All Forum Posts by: Mark Ferguson

Here is the flip side of gambling on further appreciation.

In 2013 I was doing some work in Alberta Canada, so I purchased a condo for CAD $330k, getting a $297k CAD loan at only 2.99% with a 5 year lock.  I figured it is a low risk, low cash down investment, and the condo was purchased in an area of the city rapidly appreciating with huge government investment..  The property basically broke even at a cashflow level, but with 25 year amortized loan, I was paying down principle each month.  At the time, the Canadian dollar was almost equal to the US Dollar, and the condo was undervalued by about $20k.   Within 12 months, the market value of the condo had moved to $370k Canadian, and appeared to be a good investment.

Fast forward to today, the massive oil crash is killing the Alberta and Canadian economy.  The property market appears to be holding up, and the market value has moved to about $375k Canadian.  However the FX rate move has dropped my initial USD$330k investment to $267k.  Rents are falling, in the current economy.  The Canadian mortgage also moved down in USD, however if I cut and run, I will owe the IRS the FX Rate gain on my mortgage payoff (a $100k USD gain).

This is the worst performer in my portfolio, which I really need to maintain, hope to break even each year, and dump it if/when oil bounces back.

Investing for capital appreciation feels so much more risky than cash flow.  Cash flow doesn't have to mean turnkey, or $30k homes.

Mark,

If you were to ask me, the appreciation in Colorado and Texas seem looks like what California was in the 1980s and 1990s. Look at your Proforma Analsis for the past 4-5 years. Did you become rich by your net cash flow, amortization of loan, tax benefits, or by fast appreciation. I would think your answer is appreciation.  

Home Prices in Denver and Dallas were among the top 3 metro cities with over a 10% appreciation. Atlanta metro only appreciated 6.2% for comparison.

I am in my late 30s and I am assuming you are too. There is a reason why we should be seriously listening to the wisdom and investment advice of @Jay Hinrichs and @Bob Bowling as they have been investing in real estate longer that you and I have been alive. 

Now THAT.. I must say looks like is a beautiful chart.

@Mark Ferguson, 

From a pure arbitrage play (selling overvalued asset) and buy (distressed undervalued asset I currently see  huge opportunities but the asset class will be outside of real estate. To take advantage of these great opportunities, you must think like a holistic investor. An investor who sees investment opportunities not just in real estate, but also in Indian banking sector, closed ended funds, and within the commodities sector that pays huge dividends. Certain attractive sectors I am looking at are selling at a book to price value at a 30% discount with a 15% yield. historically discounts for this sector is a 2% with a beta of .23. This sector is going to go extremely well in the years ahead.     

I like many of the wise advices that has been presented thus far of paying down your mortgage as quickly as possible and not chasing the younger attractive goose. 

What is your current debt to value at this time? If your equity is $1.3M, are all your mortgages greater than $1.3M? I know that you mentioned that you financed on either a 10 year or 7 year ARM, but I don't see mortgage going up very much in the years ahead.

It seems like you have 4 properties located in not so ideal area wheres the CAP Ex is increasing or difficult to attract quality tenants. Perhaps sell out of your 3-4 bad apples and pay down your mortgage.

Mark, my portfolio strategy is very similar to yours and I believe that buying quality assets will always trump quantity. I would prefer 10 quality SFRs in "A" neighborhoods ($200k) vs 50 SFRs in bad neighborhoods. The only two real estate asset classes I plan to own are either SFRs or Apartments complexes in good locations. I do not like multi-family and commercial investments for various reasons. Remember, the goal is not to reach 100 houses of crappy assets just for the sake of reaching your 100 SFR goal, focus on quality and your will much better off in the long run.

YOUR goal, not his.  He has stated, repeatedly, that HIS goal is monthly cash flow.  The appreciation is nice, but that is not what he is after.

I see his predicament.  The margins for B&H investing in his market have gotten very slim.  He is sitting on a nice chunk of equity that he sees "only" bringing in $7,500 a month in cash flow.  Which, I believe he said, equated about a 7% return.

The answer is yes, he can almost definitely sell off those assets, capture that appreciation in Colorado, and buy elsewhere earning much more cash flow.  I wouldn't be surprised if he could turn that $7,500 a month into $20,000 a month in CF.  Plus, as he mentioned, he would gain again via value-add (buying distressed and renovating).  

CF, which is his stated goal, should increase significantly.  Net Worth should also increase as well.  The big issue, which I believe is why so many are telling him not to sell, is he'd likely be moving into a less desirable market when looking at the potential for future appreciation.   Ultimately, that is his call.  But given his stated aim, expansion to other markets makes sense.

When I was making the decision to sell or not in Colorado, I really just asked myself the following question.

"After transaction expenses taken out, would I invest in this property today?".  The answer was either Yes, Maybe, or No.  Yes or Maybe, I could justify keeping it.  If No, then I should sell.

why not just refi current one, pull cash out and buy new ones? It works similar to sell it but with much less cost.

I came across this list of the top 85 real estate blogs for 2015.  Bigger Pockets is named at #6, which I thought it should have been higher. Many other BP members blogs were featured on it as well.

http://jacobgrant.com/2016/01/best-real-estate-blo...

@Joshua Dorkin #6

@Brandon Turner #3

@Mark Ferguson #2

@Ben Leybovich #10

@Michael Blank #14

@J Scott #19

@Chris Clothier #71

@Michael Blank again at #77

Bigger Pockets Podcast #79

@Joe Fairless #80

@Mark Ferguson  like to throw some other ideas out for you to ponder.

1. most folks that sell in high value areas for low value areas over time usually regret it. you got in at a good time.. 

2. take your positive cash flow and target one property and pay it off in a year.. keep doing that until your CO is free and clear your cash flow goes way up then.

I just look at all the property I owend in the SF bay area .. I did not need to sell when I did had I kept it ( bought when I was late 20 mid 30's.. now 60.. my equity would be off the charts .. I suspect the same would happen to you as well.

its not like you need the cash flow to live ( as I think you have a robust RE brokerage business that probably pays your bills) and your exotic car 's  :)

Or ,

Sell it all now and pay the small cap gain tax and then use those funds to match up to a facility and start lending... you could get 2 to 1 leverage so .

1.3 nets you 1mil  1 mil leverage ( I use to leverage 4 to 1  but say today its 2/ to 1) now you have 2mil to put out in your local market at a conservative 15%  thats 300k a year Net cash flow minus 60k for your 1mil borrowed net 240k a year plus you can be in cash in any one 12 month period if you needed to... so this triples your current cash flow.

Do some equity deals on your loans and you may make 500k with those same funds.

Take some of the rentals.. sell them and 1031 into premium timber ground in the northwest.. No cash flow but 12 to 14% Net yields all day long set it forget it for 25 years sell for big dollars.. 

there ya go a few things other than the obvious..   But I would be very reluctant to give up on your Denver rentals that you bought at the bottom of the trough.  then buy rentals in FLA for double what they were selling for 36 months ago.

You are just saying things that you don't understand.  You completely avoided my questions. 

1.  What is required rate of return?

2.  As far as 07, cap rates are time sensitive.  8% in 07 is NOT the same as 8% in 2016.

3. People buy NOI, They do NOT buy properties.

4. Cap rates measure market perceived risk of collecting a NOI, see my example. Again, why would someone pay $75,000 MORE for the chance to collect the exact same NOI.