2.5x the amount of cash when compared to 2021, which removes most of the benefit of investing in real estate.

The reason people are sitting on the sidelines is because it is very difficult to make money in real estate today

Cashflow, to me, seems like a small factor when you look at all the other variables that real estate has to offer. And rates are definitely high today, but you're married to the property, not the rate. You can always refinance when rates come down. By the time rates do come down, it's looking like property values aren't going to be where they are at now, especially if everyone jumps back into the market at the same time when they do drop.

 I'm not talking about cashflows informally as we often do on Biggerpockets. When I say cashflows, I am referring to the cumulative sum of discounted cash inflows and outflows over a hold period. These cashflows encompass the other benefits of real estate you are referring to, namely principal paydown, appreciation, and tax benefits.

I am arguing that real estate is not attractive as it once was, because in the current state, yields are dramatically lower due to the cost of debt, Rd, and when you compare them to other investment vehicles, it is not worth the risk.

Quote from @Samuel Diouf:

Quote from @Mike K.:

Quote from @Charles Granja:

It's definitely tough out there right now! Best of luck.

 I'm gonna make some money with a local or web business and wait until we get some blood in the water in the housing market. It's coming and there will be good investment opportunities.

 I think this is the best time to start investing in real estate. Plenty of people are sitting on the sidelines right now.

How I see it: When you buy real estate, you are buying a stream of cashflows. Due to high interest rates, those cash flows have become less attractive when you consider their respective risk profiles. If we compare levered real estate against the risk-free rate/SMP500, there is too much work for too little yield. The cost of debt has simply become too high. To get a break-even net yield with current interest rates you have to allocate 2.5x the amount of cash when compared to 2021, which removes most of the benefit of investing in real estate.

The reason people are sitting on the sidelines is because it is very difficult to make money in real estate today