All Forum Posts by: Juan Pardo

What is interesting often in discussions like this is the assumption that we are playing a zero sum game. Meaning SF and CA have to be in decline for city X and State Y to prosper. Because SF is expensive relative to city U in state Z, it’s ripe for a collapse. Hmm has anyone taken the time to compare SF rents with those in major international cities around the world? My own take is that tech as an industry has grown massively in the last 10 years. All the largest valued companies in the world are mostly tech companies. In fact 6 or 7 of the top 10 are in western US and 5 are in the Bay Area. IMHO there needs to be more spread and spillover in the future and continued growth of tech will spur offices and jobs outside the SF Bay Area at a larger scale than before. But that does not mean SF or the Bay Area will start to decline, if anything we should expect a lot more growth.

Was listening to podcast by George Gammon and Robert Kiyosaki recently. They made the comment that with high market valuations for most RE right now, and record low interest rates, that the debt is now the asset, and the property is now the liability. I think I get what they were trying to say, but can anyone expand in that comment?

House hacking is often considered here in this forum as a good beginner's move to getting started with the first rental property. When does house hacking & self-managing a property NO LONGER worth the time & effort as your net worth grows? I saw the horror movie Pacific Heights, in which a double-income child-less couple buys a multi-family & rent out the other units to horrifying results. This movie has scared me off of doing house hacking! 

The history of markets tells us that we will always have a crash.  

This graph shows total consumer debt in the US since 2003

Housing crashes come from over indebtedness, this graph shows that US consumers have more debt today than they did during the housing crisis in 2008

Total US consumer debt in 2008 $13T

Total US consumer debt in 2019 $13.9T

Total debt per US consumer according to US Census Bureau data: $41.77, this exceeds the record established in 2008 of $41.68 (this is total consumer debt divided by the entire population)

So, are we in for a crash?? UNLIKELY

There are two key financial indicators that tell us that US consumers are in better shape today than they were in 2008 (even taking the pandemic into account):

1. Median household income 2019: $68,703
2. Median household income 2008: $57,010

Consumers make more money; the median household income is up 20% from 2008, while total debt is only up 6.9%.

The second indicator is the consumer debt delinquency rate

2005: 4%                                   2016: 4%

2006: 4.25%                              2017: 4.125%

2007: 6%                                   2018: 4.25%

2008: 8%                                   2019: 4.125%

Delinquency rates for 2020 are not yet available, but there is no evidence that delinquencies have spiked anywhere close to 2008 levels. 

Anecdotally it seems unlikely that there will be a real estate market crash at any point in the next 3 to 5 years. The federal reserve has dropped interest rates to 3% or less, which is being reflected in current mortgage rates (a recent Buyer of ours put less than 5% down and obtained a 30 year mortgage with a 2.37 interest rate). The federal reserve is now committed to a low interest rate environment for the foreseeable future, IF they were to raise interest rates back to 4% ALL homebuyers and many consumers that refinanced their properties would be under water as purchasing power would decrease and there would be a subsequent impact on sale prices (historically there is an inverse relationship between interest rates and property prices; drop interest rates, property prices go up and the reverse applies).

What do you think?  Many pundits disagree with me and believe that market is long overdue for a correction.  Reply and let me know what you think. 

Completion guarantee secured by bonds are 99% off the time a requirement for LPs and lenders in the US, but the end buyer is not covered directly

In Europe developers must often deliver a completion guarantee to the buyer if the property is pre sold as payments are made in installments along the construction process. Usually 95% is paid during the construction and the remaining 5% at delivery. The advantage of this system is that it discourages speculative over development, reduces capital costs for the developer and free capital for more projects.  Usually a minimum of 60% must be pre-sold for the project to break ground, so very little leverage is used and the developer only commits about 3-5% of the equity 

I would love some insight to this as I am a new investor (don’t have a home yet). I know most don’t recommend using a PM but I see myself long term with 60+ units one day and would eventually use one anyway.

Ok with that out of the way how do you all make money with a PM? Am I being too conservative? I'm in the Baltimore area looking at homes that would rent for 1500-1800/month. When I make assumptions for vacancy (assuming it rents on avg 11/months a year with 1 months rent taken away from the PM), maintenance and cap ex around 250-300/month abs property management around 8-10%. With all that out the way I maybe walk away with 200/month and that puts me around 6-7% COC which is not great. That also doesn't assume the cost of tenant turnover which would wipe me out.

Am I doing something wrong here? I’ve heard of people getting 10-15% with a PM but I can’t make the numbers work. I would love at least 10%

With 250/month per door but it’s not looking great. Any advice would be helpful. Thanks.

I believe there could be a massive conspiracy afoot to defraud the working middle class (not just Americans) of their wealth and freedom.  Anyone who thinks that more government is better is deceived.  Perhaps they have not seen first hand (like I have) how government rarely do anything efficiently (except spend money).  I have worked as a contractor on 50 to 100 projects for the government.    In my experience, the lazy and incompetent vastly outnumber the "good ones"  Contrary to the news and history taught in public schools (heavily promoted wishfull thinking) every "solution" the government implements causes more problems.  

I think it is important to note that Warren Buffet has started buying and selling single family homes.   Blackstone is huge and actively bidding on any foreclosures that show up.  China and Japan own a lot of land on the West coast of North America.  It might be noteworthy that President Trump is a real estate investor.  Home loans interest rates are artificially low because the US is using home loans to inflate the money supply ( the FED is buying billions of dollars of home loans because it is cheaper and easier than printing money  -- study fractional reserve banking and fiat money if you don't believe me)   

Without the artificially low interest rates, demand for homes would drip (and so would home prices).   I think investors are continuing to buy real estate as an inflation hedge.  US real estate is risky since we are seemingly teetering on the verge of socialism (just another name for Communism).  Communists and similar forms of government do not respect private property.   We can only hope and pray that our investments benefit us and our children rather than being forcibly donated to powers that be.

It is easy for the media to vilify landlords and perpetuate the stereotypical uncaring scrooge.  But imagine renting  housing from an organization like the SSA, DMV, or Honolulu's permitting department?   

So assuming we don't go Communist, I envision bunch of real estate going into foreclosure in the next two years. It may take the courts a year or two to catch up with the backlog after being shut down for so long. (The process wasn't fast before and having a bunch of desperate litigants in backlog won't make the process any faster -- similar to the line at a tire shop the first day of snow) Banks will be reluctant to write down the losses so they may list them as overpriced REO's -- hoping to capture a gain justified by inflated prices (caused by artificially low interest rates) Institutions with money like Berkshire Hathaway and Blackstone will likely negotiate directly with the banks to buy portfolios of bad loans and foreclosed properties. I expect institutions to buy most of the foreclosures so the public won't see much on the open market. The relative lack of publicly listed foreclosures combined with artificially low interest rates may prop up housing prices (and by extension: prop up the stock market, large bureaucratic businesses, and inefficient governments)