All Forum Posts by: Jim Carmichael

I wrote an article on LinkedIn June 11, 2019, talking about where I thought the overall economy was going. Here are a few excerpts from that article;

“…there are about 8000 points of “fluff” in the stock market from quantitative easing.”

“… I believe Mr. Trump will hold off a downturn in the economy until after he is re-elected.”

“If the recession doesn’t clearly start in the first quarter of 2020, I think it will certainly begin the first quarter of 2021.”

“…if the market crashed, the value of the dollar declines dramatically (as well as other world currencies), what will the government do to secure the dollar? Stick with oil? Gold? Crypto?”

Today is April 1, 2020, since March 16, 2020, most of the country (and world) has been shutting down due to COVID-19 pandemic. Turns out that was the grain of sand to disrupt everything. We quickly saw the 8000 points in the DJIA disappear (as I type this at 1215 EST the DJIA is at 21201.9 down 715.78. I believe the DJIA will stay around 20,000 until the first quarter of next year.

I still believe Mr. Trump will hold off the recession until next year. We are obviously going to take a huge hit due to COVID-19, but we will have a quick faux recovery as well.

Next year when we are really in the recession, the economist of the world will look back and say it started in March of 2020.

The last quote is still in the future, but you have already seen new articles about going to the gold standard and using the digital dollar.

So where are we now? Unemployment claims at a historical high. Mortgage and rent payments can be deferred for 90 days. People can get on unemployment and receive a stimulus check (that will likely be wasted at Home Depot or Lowes but that’s a different article).

A mortgage or rent deferral does not mean forgiveness. What it does mean is that if you do not make any payments during those 90 days or make partial payments, you will not get a late fee or mark on your credit report. The bigger thing it means for your mortgage is that on month four you are expected to pay in full everything you owe and that payment. Could you make four payments at once before this pandemic? What if you made partial payments? You still have to make your regular payment and any balance you have. When talking with your mortgage company make sure you know what you’re getting into. Renters talk to your landlord to see if they will reduce your rent during this COVID-19 self-isolation period if you need to. You will have to work out arrangements to pay him back.

Most people who defer will not be able to pay, then foreclosure actions will start. By the end of August, you will see people being put out of their homes from all of this. A large majority will work something out with the lender that delays any foreclosure action by another 60 to 90 days. That puts us right at election time. Do you think the President is going to let the fallout of COVID-19 keep him from winning? Not likely, something will be done to delay any foreclosures until the first of the year. Once the Christmas shopping season and returns end the bottom will drop out soon after. I am not sure what the next grain of sand is to make it happen is but six weeks ago you didn’t know what COVID-19 was. By March 2021 we will be in a full recession.

Good news real estate brokers, agents, and investors we have a couple of windows of opportunity where there will be a dip in the market for buying opportunities. Third-quarter 2020 and a ramp-up starting first quarter 2021 and lasting 2 to 3 years.

Commercial real estate investments will be stagnant on a macro level for a couple of years like it was after the 2008/2009 recession.

2020 pricing has hit its peak. In some areas, we have even seen a slight drop in pricing. This pandemic decline will lower home prices a little bit this year, 5% to 10%. Commercial I think will stay level to 5% lower because owners will hold.

Looking forward from 2021 to 2023 home prices will bottom out according to each area of the country. Here in Greater Cincinnati/ NKY we are lucky to have a huge Amazon project going on that continues to bring jobs and people as well as the ongoing stability of companies like P&G and Kroger, so I only expect another 5% to 10% drop in housing values. Nationally it looks a lot like 08/09.

Although this coming recession is not due to a housing bubble, I would argue it’s a large contributor. People have been overbuying for the last several years. They are going to be put in a pinch in a few months and the housing bubble will burst. This was going to happen with or without COVID-19 because lenders and realtors did not advise people to buy right. They said buy all the house you can for the payment you can afford (according to the lender).

After this recession cycle is over (or maybe during) the NAR and NAMB need to really examine what fiduciary means. Let's learn from this and do a better job going forward. We as an industry should be teaching our clients to buy right, collaborate with experts and fulfill our fiduciary duty to the clients.

As always, there is a ton of opportunity in adversity. Go find yours or get lost in the crowd.

