All Forum Posts by: Josh Collins

@Mark Hong - If you already invest locally, I totally understand wanting to venture out.  Thanks for the follow-up message.  I'd still say that there are better markets to invest in in regards to cash-flow.  But as far as overall market health (schools, business, jobs, development, influx of people, etc.), MSP is tough to beat.  But the cheaper areas will be a bit more challenging to manage so that should be considered as you look to deploy capital.  It sounds like you've put a bit more thought into this than I originally realized.  I think you'll do fine if you stick to your numbers.  Good luck!

@Mark Hong - Welcome.  

I love the Twin Cities for the great living environment, good jobs, and good schools (in general).  With that said, it isn't exactly known as the cashflow king of the world.  Sure it might have some appreciation characteristics but what if that doesn't pan out for you?  You could be left making $0 on your investment.  

I'd probably go with a "boring" investment in your neck of the woods.  I love the Cities but I think your money could be spent move effectively closer to home for you.  My concern is that if you want to get into a $150K house, you'll be buying in rougher areas in the Twin Cities (which further complicates long-range investing) or you could buy in a nice middle-class neighborhood in IA (and probably get better cashflow).  Initially, the cashflow is what is going to help you pay a bill today or allow you to invest more now while appreciation is a bit of hoping and praying.  

I'm sure you could find a fixer-upper in the Twin Cities, but why not find something closer to home that will probably work out better for you in the long run.  It's no secret that investors in the Twin Cities are looking for apartments in Louisville, KY and single family homes in the Quad Cities and other cash-flow positive areas.  I think that probably says a lot.  

Sorry if I'm being a Debby Downer.  I just don't see why you'd look up here if you have better markets closer to you.  And if you choose to totally ignore my advice, I wouldn't be offended.  In the end, you have to do what's right for you.  Good luck!  

@Lesley Resnick - I appreciate your comment and sentiment.  I agree with your comment that it's going to take something unforeseen.  I feel like it's going to be something small that turns into something big.  

With that said, I don't think that the future issue is going to be real estate-centric.  I think it's definitely going to be something else that "crashes" but I think RE is going to go along for the ride.  Probably not a 50% crash or anything that drastic.  Hell, prices may not even go down but just stay stagnant.  But they could stay stagnant for 10 years.  

What I mainly take issue with (okay, that sounds harsh) is that a lot of people are saying nothing in the economy is showing signs of going down in a ball of flames so we have time yet.  I'm guessing that's what people said in 2008 and then got burned.  I'm certainly not saying anyone is wrong, I just want to brainstorm what issues the industry could see.  I doubt any future downturn would be directly related to RE, so that's not what I'm saying at all.  I'm mostly trying very hard to contemplate what the effects on the RE industry are going to be in the next downturn or stagnation, that's all.  

@Account Closed is alluding to, in my self-storage scene, building materials have gone up around 50% in the past 1.5 years.  That's a big ding on returns.  That is going to keep a lot of people from building new houses, storage, etc.  I think there is going to be further competition for entry level housing (because they haven't really built much of it) which is going to keep those prices pretty flat or slightly rising even in a downturn.  

I think with building costs, interest rates, vs. low inventory, I'm guessing we'll see close to flat housing prices. But, if you own a commercial property that resets in 5 years, that might be the buying opportunity many are looking for. Some parties may be looking to liquidate if their new, reset mortgage ramps up and cashflow isn't what it used to be. I am hearing rumblings about interest only loans here and there so some of those people might get burned if their property doesn't appreciate but their loan payments go up. They may not have enough LTV to refi. Again, I think that plays into my theory of getting money is going to be the hurdle in the future, not necessarily the asset class.

Lastly, I feel like everyone wants to get into real estate and that usually spells disaster; the dumb money chasing the smart money.  This is similar to taking the market's temperature by looking at magazine headlines, telemarketing calls, guru sales programs, and the like.  I just hope having this conversation makes us wiser and more prepared for any hiccups the market has for us.  But I will say that I don't think the next downturn will be focused on the RE industry, but we'll likely have some collateral damage to deal with.  

This is a super helpful conversation for me.  I'd love to hear more from people that disagree with my sentiment.    

