All Forum Posts by: John Koster

This thread should be renamed, "Shooting The Messenger Over and Over and Over again".   

Comparisons to other recessions and stating real estate maxims like, "Real Estate is local", "There is no national market",  and "Only a fool tries to time the market" are all true and good advice during normal times, but this is not a normal time.  Yes, you can not exactly time a market, but I find it odd that so many have responded to @Chris Gawlik 's post with anger and contempt.   There are more than a few reasons to be worried about our current state of affairs.  

As it has been stated, there is no national market and never has been, but you know what is national?  Even international right now?  Rampant unemployment. You know what else is national?  Business closings.  I think we can all agree that these two factors have never historically been good for real estate.

Buy & Hold investors have all been doing relatively well since the pandemic began with the extra $600/week government hand out going to renters, and appreciation investors have to be pleased with the constant uptick in values over the last 8 years, but how long - even during normal conditions - can/will this last?    

Even before the pandemic, Wall Street, real estate, government debt and interest rates were all primed for a turnaround and/or correction.  Now we have eviction & foreclosure moratoriums, mandated forbearance on mortgages, record unemployment, and entire industries shut down for the foreseeable future.   You can talk real estate maxims and quote Buffett, Kiyosaki and other gurus all you want, but this is not a normal time and no Guru has gone through this developing event.    

Prior to the onset of Covid, the record for first time unemployment claims for a week nationwide was 695,000.   During the first two weeks of Covid, WE HAD 10 MILLION.   Right now as of 8/15 the seasonally adjusted unemployment rate is over 15 million people, and we have not had one week of initial claims that were below the 1 million mark since the middle of March.   For perspective, during the Great Recession of 2008-2010 we had a total of 9 million people who lost their jobs. 

Now with that in mind, ask yourselves these questions:

The state governments have now had 24 weeks of initial unemployment claims that are nearly twice the record number.  EVERY WEEK.   How long do you think they can continue to honor the claims without a bail out themselves?   Do you think they have budgeted for this doomsday scenario that they currently face?   

What happens if/when state governments become insolvent?   Taxes are the source of state government income.  What will happen to tax rates if/when this occurs?  

How long can small banks last honoring their forbearance plans?  With this and a whole lot of bankruptcies, how long can big banks go?  What happens when banks default?   How many will be laid off?  What will lending look like, if any lending will occur at all? 

We are now a month into the post "Extra $600/week Fed bailout".  How many unemployed working class people will have any savings left in a few weeks or months?   Pre Covid I was reading articles about how only 40% of Americans have over two weeks of savings.  What will rental income look like when landlords aren't receiving rent and they are not allowed to evict?  What will happen to rent prices?  Are landlords more likely to sell when they are receiving income?  Or when they are not receiving income?  Will they accept low ball offers when they decide to sell?  

There are hundreds of questions that you could come up with that don't have good answers.  

How long can theatre owners continue to hold their properties?   

How long can small market sports teams go on without revenue?  How can you have a $100 million dollar yearly payroll without being able to sell any tickets?   Will small market teams fold?  Will they be bailed out?  Will they merge?  What would the economic impact be on a small market town if they were to lose their sports team or teams?  How many nearby local businesses are already folding because of the lack of games?

So far the only solution to our large set of problems has been to print 4-5 Trillion dollars and hand it out.   Will the Feds print even more?   What happens to inflation because of this?   Will this unprecedented printing of money cause hyperinflation? 

  All of these questions won't have definitive answers until it all unfolds, but it's not a pretty picture and all of these scenarios will eventually affect real estate.  Without the several trillion dollar bail out, where would we be right now?  I don't claim to know what will happen or how it will happen, but I wouldn't be betting on the next few years being a normal correction or any sort of normalcy for that matter.  Nothing about this is normal.  This economic scenario has never happened before.   

I am not selling all of my properties, but I am going to unload the marginal ones and buckle up.

Sorry for the long post. I hope everything works out for everybody.  

Cheers.

 

I would also agree with Scott Hawks.  If both tenants qualify, go with the first applicant.    

Hypothetically speaking, application order not withstanding, I can see why a lot of people would pick A, but other than the other negatives (lower credit score/past foreclosure), the retired couple's income situation is potentially not as superior as it seems.

The retired couple's income will most likely not increase since they are retired.   The separated mother's income can increase over time.   Salaries generally rise with inflation.  Fixed incomes, with the exception of Social Security, do not.  

