All Forum Posts by: David Song

Quote from @Carlos Ptriawan:

Quote from @David Song:

Quote from @Carlos Ptriawan:

Quote from @David Song:

Syndication certainly favors the syndicator, with all the risk on the passive investor. Even worse, the investor has no control. It’s probably better just to invest in SP5000 or QQQ.

With the current interest rate, commercial RE is in big trouble. I was on the phone with a BMO commercial mortgage guy this afternoon. The commercial mortgage market is DEAD, quote.

Rates are 8s up to 10s. Whereas the cap rate on active listings are 5, 6 range. No transactions. No qualified commercial loans based on current interest rate and cap rate offered.

To solve the problem, either the rate has to come down significantly (probably not going to happen in a few years), or the cap rate has to go up to 10s, which means the price has to be cut by almost half.

For those folks that has a maturing commercial mortgage, they can not refinance based on today’s rate. They can not sell at 6% cap. What are they going to do?

thanks for being so direct.

 the LP bought at 4 cap.
GP wanna get out at 5.5
buyer wanna buy at 6.5 only.

I keep hearing in-refinance , i don't know what that is, maybe refinancing / debt restructutization for another 5 years ? 

 Most commercial loans are only for 3 to 7 years. At the end of that period, the owner must pay off the existing loan and get another loan to pay off that old loan. If the loan is maturing in the next few months, the owner has no way to refinance at the current high rate, since the cash flow will not qualify for the double high interest rate. Oops! Bankrupt.

 THATS IT !

So there is inherent danger in commercial that never been talk about, becoz every GP is rushing to buy at discount->to rehab in hurry->to rent it out->to sell it quickly and do the same/repeat, this cycle can't be repeated in basic math because at one point, the cycle would go againts them. And that cycle is now.  
Everyone is promising the same thing. Multifamily syndication by average expecting 15% IRR with high single digit cash flow.

I am not blaming those GP, but from financial perspective, the lending aspect of it doesn't make sense. What has to change is, the lending structure, they should be able to keep the property for ten years, so if there's unexpected happening in the future , they could recoup the losses. 

There should be lender or banks that could finance them for at least ten years. 

From macro economic perspective, These cycle can only be executed when Fed is increasing money supply.

Syndication is like the wolf eating a wolf game, it's just at what one position during cycle that would determine you make it big money or you may commit suicide ( there's GP that's already committed suicide) just saying how serious it is ...

My fist commercial mortgage was a 10 year. However, you pay more with higher rates, etc. 

I never invested in syndication myself, so I can not speak to the GP’s experience, net worth, etc. if I ever invested in a syndication in the future, I would like to know that the GP has personal net worth of a minimum of 50M, with verification from successful REI. This does not include other people’s money. There are too many inexperienced people pretending to be experts and want to be a GP. That is simply not acceptable. GP needs to actually have a lot of net worth from REI to prove that they are actually good investors. 

Quote from @Carlos Ptriawan:

Quote from @David Song:

Syndication certainly favors the syndicator, with all the risk on the passive investor. Even worse, the investor has no control. It’s probably better just to invest in SP5000 or QQQ.

With the current interest rate, commercial RE is in big trouble. I was on the phone with a BMO commercial mortgage guy this afternoon. The commercial mortgage market is DEAD, quote.

Rates are 8s up to 10s. Whereas the cap rate on active listings are 5, 6 range. No transactions. No qualified commercial loans based on current interest rate and cap rate offered.

To solve the problem, either the rate has to come down significantly (probably not going to happen in a few years), or the cap rate has to go up to 10s, which means the price has to be cut by almost half.

For those folks that has a maturing commercial mortgage, they can not refinance based on today’s rate. They can not sell at 6% cap. What are they going to do?

thanks for being so direct.

 the LP bought at 4 cap.
GP wanna get out at 5.5
buyer wanna buy at 6.5 only.

I keep hearing in-refinance , i don't know what that is, maybe refinancing / debt restructutization for another 5 years ? 

 Most commercial loans are only for 3 to 7 years. At the end of that period, the owner must pay off the existing loan and get another loan to pay off that old loan. If the loan is maturing in the next few months, the owner has no way to refinance at the current high rate, since the cash flow will not qualify for the double high interest rate. Oops! Bankrupt.

Syndication certainly favors the syndicator, with all the risk on the passive investor. Even worse, the investor has no control. It’s probably better just to invest in SP5000 or QQQ.

With the current interest rate, commercial RE is in big trouble. I was on the phone with a BMO commercial mortgage guy this afternoon. The commercial mortgage market is DEAD, quote.