I hear a lot of people talking about slow downs or corrections in RE.  I've even heard rumblings from a couple people that work for large developers that say developers don't have any plans for new construction over the next two years because they are on hold to see what happens.  I have a feeling these people are being a bit dramatic but I've heard this in a few different arenas now and I'm curious to know if they know something I don't.  Things have gotten pretty good and that always tend to be when things head south.  (I guess you don't hear about bubbles popping at the bottom of a market, that's just part of the correction.  But I digress.)  I'm pretty well leveraged so I'm naturally keeping my ear to the ground.  I'd say the market is overcooked but what would possibly lead to bubble bursting?  In my mind, if interest rates go up and Quantitative Easing is slowed down, maybe there won't be as much money floating around for real estate.   For example, why buy an asset with 6% return that is full of risk when you could buy a 5% bond with zero risk?  My theory is that money will be harder to come by in the future and that might hold back pricing a bit which will probably flatline prices for a while.  That might also slow down the amount of free capital in the investment markets which could make it hard to get a new loan.  I'm kind of thinking that loading up on loans (smart loans, of course) might be the wise decision before that free capital starts to dry up.  I could be wrong but that's how I connect the dots on financial markets.  

Additionally, what I am seeing is that there are a ton of homes that cost $650k in my area (upper level housing stock but not elite housing stock by any means) but zero under $300k in nice areas.  That tells me that there is still need for under $300k housing but likely a cooling down of $650K housing.  I like to think that is the market leveling out a bit or maybe getting a little overcooked in the upper level housing.  There are also periods of zero appreciation for housing in past decades so we could be going through that.  People tend to freak out when their house value doesn't go up 5% every year so I tend to take the headlines with a grain of salt.  We might need pricing to flatline for buyers to catch up to the inventory on the higher end.  But I think starter homes are still going to run up as millenials get into houses and boomers downsize.  It might be a good time to buy if you're looking for a higher end home in the coming years!

I would love to hear others theories or to hear others disprove my theory.  I'm trying to be completely open minded here.  In the end, we aren't going to see the next downturn coming and it's probably something that's incapable of being predicted anyhow.  I mean, who's going to see this coming first, a bunch of real estate investors in the US or Wallstreet with their connections to the global financial industry?  Well, last time around, neither saw it coming.  I've got my gold, guns, and hideout, just in case!  Haha. No, not really....

@Chris Wierman

If the zoning is already setup for you, that is great news.  The hardest part can be rezoning property to something other than what it's currently zoned because you never know what kind of feedback you'll get.  

With that said, the best, easiest option for you is to take it to a civil engineering company to subdivide the property such that it meets local zoning requirements and to figure out how to protect the wetlands.  It's likely that a stormwater pond system will need to be implemented to clean the stormwater before it works its way into the wetland.  

This will cost you some money, probably to the tune of $50k+.  The next step would be to build the improvements - grading the site, putting in the roads, putting in the sewer, water, and electric such that houses/duplexed/industrial can be developed on the property.  This is expensive and is probably where you are going to want to stop.  But maybe not.  If you own the property free and clear, you could take out a loan against the future worth of the property to do the work.  

The catch is that if the market stagnates and you can't sell the lots, you're stuck with the developing costs, whatever they may be.  As @Tim Swierczek and @John Woodrich mentioned, the best way to get you to the next level in value is to do the subdividing and sell it to a developer who's going to do the roads and utilities.  But you won't get the finished lot price, you will get the subdivided price.  

Price difference:

Raw land - $8-12k/acre

Subdivided Land - $25-30k/acre

Fully Developed Lot - $150-195k/acre (3 - $50-65k lots per acre) - Retail price

But if you develop the land, you can sell 3-4 lots to each of 15 builders or all of them to one builder.  That helps diversify but I wouldn't go into the full scale development until you had a commitment from enough builder to at least break even on the project.  

Now, let's say the economy tanks and you can't give away the property after you subdivide the land?  I'm hoping that you could take out a mortgage on the property for $50k for the engineering and if you had to sit on the property, you could at least farm it (or rent it out to a farmer) to make enough to cover the loan payments on $50k while you wait for an upswing.  Then, when the economy comes back, you would have some of the first lots available to be able to sell to builders.  You'd have to run the numbers to decide whether you are comfortable with that, though.  