There seem to be several investors on here at many different levels, all of which look to be investing alone. Although many of you are from the same area without realizing it. You have so much more buying power together than you do as an individual. Setting up partnerships is relatively simple. The challenge is who's in charge? That can also be resolved by voting/ assigning someone as the signer, create a buying criterion that does not require review and working within those boundaries. You can also join a group set up by a third party, say a broker, who has skin in the game too. Same criterion based group, but now you have motivated person in a given market working for you full time. 

Here's what I suggest as a working outline;

5 member minimum, 4 investors and a broker. Each investor own 20% an the broker gets a 10% ownership (yes on top of commission). Buying criteria for an out of town investment, a minimum of 50 units and a 12% COC return. You can add a class of building, locaion class, etc. If it a group that prefers value add, you can set up the criteria for that as well. I know you are questioning the brokers' role of an owner, but fiduciary is one thing, disclosing they are part of the deal is another level of legal protection and who is going to work harder for you? Plus you have eyes on the ground.

You get to scale quicker, you are paid a quarterly "dividend" as an owner. Each person will be assigned a role in the LLC. This arrangement could work for less than 50 units if the broker is capable of managing the property.

Something like thiis interest you?

I have to agree with Curry, this is a lot to unwind. And when Inhave the time I will type it out long form. If youd like to hear it, we cam set up a 30 minute call.

Our company has a property management division that is exception based on what you're going through. Our software alone let's you look in at your account 24/7, no waiting. 

I have been a broker for 17 years and have managed as many as 1500 units at a time. Well oversaw 13 managers that were onsite. I manage to sell. And what I talk to our property management division is manage to sell.

I'm not saying the client is going to sell, but always look at it as an investment someone wants to buy. And because I sell them I know it's more than CAP rates.

The other issue is you said they are C properties, is a C neighborhood too? Have you put any money into them to bring them to a C+ or better? Is the area not worth the investment?

You all want to know the real truth? The old rule of thumb is you never hired outside management until you had a 100 units, then it became never under 50 units, because the numbers don't make sense. Truth is it hasn't changed. Sometime after the 2009 recession somebody started selling the idea to people from certain markets ie west coast, NY, S Florida and overseas where real estate is so expensive, you could get more for your money buying in the mid west. Problem was/is anyone with $50k to $100k buys up to 4 families, sometimes a 5 or 6 unit hires management and waits for the money to come in. Unless your property manager and thier brokers are working in your best interest to grow your portfolio step by step and show you what it's going to take and everyone has an understanding you will be spinning your wheels and frustrated.

I like the relationship to be one where our client is on the west coast and I send an email that says you need to buy this, cash close quick, only contingencies are third party inspection and mine and the senior property managers inspections and verify financials, the client doesn't ask questions other than where to send the checks. Buy sight unseen. And yes it happens.

There's a lot more to discuss as I said. Your troubles are not uncommon in this area. Let me end with this thought for you to consider ... an awful lot of property management companies were started post recession because brokerage was almost dead for 2-3 years.

@Bill Plymouth more or less. But the CAP rate should be higher, 9% would be lowest I'd consider. I advise all my clients that buy single family to 4 family's to make sure the CAP rate makes sense and they are getting a cash on cash return of at least 12%.

Investment Info:

Small multi-family (2-4 units) other investment in Covington.

Purchase price: $4,800,000
Cash invested: $4,800,000
Sale price: $4,800,000

This was a package of Duplexes, single family and urban lots. 91 total properties, 123 units. Only 37% occupied, which over half needed to be evicted. The project was put on me to valuate, stabilize, manage and sell as quick as possible.

What made you interested in investing in this type of deal?

The upside of this deal was too much for the investor not to buy.

How did you find this deal and how did you negotiate it?

I am a problem solver and managing projects is a specialty of mine. The deal found me through my company.

How did you finance this deal?

This was a cash deal

How did you add value to the deal?

It was based on current income and value of properties.

What was the outcome?

I was able to deliver on what the banks demand in less than 70 days.

Lessons learned? Challenges?

Constant communication and transparency is the only way to get through a deal this complicated.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

I was the broker on this deal. A local agent who specializes in wholesaling referred the buyers to me. Knowing the complexity of the deal he agreed it was better to let me handle it and collect a large commission at closing. And that he did 2% of that deal is a nice payday.

The short answer is yes, that is the formula. Making sure you have good numbers to generate the NOI is key. And knowing your market to know what CAP rate to use. A 6%CAP for multi family in my market would be something over 50 units, A location, A property.