All Forum Posts by: Giovanni Isaksen

@Nick L. great post and great discussion everyone. A couple points about Mueller's Cycle Monitor: First, your link is to Glenn's August 2014 Cycle Forecast of positions in Q2 2015 which is different than his quarterly Cycle Monitor which is a report on where he believes the markets actually are. Unfortunately it turns out that his predictive powers aren't better than throwing darts blindfolded*.

Another point to keep in mind is that even the Cycle Monitor reports have had markets in far different positions than they objectively were in at the time. See my posts here and here for research backing this up that I reported on earlier this year.

The Cycle Monitor reports used to be posted on Dividend Capital's website but no longer are. The most recent report I can find online is for Q1 2015 here. I have the reports going back to 2005 and am happy to share them with you if you request them via email (email address is in my signature, don't message me here for them).

*As part of my report I was going to analyze Mueller's predictions but between the track record of the Forecasts being what it is and understanding what can objectively known about the future it wouldn't have added any real value.

Good hunting-

As others have pointed out it's about construction costs vs. market prices and you should take that one step deeper and say it's about your construction costs vs. what it costs you to buy. If you're builder you probably have a lower cost structure than an investor hiring a contractor. On the other hand if you're a REIT and float bonds at 1.75% to finance your deals you can buy things that you wouldn't if you were borrowing ten year money at 4.5 - 5%. It's really important to know what your costs are.

And as @Chris Soignier says no one is building class B or C buildings because you can't get enough in rents to justify the construction costs. That's why virtually all the new supply is Class A. So building vs. buying comes down to whether there is demand for new class A vs. are class B & C properties selling above or below replacement cost.

In a lot of markets in the west class A vacancies are starting to rise (demand is easing off) and B&C properties are selling above replacement cost so what do you do? Look further out in peripheral markets or find properties that have serious problems that you have the skillset to remedy is what a lot of other investors including the institutional outfits are doing so as the small guys we have to be willing to go further out or take on bigger problems... or be patient.

Just in time for Halloween an old thread comes back to life like a zom.... And yet @MARK MONTANO hasn't posted in eight months. RIP Mark.

@Denise Evans as a buyer I start with the premise that if there was any net upside in rents the seller would have procured them already. Yes market rents might by X dollars higher but if raising existing tenants' rents to market causes a third of them to move out how long will it be until you're actually money ahead (and recovered from the brain damage)? And yes one can (and I do) run numbers modeling that but we then run into the problem you so eloquently elucidate upon in your "I NEVER" post above: That the future is unknowable, the best we can realistically predict is a range of probabilities, and anything more than that is pure rationalization.

Which brings me to an interesting question Denise: If we locked your future is unknowable view from your post above with the I can predict future incomes from your post before it in a room who would win? ;)

@Jon Holdman +1

Plus it's difficult to read and therefore goes in Warren Buffett's 'too hard' pile.

One thing to keep in mind (in addition to all the other good points raised) is that large institutional investors who Rogers is doing business with think of a whole country as a single market. Since they are primarily buying trophy assets in gateway cities when they say UK they're really talking about London. When they say Japan they're really talking about Tokyo. When they say US they're talking NYC, maybe Boston, maybe LA and everything else is secondary or tertiary. So when Rogers says don't buy US he probably means NYC is getting too expensive and maybe he's including Boston or LA but mostly NYC.

I also think it's important to come to grips with our innate recency bias where we see a bubble around every corner. Yes prices are rising in a lot of coastal markets but unlike in the mid-2000s loans are still being underwritten and not handed out like candy on Halloween. Yes some is driven by foreign buyers but that's because the US is understood to be the most stable, legally governed large real estate market in the world (Or as Sam Zell said in Chicago last summer we're the cutest girl in the um, 'gentlemen's club'). 

And yes some of this is driven by artificially low interest rates but consider if you will for a moment this thought: What if the Fed really is trapped holding interest rates at 0% for a lot longer than 'everybody' believes? Right now they're afraid to even raise them a quarter point six years into the recovery. Maybe low cap rates are the 'new normal'. After all the Fed is following the same playbook as the Bank of Japan who've been trapped for twenty five years.