Rates are 8s up to 10s. Whereas the cap rate on active listings are 5, 6 range. No transactions. No qualified commercial loans based on current interest rate and cap rate offered.

To solve the problem, either the rate has to come down significantly (probably not going to happen in a few years), or the cap rate has to go up to 10s, which means the price has to be cut by almost half.

For those folks that has a maturing commercial mortgage, they can not refinance based on today’s rate. They can not sell at 6% cap. What are they going to do?

Lol. You still want to buy it? They almost caused you a fortune. Imagine if you closed and get that code enforcement later. The seller is not disclosing material facts. You are not dealing with honest people there. 

Which neighborhood is that in? Have you ever visited Columbus? 

This is a duet house in Union city, ca, with separate parcel numbers, separated by a common wall. Neighbor installed a new solar system onto my side of the roof recently. My tenant told me a couple weeks ago. I called the neighboring property owner and he is contacting the solar company (sunrun) to remove the solar panels from my roof.

I was told that Sunrun got a permit and even passed city inspection.

Has anyone experienced similar situations?

This is a good play in my view. just need to spend enough time to figure out the water right waitlist number, and possible other potential uses, development cost, etc.

coastal area development requires special review. However, that also limit the development and increases the value. Double edged sword.

REI is in essence speculation, particularly land investment.

I have never stayed there, probably driven past that city a few times. Therefore I can not comment on this particular city. Similarly, in halfmoon bay where I am close by, there are similar lots waiting for development and priced at a deep discount.

there will be a lot of challenges developing in that remote city, like lack of labor, etc.

I will spend at least a week there to investigate the local planning, economy, people, market, before doing anything further.



Quote from @Ken Kwok:

Recently I am researching a small and beautify city in California, Cambria.

A 5,000 sq ft. lot only cost 30-50K with ocean and mountain view. BUT, there is no water supply currently and instead, they have a water wait list #, eg. CCSD water wait list #150 which means you are in the position of #150 when the government started allow people to build house. But NONE of the # was called since last 20 years and that's why the price keep dropping.

I am so interested in buying a lot at $30K and bet somehow the government will allow people to build with water supply.

What do you guys think?

All deposits in SVB will be available tomorrow morning, guaranteed by Uncle Sam.

Uncle Sam has a printer that can print money forever.

Quote from @CJ Lounsbury:

Quote from @David Song:

@Greg R.

Housing prices will always go up. Buy anytime. - bigger pockets.com

Reality: numerous REI lost their life savings in 2009 and maybe 2022. Over leveraging, insufficient reserve, short term loan with balloon payment, etc.

Flippers bought in Q1 2022 will learn the lesson now. Many of them are losing their shirt. None will tell you publicly.

The price decline started in April 2022, and has been declining for the last 4 months. The bottom has not been reached yet. This is nationwide, from CA to Texas, everywhere. 

 Hey @David Song,

Would you be able to reply with where you got your data to determine housing prices have been dropping since April 2022? Thank you!

From walking in the doors and monitoring local market. If you look for the news to tell you market condition, it is usually a couple months lag. In q1 2022, Bay Area market was still red hot. In march, there was still bidding wars for almost all properties. 500 k above asking was kind of normal at that time. People were crazy bidding up prices. In APRIL, SUDDENDLY, the atmosphere changed. 

The person who knows the market best is the title company escrow officers, who handles a large number of pending transactions. They knows the market better than local realtors, and way earlier than news media. My escrow officer was the first person telling me that the market changed. I investigated and found that was true. Buyers suddenly disappeared. No more bidding wars. Price cut, which I have not seen for many years, started gradually in May and afterwards. 

Remember April to September is normally the prime time for price appreciation. This year it’s not.

Quote from @Greg R.:

Thanks @David Song. Any idea where I'd start to learn about this strategy?

I do not know if there is any official source for leaning, but most of the valuation is kind of common sense.

When I look for land to buy, I want to build something on it. 

1. Zoning, what is allowed, floor area ratio, set back, height, units, etc.
2. In CA, I usually ask an architect to talk to the planning department to figure out what the building envelop is, and draft some preliminary plan.
3. to get to final approval, takes a minimum of 1 year and 50 k.

So if the seller is willing to get all those things done, I will certainly pay more for it. 

As far as how much extra value it is, that will be case by case. Some land has very low value, if the seller is not sure about what it can be used for. If the seller already has the plan approved, the valuation will be much easier.

land price + construction cost + profit margin = estimated building value (ARV)

This will simplify it as a flip model.

I do not know if there is a name for it, but it’s frequently used. Shovel ready land will save the buyer a lot of time and effort, and therefore command a higher price. 
not just for commercial land, but also for residential land.