All Forum Posts by: David Lutz

 Why kind of rates are you seeing from the portfolio lenders? They much higher than investment rates being run through fannie/freddie?

Let me just throw in a word of caution. To be clear, I'm a believer. I bought a SFR in Nov and have two in escrow now. My concern is that prices are only going to go up if people are willing to pay them. If inflation kicks off there's a risk rates go up and wages don't follow. That holds home prices down while simultaneously making them more expensive for FHA buyers. I don't think that creates any real risk of a crash - per everyone's comments about supply shortages and the number of millennials entering the home buying market. But I do think its reason to rein in expectations that the market is going to keep going nuts in 2021.

@Chris Clothier So after all the talk about the benefits of inflation I decided to take a quick look at what impact it actually has on my deals. J. Scott is right, it definitely helps... maybe.  So inflation helps as long as everything else is staying in equilibrium (i.e the ratio of appreciation to inflation stays the same). 

So ten year IRR:

• 8.2% with 1% inflation and 1.25% appreciation
• 98.3% with 100% inflation and 125% appreciation
• 7% with 100% inflation and 100.25% appreciation
• 4.5% with 100% inflation and 99% appreciation

The issue is that homes are so expensive that they're very sensitive to appreciation. Even if a home cashflows well, if the neighborhood slides from a Class B to a Class C, you could loose ten year of CF profits to a drop in home value when you resell. Even if the absolute appreciation benefit stays the same at 0.25% you're worse off because the importance of 0.25% is minimized by the inflation. Similarly if inflation gets so high that home appreciation actually slows down because no one can afford to buy anything, then your overall return is going to suffer. J.Scott's extreme example would actually probably be Armageddon for RE returns.

End of the story is that inflation is good, as long as it doesn't either outstrip wage growth growth or cause enough inflation that demand weakens.

To get a cashflow like that you're not in a great area, and it's not a newer home. So assume that you're going to get minimal or even slightly negative real value when you sell (home appreciates slower than inflation). That's not bad, just means you're making all your money from the cash flow. On paper that looks pretty good. Just be careful because the automatic calculators don't necessarily adjust your maintenance and CapEx costs accurately based on the type of tenant and age of home you're getting. Also, on a lower value home a $1000 water heater replacement is going to have a much bigger impact to your returns than on a nicer home renting for twice as much. Assume you're going to get less than is being projected. Personally I'd pass, but if you ask 5 people that you'll get 6 opinions.

@Carlos Ptriawan Agree with your comments, I haven't seen any MFR with workable numbers in markets I like or I'd have gone straight to that. Would you mind sharing what kind of syndicator IRR you're seeing? As an aside, if anyone has thoughts on how to get the PM rates manageable for a MFR (where you get less per door than a SFR) before you have a larger portfolio to get you a major cost break, please share.

@Jonathan R McLaughlin  Thanks for joining the conversation!   I'm using an inflation assumption of 3% and an appreciation assumption of 4%. As you noted it's the ratio of one to the other, not the absolute number that matters. The best research I could come up with is that appreciation tends to be within +-2% of inflation. So I assume national appreciation matches inflation and then use data from neighborhood scout on local appreciation to gauge what to drop in to my model.

The implication of what you're saying is that I could use a lower CapEx reserve if I was going to sell in 5 years. I'd be worried that (a) any benefit from that would get eaten up the transactional costs of a sale prior to the home appreciating much (b) there's a good chance the buyer is going to want additional concessions if there's large pending CapEx. I'm actually going the other direction. IRR at 10 years is noticeably better than at 5, and I'm reserving for CapEx assuming I'll have to replace everything on a continuous cycle. Real goal is to hold on to these things forever since the IRR will just keep going up and it's unlikely I'll never see these interest rates again (forever = so much built up equity I would consider doing something to get leverage again).

@Dan Valiente  hey Dan, I'm having similar concerns. I posted what my deals are looking like on this thread

https://www.biggerpockets.com/...

What are you seeing in the market at the moment?

Good comments @Chris Clothier, thanks.  I should have clarified. I'm using a property management company, chosen after screening a lot of them, which I'm pretty confident in. The properties are all well positioned in their local markets and I would expect very low vacancy/turn. The properties are all in good shape.

You raise an interesting point about leverage. I looked and can't find J Scott's post - do you have a link?  Historically higher interest rates decrease home prices. I think you're right that there's such a supply shortage and so much demand that price to rates might not equalize. That would create a significant windfall, I just don't want to count on that.

To your comment, everyone's analysis varies a bit. So nothing is ever really apples to apples when you're comparing deals unless the same person is running the numbers and making the assumptions. (ex. J Scott's SFR estimator uses ROI instead of IRR and doesn't account for inflation, mine I just realized didn't capture my appraisal/inspection costs). I know that overall my analysis is very conservative. But knowing there's so much variance in how people are evaluating deals makes it reeeeeaally hard to know what a good deal actually is.

I'm planning to move forward because I can see these deals are going to make me more money than the alternative options I have (other RE deals I have access to, or the stock market). It's just frustrating that I can't tell if I'm going to burn through my investment capital by moving at the wrong time. The main purpose of my post was to ask if others are also seeing that deals in this market are a lot less attractive than what people were seeing 2 years ago, and if folks are buying now anyway when they find things or waiting on the sidelines for the next market adjustment.

Check that. I know why I'm doing this. My IRR is inflation adjusted. The Inflation Adjusted stock market return is only 4-7% on average. So conservatively these will perform twice as strongly as the market. I'm just wondering if folks are finding better things out there.

The market has changed so much over the last 2 years, I'm finding that posts and other reference points on what's a good deal from a few years ago don't seem accurate anymore. I'm buying turnkey properties from out of state (buying them in California just doesn't work) for buy and hold. I understand that you can get much higher returns buying distressed properties, but that's not something I'm ready to attempt yet. So I have one house purchased and two under contract - with active contingencies so I can still get out :)

Assumptions: 25% to cover vacancy, R&M, CapEx. solid assumption for all the other variables. 20% down with 30 year note at 3.625%. 10 year holding period. B neighborhoods, SFR, IRR includes sale with 6% transactional cost and the annual CF from rent. Tax benefits excluded.

• Greensboro NC: Purchase 137.5K built 1963, Gross Yield 11.5%, "cap rate" 6.9%, CoC 6.5%, 10 year IRR 14.1%

• Martinez GA: Purchase 145K built 1970, Gross Yield 10%, "cap rate" 5.9%, CoC 2.7%, 10 year IRR 13%
  
  Grovetown GA: Purchase 159.7K built 1999 assumes lower maintenance, Gross Yield 9.7%, "cap rate" 6.3%, CoC 4.2%, IRR 14.5%

I should clarify that I don't care about CoC so don't light me up on that. I care about the overall return. Also, I've put in conservative appreciation assumptions in general for area's that have strong economic and population growth. So these deals are very likely to perform better than listed. Obviously I'm saying that because I spent a lot of time finding/negotiating these deals, and they're the best I could do in the current market. I'm just trying to figure out if the issue is that I just suck and didn't realize it, or if the market has really changed that much. One of my current contracts was off MLS and I negotiated the price down, the other had bids over asking but mine was a stronger offer (at asking).

Honestly I'm just second guessing myself a bit now. I know I'm getting some of the better deals available for turnkey in these markets. That doesn't mean they aren't the best of a lot of crap opportunity. At the end of the day I might have been better leaving my money in the Stock Market. Are you guys seeing better deals than this in good second tier markets? Is there something I'm missing? Why they hell are we buying SFR? Disclaimer - this has been bugging me for a bit and it's now 2am, normally I'm more optimistic.