If Chinese investors have been moving their money here because they're concerned about their investments at home up to this point, and now the dollar continues to rise, cap rates remain low or fall further and their economy continues to slow down do you think they'll be more or less likely to continue investing in the US? We were talking about the answer to this question over on another BP thread yesterday:https://www.biggerpockets.com/forums/522/topics/240269-newest-trends-chinese-overseas-real-estate-investing

Good hunting-

@Yinan Q., @Joe Fairless CBRE Research had an update end of last month on Asian offshore/cross-border investments:

• Asian outbound CRE investment grew by 8.9% during Q2 2015, to US$10B.
• Intra-regional CRE investment declined by 40%, YOY, reflecting Asia's challenging investment conditions.
• China remains the largest source of Asian capital, while the US has just surpassed the UK and the top destination.
• While New York remains Asian CRE investor's top US city, Boston, DC, Seattle and Los Angeles have captured a ~40% share of their US investment capital so far in 2015
• Asian capital flows into the Pacific have increased 63% in the past year.
• Taiwanese buyers are on track to nearly triple their 2014 overseas investment volume.
• H1 2015 saw 30% of Asian outbound CRE investment go to hotels.

Our private equity clients with Asian investor backing are searching for two different opportunity sets depending on the investors' prior experience with CRE in the US: Those new to the market want the gateway city trophy asset, but those who've invested here before tend to be more willing to branch out and invest in opportunities with more upside, say value ad deals in secondary markets.

Good hunting-

P.S. If you'd like to see the report (PDF) shoot me an email.

edited below

@Ryan Busk I didn't mean to have the prop mgt co. manage the dental practice but to manage the property and treat you and the dental practice as tenants and not the owners so that the apartment tenants don't know that you own the building. You wouldn't want a disgruntled apartment tenant to come barging into your waiting room demanding to see you about an issue with their apartment or feel that since you're the rich dentist they don't really have to worry about paying rent on time.

@Sean Dawson there are a number of reasons why people who theoretically could buy a house wouldn't, and they are a large and growing part of the population of homeowning aged people in the US.

Let's start with the 7.3M who lost their home between 2007 and 2014 (and counting, by some estimates to 9M+ before it's all over). Even though the foreclosure or short sale is disappearing off their credit reports for the first wave of victims, how many are that excited about jumping back in?

Then there are the kids of those unfortunate former homeowners who watched their parents go through the hell of losing the roof over their children's heads. These are the millennials who did the thing a lot of people do in a recession which is go to school (it's way more fun to be a broke student in a school full of broke students than a broke adult with no job). Unfortunately they financed their education with debt that can't be discharged even in a bankruptcy and many if not most can't find full time work in their chosen fields.

Plus to add insult to injury, what ever they do manage to save for a down payment earns zip thanks to the Fed's ZIRP (that the Fed find themselves trapped in). But it's not only the kids; grandma and grandpa, mom and dad are also earning squat on their savings so they can't help with the downpayment either.

And then there's the 56% of existing starter homeowners with a mortgage who can't afford to sell their house and net enough to buy another of the same price let alone move up (http://ashworthpartners.com/46-of-us-homeowners-with-a-mortgage-are-frozen-and-cant-afford-to-move/ ) making it difficult for those who do accumulate a down payment to find a starter home they can afford.

Now the NAR and their resi real estate agents, the MBA and their home mortgage bankers, the NAHB and their home builders are all saying it's just a phase and everything will go back to the 1950s just as soon as Ward & June Cleaver get their new TV show but they underestimate the power of recency bias and demographics combined.

Add on the need to stay mobile for job opportunities and it will be much longer before owning a mass produced suburban sfr is the American dream again.

@Ryan Busk sounds like you've found some good opportunities there. One thought about financing the downpayment is that if you levered up the practice, had negative cash flow on the mixed use property and then things didn't go as planned at the second location it could threaten your primary practice. I would try to keep the two separate so that a bad result at one didn't bring down the whole enterprise.

I would also be inclined to bargain the 700k price down considerably. Wenatchee (I was born there) is a quaternary if not a quinary market at best and any of the nearby towns (Cashmere, Quincy?) should not command a 6.09 cap in any market condition. Even at the 2016 NOI of 48.5, at an 8.5 cap that's about a purchase price of $571k. I would definitely not go above 600k. That would probably help you cash flow as well... but I would still try to avoid levering up the main practice.

One other thought would be that if you do acquire the mixed use property I would hire a property manager to run the mixed use building to witch your dental practice would pay rent just like the other tenants. The property manager would be instructed to treat the dental practice as a tenant and not the property owner so that any issues with the apartment tenants would not spill over onto the practice or your patients. If there's one thing worse than being a apartment landlord, it's being a landlord who lives (or works) at the property. Owning an apartment on the other hand is a very good idea but landlording is a different business than property owning.

Good hunting-