All Forum Posts by: Victor Saumarez

@Joseph Matsushima Joseph, I feel this survey wouldn't be complete without a little balance. Cash flow has become a dirty word in 2022. I have sold nearly all my US properties and am happy to discuss the rationale behind that. 

In a nutshell, the real estate investor doesn't exist. We're all just investors looking for the best returns. If real estate is outperforming the S&P 500, then investors are overweight real estate. However, historically equities outperform all asset classes, so why do so many investors prefer bricks and mortar? Moreover, real estate is ranked the second most risky investment after derivatives, because it is highly leveraged. Do investors really understand risk? 

If you think this might be useful, I'm happy to discuss.

I think you are missing the point about financial ratios. Ratios are not infallible. They are only a guide and are mostly backward looking. Experienced investors know past performance is not a guarantee of future performance. Ratios are a guide and are often used 'relatively' or 'comparatively'. In fact, they are often ambiguous when viewed in isolation. They are not intended as fool-proof guarantees. However, if you are looking to invest, you ignore the 'numbers' at your peril.

Most comments above are suggesting the 1% rule as a 'first pass' filtering mechanism once you have chosen your location. This clearly makes sense.

More broadly, returns are built around 'expectations' of future performance. A simple analogy with the Dividend Discount Model shows that present value is arrived at by discounting future cash flows. This demonstrates a widely held belief, if you will, that cash flows and value are inextricably linked. The cash flow method of working backwards to arrive at an acceptable price using rental comps is also a useful valuation tool. The CRE industry uses the Gross Rent Multiplier (GRM). It simply divides fair market value by rent. If you know the going GRM you simply multiply gross rents by the ratio to arrive at value.

Values and rents are not necessarily arbitrary. They are fixed by markets acting efficiently—at least most of the time. Although there will be variability depending on many factors, rents and values do have a relationship. If they weren't we'd all be at sixes and sevens. I hope that makes sense.

I sold a LV home this year before prices started to tumble. The reason for the sale was prices had peaked, but the main reason was the net yield (cap rate) was lower than what I could get in financial markets. The fixed income market is offering +5% for investment grade. CD's through brokerage accounts are offering +4.5% and some pay monthly. The other important point is the longer you delay selling, the less you will realize as prices continue to fall. 

A note about selling in this market. Expect buyers to be fickle. After all, they are catching a falling knife. Be realistic about your home's value. Don't expect it to sell for what homes sold for six months ago. Don't chase the price down with several incremental reductions. Buyers will read this as either a distressed sale and low ball you, or they will wait in expectation of further price reductions. So, get ahead of the curve by either pricing realistically, or reduce once or twice by a significant amount to get the traffic. Start from the basis of the minimum price you would accept. As long as the reinvested net gain still yields higher than rental comps the sale makes financial sense. If you are forced to lower the price below that threshold then it makes sense to rent. Good luck!

You're right about Vegas. In fact, the window has past even for selling (at least for the big prizes). 

I wouldn't be buying in this market quite yet. Housing is ripe for a correction. Mortgage rate hikes will take time to filter through to values. There's a lag. The best time to invest is when there's blood on the street. Buying 'value' ensures long term growth, acceptable cap rates, and hedges against downturns. You'd be lucky to find a 2% rule in low risk markets (there is a relationship between risk and return). 

If you want a return on your cash now, bonds and CDs are a better bet than real estate. You won't get growth until interest rates subside, but your yields will be higher than LV rentals.

There's no direct relation between rental values and home value? So, would a $10,000 a month rental sell for $100,000? Or, would a $1m dollar home rent for $1,000 a month? 

Cash flow is a product of rent (net of expenses). Expenses and rent are linked to value, ergo, there is a relationship between cash flow and rent.

I don't see anything wrong with corporate landlords if it brings operating and price efficiency to the market. If they're working with developers, it hopefully means they're not vacuuming up existing SFHs and pricing out retails buyers. Of course, it may mean more competition for individual investors. I don't believe the US is becoming a nation of renters, nor do I believe that would be a bad thing anyway. Most Germans rent, not because they can't afford to buy, but because it is sometimes more convenient, and it is more socially acceptable to do so than in the US. What does concern me is institutional investing in the lead up to and during bubbles. There are more than just rumors Wall St has been bundling rentals into securities and selling them on just as they did with mortgages before the credit crisis of 2008. If it is true, whoever is holding these investments may need to watch out if their values decline sharply.

Thanks Marcus. We have no middle ground. It went from high but sustained to irrational and mad. I guess it's a question of trying to create that middle ground in order to capture a little of what's left of the madness.

Anyone with tried and tested selling strategies especially in the frothier, over-bought residential RE markets such as California and Hawaii?

All indicators point to a cooling market so current sellers have probably missed the bidding war frenzies. The question is how to optimize selling in order to capture some of the eroding gains. Price is an obvious answer, but how do you pitch a price when comps are lagging indicators in a market that is turning, or has already turned the corner? If you shoot for the top and slowly reduce price to generate interest, you'll look like a distressed sale and the danger is buyers will wait you out. The other extreme is to list well below comps and hope prices are bid up, but that could backfire and trap you in the lower bound range. Picking a price point lower than the frothy comps, but higher than pre-froth comps seems like a good compromise. I just wondered is any sellers/investors have clear strategies for selling in markets that are showing clear signs of cooling. Upgrades, incentives, marketing, etc.

There’s no doubt the market is very over-bought in many locales, but many investors are looking at the Fed’s response to inflation. If inflation remains stubbornly high, tightening will occur sooner than anticipated. That will probably lead to a flurry of listings, which could spiral dangerlously out of control. Institutional investors will lead the charge for the exits so it’s always worth keeping your finger on the pulse.

The numbers have to work. Positive cash flow is a challenge on leveraged properties, so if you are going for total return you have to buy value. That means either timing the RE cycle, or adding value some other way. Few uninformed sellers exist these days. As a rule of thumb you need $800-$1,000 in rental for every $100k invested to produce a 5% cap rate. The recession means we are now in the early stages of a bear market following a very protracted bull market. Values across the board are showing signs of being overbought. This is because RE has been behaving like bonds. It has an inverse relationship to interest rates. When rates are very low for extended periods home values rise and even become disconnected from the fundamentals. The easiest way to see that is by cash flow analysis. You choose your required rate of return, plug in the estimated income and expenses, and adjust the price until you find the yield you want. In the current market, expectations have been lowered since interest rates have affected all asset classes. So, you either accept a lower return, find alternatives, or wait for oppurtunities down the line. One of the main barriers to investing across state lines is fixed costs. When homes are cheaper it may be for a good reason such as high property taxes and insurance. Let the numbers guide you.