Using some rough numbers, assuming the property is relatively flat, here are the costs for full development (at least in order of magnitude):

Engineering: $65K

Grading: $1.25M (stormwater ponds and road grading can get pricey)

Roads: $1.25M ($1M per mile of roads - 1.25 miles estimated)

Utilities: $200K

Land: $400K

All in: $3.165M

Developed properties: 25 acres (3 acres set aside for parks/paths/etc.) x 3 lots per acre = 75 lots.  75 lots x $50-65k per lot = $3.750M- 4.875M.  

I might be heavy on the grading and light on the price per lot but this gives you some indication of the numbers.  I think it's no secret why big developers (Pulte, DRHorton, Lennar) are doing their own property development.  They can make a little margin on the lots and then more margin on the homes.  They certainly aren't buying lots for retail and you probably shouldn't expect to sell them retail either.  

Feel free to DM me if you have additional questions.  

So cool.  Good luck man!  I'll be following you in hopes that you'll soon have some really cool news to share with BP!

@Dawn Young - Sorry for all the posts but I wanted to add to your list of possible expenses:

Engineering Fees, survey, local entity's application fees for development, building permits, parking lot paving (some areas require pavement rather than gravel), stormwater permit fees, stormwater ponds (the design is included in the engineering fees), underlying soil corrections if your property is on peat-y soils or poorly drained land, wetland delineation, building structure engineering, worker's comp insurance if you hire someone (probably not in this scenario), legal fees for an attorney to write/review your lease, legal fees for attorney to guide you through the process of eviction (often called a 'lien sale' in SS circles), landscaping buffers (yes, I've had to install trees to buffer vehicular traffic - that reminds me, one of those trees are dead and I need to replace it.  Crap, another expense.), Onsite internet if you want remote camera surveillance.  

If you have an onsite manager, you will probably need a bathroom onsite.  That means a perk test for septic system, septic system, office expenses, bathroom expenses, a well, (or you can tap into city water and sewer if available but that will still cost you something), and septic pumping.  Initially you can probably get by without an assistant but if you get large enough, you may need a manager onsite.  Some municipalities actually require some sort of septic/water onsite.  Yes, I've run into that too.  

You will also have ongoing maintenance: weed spraying, grading the gravel parking lot (or a set aside for future repaving the parking lots), lawn mowing, snow plowing, door maintenance.  

None of these things should be deal breakers, but you don't want to overlook anything either.  I overlooked building permits assuming they would be $500 each.  Well, it turned out they were $3500 each x 5 buildings.  That's certainly a cost overrun.  The nice thing is you can usually move money around a little if you are developing.  But the biggest concern is when you have to sacrifice space that makes you money (storage units) for space that doesn't (manager's office).  We had a bathroom building and maintenance garage cost us nearly $75K once you add everything up.  I'm not proud of this.  Maybe I could have done it a little cheaper but when you add a well plus septic plus plumbing, plus heat, plus bathrooms, plus electric service, etc, etc, it adds up fast.  I like the idea of skipping that if you can, but it's something to think about.  We built ours after our 3rd building was done so we knew we could afford the monetary suck it would inevitably require.  But it's one of the best features that our facility has over other facilities in the area.  

For what it's worth.  

@Ned Willis - Sounds like you have a real interesting opportunity.  I'd be happy to help out on the development side although all my funds are tied up in my current projects.  However, it sounds like you may have the financial portion figured out.  The fact that you have the property (as part of the partnership of course) already in hand, that helps a lot while you get this facility off the ground.  As I mentioned in a previous post, construction costs are going up so you probably want to factor in a little contingency for that.  Well, maybe more than a LITTLE.  My material costs have gone up 50% in the past year and a half.  Lumber and steel are up and that's pinched my returns.  Not insurmountable but definitely a factor that needs to be part of the calculations.  DM me if you want to chat at all.  I have a blog that I'm trying to keep up to date that explains a lot of this and some of the headaches involved.  If we discuss a topic of  general interest, I might add it to the blog so others can also refer to it.  @Dawn Young - This might be somewhat helpful for you also. 

http://joshrlc.blogspot.com/

If you are going to go the development route, make sure you have time set aside for putting together documents and signing papers and whatnot.  I feel like I've spent the past 15 weeks since I quit my dayjob filling out paperwork.  Granted, it's been for two separate properties but it's been quite a bit of work.  Probably a lot to bite off if you are working full-time.  I've done it before but it can get very hectic at times.  