Both have costs that the other probably does not.  Child care, age related health etc.. Whose situation is likely to improve?  Who knows?  There are a lot of unknown variables which could affect both of these tenants positively or negatively, and their income ratios could flip flop overnight.  

Hypotheticals can make your mind spin though, so it's best to just go with what you know for sure.  The retired couple is technically in a better financial position as of right now, but ultimately I would pick B because, who is more likely to walk away from a a financial responsibility?   The tenant who has already done so before.   

I don't think your lender's policy is standard.  The lenders that I have been in contact with have based the refi % off of their appraisal, not the original purchase price.  

Yikes.  This is not a good sign for the economy as a whole. 

Discussing the 50% rule when comparing expensive cities like LA and inexpensive cities like Cleveland really highlights the weakness of the rule.  Obviously there will be % differences when one has an average rent around $1K more than the other.   The rule is based on the average US market.  LA is an outlier expensive market and Cleveland is an outlier inexpensive market.  

As it is stated above, Cuyahoga County taxes are notoriously high and they vary greatly between the different neighborhoods as well.  A uniform percentage for the area does not exist.   Here is a short list of some of the common areas and their current tax rates as a percentage of market price for the tax year 2019:

Cleveland - 2.79%

Cleveland Heights - 3.80%

Euclid - 3.07%

Garfield Heights - 3.93%

Lakewood - 2.93%

Maple Heights - 3.71%

Parma - 2.50%

Shaker Heights - 3.95%

On paper the duplexes cash flow better, but in my experience, they never seem to live up to the pro forma prognostications.

The downside about duplexes in Cleveland is turnover costs & maintenance in general.  Duplexes tend to attract people looking for a more temporary situation, whereas single homes attract small families looking for a more stable situation.   I don't think I have ever gone a year without at least one tenant moving out from each of my duplexes.  In comparison, I think I have only had one tenant move out after a year from one of my SFRs.  Turnover costs kill cash flow.  

Also, I have had 3 or 4 evictions over the years - all from duplex tenants.  Zero from my SFRS.  

@James G.

I pay for water & sewer.  One of my PMs pays the bills for me for two properties.  The others I pay myself.  

I know some investors have the tenant pay water & sewer.  Some bill back the tenant.  Others pay a set minimum amount and then bill the tenant for any above minimum costs.   

Dave Ramsey's Total Money Makeover is a solid book and I recommend it to anybody heavily in consumer debt without a financial clue.  

His financial teachings are solid, but there is a huge difference between high interest consumer debt on depreciating assets and low interest loans on income producing, appreciating assets.  

His stance that all debt is bad seems to be an extreme reaction to a traumatic event that happened to him.  People have dramatic responses to traumatic events all the time.  Drug addicts go from being homeless street urchins to tee totaling Bible thumpers who scold people for having an occasional beer.  Prostitutes become Nuns.  Some people are unable eat peanut butter, because that is what they were eating the day Dad beat up Mom and left forever.  There are many stories like this and I mean no offense to anyone with a similar story. 

But Dave's stance on debt is just another example of this.  Yes, being a debt free millionaire is way better than being bankrupt, and living a monastic lifestyle sure beats being a drug addict or a prostitute, but going bankrupt and losing everything because he got burned using high interest 90 day loans with no guarantee of renewal like Dave did, then declaring that all debt is bad because of this and saying that 30 year fixed rate loans should be avoided, is like someone who goes out with an ex-con member of a biker gang - gets sexually assaulted by the gang - and then declares that sex is bad and no one should have sex.  Just because he got burned utilizing reckless and risky financing, doesn't mean all financing should be avoided.

Again, I get it. Mental health is important and there is nothing wrong with feeling safe.  Live the lifestyle that makes you feel good about yourself.  Invest in a way that makes you feel comfortable.  But I'm going to continue to enjoy my monogamous relationship with my wife, have a few beers with my friends, occasionally enjoy a peanut butter sandwich and continue to use long term low interest loans that enable me to purchase cash flow producing real estate.   Because so far, thanks to moderation and an appropriate amount of caution, I haven't had any traumatic experiences with any of these activities.

44110 Is considered by most to be a D area.   It does have a growing arts area, The Waterloo Arts District, which has led many to believe that the area would start to gentrify, but as you can see by the property values, it has not.  Without an expert "boots on the ground" person that has managed in that area, I would steer clear.