All Forum Posts by: George Gammon

@Aditya Varlet me preface by saying what I would do isn't right for everyone and only take what I'm saying in any of these posts as food for thought.

It really depends on the value of your current home or the R/V ratio if you could rent it out.  I'll assume you own your current house free and clear.  You said prices are pretty high in your area so I'm guessing the R/V ratio's aren't great.  What I'd consider doing is selling your current house and buying however many properties you can buy with the proceeds of the sale in a market where the R/V ratios are higher and is more linear in it's historic price action.  

Once I did that I'd take the rental income and rent an expensive house in your current area.  Why do this?  Rent on a 400k house will most likely be less than the rental income on 4 100k rental props.  You take your equity and put it in a market that has less ups and downs (shielding it from some downside risk) and pocket the positive cash flow spread on the difference between the rental income and what you're paying to rent.  If you really want to own the house you live in you can take the equity out of the rentals for the down payment and you'll still be making more rent income then if you rented out your current home because of the difference in rents between 1 big house and 4 little houses.  

If you're really concerned about the market going down you could just sell now and rent until you're more comfortable buying.  Once you're comfortable with the market conditions employ the strategy above.  The downside is if the market continues to go up you won't have the price appreciation in the linear market or any appreciation at all if you're in cash. 

Again, it's all about analyzing probabilities and then executing a game plan that's right for you.  

Hope that helps, let me know if I can clarify anything or you have further questions.

George

@Paul Gilo@Jay Hinrichsso my bullish case for real estate prices is as follows and Jay I'm really curious to see what you think about this...

Let's assume for a moment the fed takes rates negative. This could make money even cheaper, potentially almost free. Heaven forbid, but how many projects that won't cash flow or don't produce decent ROI at 4 or 5% will cash flow or produce sufficient ROI at .5 or 1% interest? Look at how far the cap rates have compressed due to lending rates being at 4-5% what happens to cap rates if interest rates go to .5%? DSCR are already down to 1.25 look at what that does to asset prices if lending rates go down further. Sovereign debt in Europe is negative, where is money going to find yield if US treasuries go negative? What do investors do if only given the choice of paying the bank negative interest and guaranteeing a loss or buying real estate at a price that's inflated?

Also the government has to have inflation to reduce it's debt load.  If they can get the velocity of money to increase, producing price inflation, I think they'll understate the CPI so they don't have to raise interest rates.  Although the real value of real estate may not go up the nominal value most likely would. 

So my argument for higher prices isn't exactly comforting, but if negative rates go low enough it could produce a massive rotation of capital into real estate sending prices even higher.... or if velocity picks up, inflation could send the nominal value higher as well.  Look at a dollar index chart going back to 1970.  Dollar bull runs usually last about 2 or 3 years and crash down lower than the starting point.  We're about a year into this dollar run so 2017 or 2018 it could start losing purchasing power putting upward pressure on nominal real estate prices.  

A bull case and bear case (above post).  I want to impress upon real estate investors that there are no certainties only probabilities and to assess the probabilities you have to consider the macro as well as the micro...investing without probabilities is gambling.  

 1.  yeah I figured ;)

2.  my concern is there's systemic risk because the banks are so intertwined now.  I didn't mention before because it's a bit esoteric but as you know banks margins will get really squeezed with neg interest rates.  If one of the European banks pulls a lehman because of the neg interest rates, oil loans defaulting etc.  that will negatively impact lending on everything including US real estate.  Debt expansion is the only thing that's keeping the world economy afloat right now (especially in the US), look at a chart of credit growth vs. GDP growth since we went off the gold standard in 71 and that'll jump out at you.  If anything happens that spooks the banks to tighten lending, reducing credit growth, we've got problems.  

3.  Smart...I personally like a little long term fixed rate debt because I think inflation will soon or later erode the real value of it, transferring that purchasing power to me from the bank (or whom ever the bank sells the paper...unfortunately that may be the tax payer via fannie freddie).  But your point is well taken that any debt should be used with caution.  One thing I didn't mention when I outlined my strategy is using all cash to buy the house and rehab it up front.  So prior to the cash out rifi no leverage is used.  

 1.  Agreed, but don't think that would've happened and/or blown up with out artificially low interest rates.  And you don't see that today but unfortunately today you've got the subprime oil debt, car debt etc. that more than make up for the lack of bad debt with builders.  Remember bad debt has the same affects on banks balance sheets regardless of where it was originated.  

2. Agreed. That's why I advocate a strategy where you're cash heavy. If you extract the original equity and sit on the cash to deploy at an opportune time you can always use it to pay back the loan if you're struggling collecting rent to cover the mortgage. And another reason I like A/B neighborhoods (more stable rents). Finally, you're extremely sophisticated Jay so you might prefer a LOC to access the equity instead of the outright refi...gives you more flexibility. That might be tough to time for a newbie (interest rate hikes, banks yanking the LOC etc.)