@Dawn Young - I am in the midst of completing a facility and starting a new facility.  I'm struggling to build (they are maxi-storage, so a bit more costs than mini-storage) for less than $25/SF today.  1.5 years ago I started building and I was putting them up for about $18/SF.  Material prices are going up pretty fast which starts to kill the returns.  Also, someone else made a very good point that development costs hit up front and linger while you are renting the facility up.  The returns are probably better in the longrun but there is zero cashflow up front.  Probably negative, actually, even when you start small.  When you start small you still have grading, permits, building expenses, property taxes, insurance, possibly utilities, and the land costs to pay while you don't have any income or sufficient income to cover costs.  Remember, you might need to build 3 buildings to break even.  Sure you plan on starting small, but starting small may not pay the bills.  All things to consider.  I like the idea of buying a completed facility up front to get your feet wet.  At current construction costs (by the way, I hire a small Amish company to do the construction and buy materials from another Amish company, and have an inexpensive electrician - so my costs are pretty low in comparison to others), you will likely be able to buy at a cheaper SF rate than building.  And I think increasing construction costs will probably slow down development in the short to long term and this will allow for rents to rise going forward as new construction gets filled up over time.  

I personally love the large-scale storage.   I believe this is an underserved sector of the SS niche.  Sure it's more expensive to build but it's also a higher end client.  I look at it like this: If you can rent out a large storage unit for $600/month, why bother with renting a low-end house?  Less tenant hassles and all your rentals can be in one spot!  

I would totally agree that putting up SS in cities is getting next to impossible.  The new frontier for SS is the fringe markets where people are moving to.  The next ring suburbs, for example.  

I've owned both mini and maxi now and I like maxi a lot.  However, I also realized that in the Minneapolis/St. Paul market that this is an underserved niche.  I'm from Green Bay, WI and I would not be building this stuff there.  There is too much inventory available and you can build it nearly anywhere.  So you have to know your markets.  

@Kris Benson - Thanks for starting this thread.  I love the info and the discussions.   

@Wendy Carpenter - It sounds like you found an amazing opportunity.  Good for you!  I agree, military towns should probably be on the short list for everyone looking for a SS facility.  They might be the perfect long-term renters.  They might be a little more work if they are on active duty but that seems well worth the hassle.  

@Ivette Bravo - I am hoping these people are buying because they can force appreciation through rehab or raise rents. Others are banking on the market being hotter than the cashflow and therefore wanting in because they think appreciation is their investment method of choice. Think of it this way, if you put 20% down on a $1M property ($200k) and rents go up 10% over the next 3 years, you could double your money in 3 years with zero cashflow. You might ask, how if the rents only went up 10%. Well, that 10% rent increase is mostly likely free and clear due to expenses staying the same. (Okay, I'm making generalizations, but I'm making some assumptions for ease of following. The numbers I'm using could be taken literally with respect to each other, as in, the difference between rent going up and expenses going up is equal to the net increase of rents going up 10%.) I'm guessing this is the thought process of institutional investors and also other investors who don't need immediate cashflow. So if the profits go up 10% (which is just $9K/ year), the value of the property might go up approximately 18% using a 5% CAP rate ($180k). Therefore, you double your money (assuming you can still sell the property with a 2% CoC return, of course) in 3 years. But wait there is more: depreciation can help offset other income from other properties not to mention your tenants are paying off your mortgage. In 3 years, on a $800K loan at 5.5%, that's a return of $71,700 of loan paydown.

So you add up the loan paydown and appreciation you get a return of $251,700 over 3 years or roughly a $83,900/yr for a 41.95% return on your initial $200K investment.  

Okay, so this is super simplistic, but let's say it doesn't appreciate at all and you have a 0% CoC return and all you get is the loan paydown. That is $71,700 over 3 years on your $200K investment or $23,900/yr for a 11.95% ROI. Still not horrible. You certainly would want some sort of slush fund for expensive stuff that could go wrong up front but assuming you budget for it, the rental income should pay for the repairs over time once reserves are built up.

So this is how some people might be buying these properties.  Banking on the loan paydown and hoping for appreciation.  As you can see, it's not a horrible strategy.  But if rents go down for some reason, you could be in a world of hurt.  

(My numbers were based on a $1M purchase of a  5-plex that rents out for $1500/mo before raising rents and the expenses eat up all the rental income.)