All Forum Posts by: John Tan

Hi Carole,

We're looking for a property manager for 4plex in Mesa as well.  Did you ever find a good manager?

All the best,

John

@ Joe Pickett.  Is it slowing down in Texas?  I am looking to buy once oil crash start bringing the prices down.

@Minh, Gene, and Dmitri:

Good points....  You are right, there is actually a positive correlation between residential prices and interest rates.  Ie, when rates rise, prices actually rise and not fall (go back 100 years, that is the case).  So there is not too much fear on my part for the SF residential side.  Funny I have been arguing this since 2011, when everybody said don't buy because rates will rise and price fall.....   Japan this and Japan that.... And I argued for FED being behind the curve and always slow to act and there won't be deflation.  Then I get my own arguments brought up at BP :).  

But in the long run (I'm investing for 5-15 years), I think everybody agrees rates have to rise to more historical norms.  When everybody said rates will rise in 2012, it never did.  Now everybody says it will stay the same, I bet it will rise...

So think I wiser to stick to 4-plex and lock a 30-year rate instead of floating with a commercial loan . 

thanks a lot @ J Scott, great link.  Only 200 basis points in spread between treasury and cap rate, that is pretty low!  Looks like lots of deals are still out there by that standard.

Trying to find a place to invest in the southwest.  Can people fill in some info in your local market in the southwest?  i.e. in Phoenix, Tucson, Denver, Sacramento, Bakersfield, Salt lake?

My area, San Diego, CAP rate is 3.5 to 4% for an entry level SFH. Appreciated ~4.5% last year. Market is warm, though entry level SFH moves quick, those going for around $350k sells in 2-3 weeks if priced fairly. Not much competition from investors, mostly entry buyers for SFH. Outlook is slight increase, but wide variation in opinion on where we go from here. Inventory and volume are both really low, so there likely be high volatility depending if buyers or sellers emerge in the spring, personally see a small increase or aggressive appreciation if inventory stays low (2-3 months of current inventory).

@ J Martin, thanks for the thoughtful response.   Two followup questions: 

1.  so you think amount of optimism in 2007 that caused the spread to shrink will return this time around?   

2.  in general, I think it is best to buy from the dumb money and go with the smart money. (so in sequence of smarts as: mom and pop MF investors, hedge funds, mom and pop real estate investors, investors from other fields, mom and pop passive investors)  Do you see smart money leaving or slowing?  I think I see relatively late money looking to jumping in, so I am leery....  i.e., I see MF eventually going down, how early in cycle are we?

Nobody has the complete answer, but here are some historical numbers.... See below for treasury rates, and wage change (orange in chart below). Given wage and inflation are pretty closely tied together and Fed is targeting 2% inflation, we should see rate increases if wage gains go above 5%. So basically I don't see wage growth has that much free room to run without triggering jump in rates, which will generate a higher CAP rate demand/lower price. If I see large wage gains above 5%, I might run for the hills.... Then buy stuff with much higher rates at a later time.

Thanks all for your responses.  

I agree the consensus is it depends on how much rent increases (wage driven) vs market demand for CAP rate. However, without historical numbers, it will be hard argue one way or another.

In my original post, I had a hypothetical change of 20% wage/rent, and treasury rate going from 3 to 8.  I think 3 to 6% is more realistic associated with a 20% wage/rent increase.  So redoing the numbers:

10% CAP at 3% treasury (7% premium for multiunit)

13% CAP at 6% treasury (same 7% premium), and 20% rent increase. 100K unit at 10%, would be worth 92K at 13%, so a drop still. I think numbers for SFHs generally give the same results, i.e. under typical scenarios, wage growth won't be able to keep up with rate change in residential (what Bruce Norris believes as well). So affordability goes down and a net negative effect on SFHs.

But I'll try to get some charts together.  It is easy to find interest rates, harder to find historical wage changes.   anybody has a good chart already on rent vs interest rate going back at least 30 years?

I wonder if future rate increases would decrease multi-unit price?

Since multi-units are priced based on CAP rates, they will be interest rate sensitive. Ie buying a multi-unit at 10% CAP makes sense in a 3% treasury-rate environment, but what if treasury goes to 8% in the future? I assume the CAP rate of the multi-units would need to increase to keep up. So unless rent jumps to, does that mean the price of the multi-units would need to decrease?

Let's say an apartment complex costs 100K and generates 10K in cash flow, assumes now market demands 15% CAP rate, and a rent increase of 20%. Even with now 12K cash flow, the unit is worth now 80K and a drop in price of 20%? So would it be wise to wait to buy multi-units? Especially given the market for them seems pretty hot? Any intelligent and analytical response would be much appreciated!

Anybody know any lenders that will do 80,10,10 for jumbo loans?  If I can find a seller willing to carry back 10%, and want to finance the other 80%.