3.  Disagree here...cash was not only immune but gained a lot of purchasing power ;) 

 1.  Correct.  The fed can do more QE and forward guidance but the jury's out on whether or not that will do anything other than give the stock/bond market a boost.  And the one thing we do know is QE and lowering interest rates have diminishing returns if any at all.  The fed could go to negative interest rates like the BOJ and ECB but that takes me to a completely separate topic of my bullish case for housing which I'll have to write when I have a little more time.  

2.  Exactly.  Make sure it's a 30 year fixed or, if you're a sophisticated investor, a line of credit.   

3.  Exactly, there's some wiggle room on #2 and #3 based on your risk tolerance but you've got the idea.  This gives plenty of cash flow cushion for vacancies or lowering rents even in a downturn.  

*one thing I forgot to mention is regardless of macro environment I'd only consider homes in A or B neighborhoods.  I know those numbers are almost impossible in those neighborhoods but that's when you've got to work hard to get deals or just realize being in all cash is sometimes a very prudent investment strategy.  

@Chris Romanythanks for bringing up an important topic.  I'd like to expand it a bit further and point out housing prices across the nation being high (see case shiller inflation adjusted home index and compare current level to historic norm).  But my post pertains to Orlando as well.  

I'm new to BP but I'm not new to macro econ or real estate investing and I must say, after reading a lot of posts on BP, I'm astonished by 2 things...  A.  How well many real estate investors study the impact of micro econ and B.  How most real estate investors totally ignore macro econ.  And ironically, there's a very strong argument for the macro playing a much bigger roll in price appreciation or depreciation.  

As you point out, lets look at the last crash.  At a very basic level what caused it?  homeowners not being able to make their payments.  If homeowners would've continued to make their payments we wouldn't of had the defaults that caused the domino affect we all remember well.  

So then the question becomes "why were homeowners unable to continue making their payments"?  because everyone lost their jobs? No...that was a result not an initial cause.  The answer is because interest rates had been artificially low for several years and when interest rates started to rise the loans adjusted, increasing the mortgage payments, making those payments unaffordable for a large amount of borrowers,  regardless of whether or not they were subprime, granted subprime was a huge part of the problem.  (if you have an adjustable rate loan right now just run the math on what would happen to your monthly payment if interest rates normalized and increased by 5%.  Many properties owned by investors far from "subprime" would become cash flow negative).  Now, if you recall, the theory was if you couldn't afford your monthly payment anymore you could just sell and no one's hurt.  The reason that didn't work is because demand evaporated overnight and prices plummeted locking the homeowner/investor into a position where they couldn't sell or make their mortgage payment.  Why did demand vanish?  Because when you keep interest rates artificially low it pulls demand from the future into the present.  In 2007 much of the demand from the future (2008,2009,2010,2011) was pulled into the present/past (2003,2004,2005,2006).  Combine that with the fact that monthly payments increased, therefore the price of home that people could afford decreased (if you can afford a $950 a month payment you can afford a $200,000 loan at 4% interest and only a $160,000 loan at 6% interest), and you've got no demand.   

As we all know the fed just started a tightening cycle (whether they continue to tighten remains to be seen), the same thing they did in 2007 that pricked the bubble.  So what's different now?  1.  Interest rates were far lower for far longer from 2008-2016 compared to 2003-2007... 2.  As a result far more demand was pulled from the future than before and malinvestment was enabled for much longer... 3.  Labor force participation is much lower (lowest level in decades) and wages have been stagnant, adjusted for inflation, so fewer people working at the same rate of pay, reducing aggregate purchasing power... 5.  If we go into another recession (many economic indicators show we're already recession) the fed is out of ammo.  Interest rates are basically zero already.  This means that we have exhausted all traditional methods of softening a blow of recession.  Just think what would've happened in 2007/08 if interest rates were already at zero...we most likely would've gone into a massive depression... 6.  Hedge funds now own a significant amount of homes, many just like the rentals us small investors buy.  Whats my point? What happens to the supply/demand balance if they have to liquidate their real estate portfolios?... 7.  "Lending standards aren't as low."  That myopic view may be misleading.  Look at auto subprime, student debt subprime, oil subprime.  Remember the only reason subprime housing debt was a big deal was because it was colateralized and sold and made the banks freeze when it went bad.  People may think that bad housing debt affects only housing and bad car debt would affect only car sales.  Not true.  The type of debt is irrelevant if it causes banks to freeze up.  Subprime car debt could crush the housing credit/demand just like housing subprime crushed car credit/demand.  I could go on but hopefully that shows the importance of the macro environment on housing.  

My goal is not to promote a bearish narrative.  I actually currently like US rental properties as an investment.  But only under certain conditions and only if you factor macro as well as micro into your decision making process.  An ignorant investment that makes money is still an ignorant investment and over the long term ignorant investors lose.  

Taking the macro into consideration here's my current strategy in the US.  This applies to Orlando as well as any other market you know well and are comfortable with the micro conditions.  

1. Only buy something where you can add value and be all in for the LTV of a current cash out refi. As soon as the rehab is done take out your equity and lock it into a 30 year fixed. If the market goes up that's great and if it goes down your equity is protected and you'll have cash to buy after prices have fallen. You get paid (the positive cash flow) to hold cash and see how everything plays out AND you participate in the upside if the market continues to rise.

2.  Only buy something with a 1.3+ R/V ratio.  This will ensure you're cash flow positive and you have staying power regardless of which way the market goes.  

I personally wouldn't buy anything unless I could fit it into that strategy because the risk/reward doesn't make sense when compared to cash.  

Having said all that I could lay out a strong argument for US housing prices, including Orlando's, going  higher.  I'm happy to expand on that if anyone would like me to but this post is long enough;) 

I hope that helps your decision making process Chris, 

George 

@Scott Pirriegood observation on the exchange rate.  Remember the peso is closely related to oil.  So I'd focus on which direction you think oils going.  If you see oil going back to 60+ over your real estate investment time horizon then an asset denominated in pesos is a great bet.  

Cartagena could be good, you might want to check out Medellin as well.  The Medellin economy is a little more diversified.  

The reason I went to Montenegro to look for real estate started with my interest in buying a hotel or a group of vacation rentals.  I looked all over the world for countries/cities that had the largest gap between average overnight rates and wages.  So I was looking for really high nightly rates and really low monthly wages.  My research pointed me towards Croatia, and Kenya.  I didn't like the 99 year lease deal they have in Kenya so I focused on Croatia.  While I was in Dubrovnik I heard everyone talking about Montenegro so I went down for a few weeks, hung out at Porto Montenegro, Kotor and Budva.  I ended up putting an offer in on a place in old town kotor because it was the best value with huge upside.  Downside is the euro, I have no clue where it's going long term? With the fed and the ecb currently going in different directions it's tough to be bullish on the euro.   

Good luck with Cartegena, let me know if I can answer any further questions. 

George 

@Oliver Trojahnthanks for the help.  It's a two story building, upstairs is office downstairs is right on main st.  so can be used as retail or office, currently being used as office.  It's right at westport rd. and main st. so area with some upside.  

I don't have anything else available.  Although it's produced great cash flow, I prefer residential, which is why I've considered selling.  The buyer is submitting proof of funds today before I give him a counter so I'll let you know if the deal doesn't move forward.  

Thanks again for the insight on the cap rates,

George

I own a commercial building down by Westport off main st. I just got an offer on it but I'm not familiar with the commercial market there at all. The offer gives it a 8.2 CAP.

I'm wondering if anyone that focuses on the commercial side of KC investing has an idea what the going CAP rate is for that area?

Thank you,

George

 I just allocate capital where ever I feel I can get the best return Brian.  When I was in the business world I made a lot of money overseas so I don't see international investing from a base of fear (like most americans), I see the opportunity.  I've also lived in Australia and Singapore so investing in foreign real estate was much more natural than "outside the box" for me.  

Finally, my primary reason for investing in real estate is rarely real estate. Typically it's a way to take a hedged investment in commodities or currency. Using my current investment in Medellin, Colombia from above as an example...Just like a flip in the US, I look to be all in (purchase and rehab) at 70% ARV. That gives me about a 30% return (I'm all cash but theres closing costs) if I flip, and about 10%-12% cash on cash return if I rent it out. These are numbers we all understand. But what's a little different about what I do is that return is my buffer, or hedge, against my primary investment thesis going against me.

My primary investment thesis in Colombia is oil increasing in price over the next 2 years not real estate.  The Colombian peso has a strong tie to oil and my real estate is denominated in pesos.  If I'm right and oil increases in value over the next 2 years I'll make money off the equity from the rehab, cash flow from the rental and the currency appreciating.  If I'm wrong and oil goes down, I have the gain in equity and cash flow to cancel out my loses in currency.  Right = home run...Wrong = break even.  And also remember oil's at $30 and it can't go to zero but it can go to $150, so your downside is very limited and your upside is huge.  It's a very common asymmetrical trade hedge fund managers look for but it's expressed through real estate.  

The reason I've explained this at length is I strongly suggest other real estate investors look at their investment from a non traditional approach.  Not necessarily by investing overseas (that's not a good idea for most) but right in your back yard, where ever it is you invest, it's a principle that I believe can be utilized to increase risk adjusted returns anywhere... Maybe that makes me an investor w/o borders, I'm not sure?  

George