All Forum Posts by: Michael Worley

 How is a $1 Million property going to cash flow 40k a month? If you mean 40k a month in gross rents then that isn't cash flow. If you mean 40k in cash flow that means you're expecting 75k+ in monthly gross rents, on a 4 plex?

 20-25% Down on a commercial loan is the standard, not 30%.

Why don't you just offer larger EM deposits with a portion of them non-refundable? That will show the seller you are serious.

 According to the National Apartment Association, the national average for expenses is roughly 40-46% not including debt service.

See this link, it's a good valuable resources.

http://www.naahq.org/sites/default/files/naa-documents/income-expenses-survey/2013-Income-Expenses-Summary.pdf

The Gasoline analogy is not false, it's accurate. The demand for gasoline in 2007 was higher in 2007 than in 2014. (Link:

http://www.eia.gov/tools/faqs/faq.cfm?id=23&t=10 ) despite the lower 2014 prices. Supply is a response to demand, not a driver of demand. My point about the price of gasoline is that the low price of gasoline does not create more demand, it is in response to lower demand. Hence the point and the analogy to interest rates. Low interest rates are in response to low demand for credit. 

The point about bretton woods is off the mark. If you'll review this graph from the (link:

https://research.stlouisfed.org/fred2/series/MZMV ) you will notice that the increase in the velocity of money PRECEDED the August 1971 Nixon policy change regarding the gold standard. In fact you would say it CAUSED the Nixonian policy pivot. Also note that the MZM velocity has consistently DECREASED since the interest rates have begun to fall in 1980. In fact the velocity of money is, based on that same chart, lower now than at any time since 1959 at least (that's as far back as that particular data set goes).

Total money supply has gone up during that time, but at a declining pace relative to productivity growth.

That reduction in velocity is what leads to a reduction in the demand for credit and what then leads to a reduction in the price of credit (i.e. interest rates). US Savings rates are higher now than they have been in the last 20 years (with some exceptions to just after the 2008 crash) (source:

https://research.stlouisfed.org/fred2/data/PSAVERT...)

How can you say that demand for debt is at an all time when according to the NY Fed as of September 2013

"Overall consumer debt remains 11% below its peak of $ 12.68 trillion in 2008Q3"

So total US consumer debt has dropped 11% in 7 years (that's massive deleveraging of the US consumer).

According to the ECB, credit demand saw it's first increase in q4 2014 since 2011. So Europe has been deleveraging as well.

Just because sovereign debt is at an all time high doesn't mean AGGREGATE credit demand is high. The facts are clear, aggregate demand for credit WORLDWIDE has been decreasing at a feverish pace.

Your notion that supply drives prices more than demand does is not supported in any way. All the empirical data actually suggests it's quite the opposite.

@Sue Kelly

I can appreciate that some have more tolerance for leverage than others. What I'm referring to is that if you buy a property in all cash with say a 7% Cap Rate that money that money is better invested somewhere else if we're talking return.

What makes real estate such a remarkable investment is the leverage that you can use to achieve very good cash on cash returns. Without leverage, real estate is a poor investment relative to others.

As for the 'market' when you refinance, that's the thing with commercial real estate. The value of the property is based on the cash flow it achieves, not based on the sales comps of the area. Commercial properties, that are cash flowing are always properties you can refinance. In addition, the shorter amortization schedules and LTV requirements mean that if you run a property effectively getting financed every 5 years not a concern.

No, inflation is not rising prices. Inflation is the total amount of money in circulation compared to the total amount of goods/services. Prices change daily without inflation or deflation.

As an example, the price of a VCR in 1985 (see link

http://articles.chicagotribune.com/1985-09-22/news/8503040687_1_vcr-boom-suppliers-marketers ) was around 200-400 dollars for an average VCR. Today, you can get a Blue Ray DVD for 69.99 ( link

http://www.bestbuy.com/site/samsung-bd-j5100-za-streaming-blu-ray-player-black/3147057.p?id=1219573000938&skuId=3147057 ). Does that mean there has been massive DEFLATION? Of course not. It means that there are price substitutions all the time some things get more expensive, some things get less expensive. Inflation is not a price phenomenon, it's a monetary phenomenon.

More specifically it's related to credit, as the only way to increase the money supply is through the issuance of debt. Whether that debt is government debt or private consumer debt it doesn't matter, it's still the aggregate debt level that matters. That's because the only way to create money is through debt. The treasury can't print money to create it without issuing Treasury bonds (government debt). The fed doesn't print money, they buy government bonds (created debt).

If you look at the overall aggregate debt growth rates, in 2005 it was 9.0%, 2006 8.4%, 2007 8.2%. Compare that to 2011 3.6%, 2012 5.0%, 2013 3.8%, 2014 4.3%. So if productivity grows faster than debt, you actually get deflation. It's the slowing down of debt growth relative to productivity growth that prevents hyperinflation.

So, I'm going to take the opposite side of this argument.

I think things like 'interest rates are so low that it is causing crazy high prices....etc' arguments miss the mark.

If I asked you, if Gas prices were $4.00 a gallon of if they were $2.00 a Gallon, which scenario would people buy more gas?  Most people immediately say that at $2.00 a Gallon, people would buy more. The classic, price effect on demand equation from Econ 101. However, in practical terms, it's usually an opposite observed effect. The reason is that it's BECAUSE people are using more gasoline that the price is $4.00 and it's BECAUSE people are using less that it's $2.00.

The reason I mention this is it relates to interest rates directly. The common theme is that when interest rates are low people borrow more than when the interest rates are high is observably false. In every cycle interest rates are not inversely related to the actual demand for credit they are directly related (i.e. high interest rates = high demand, and vice versa).

Interest rates are not controlled by the FED. The FED controls only the short end of the curve, and to some extent mid curve rates on T-Notes. However, central banks do not control consumer lending and business lending rates directly. Those rates are actually LOWER today than 2 years ago. The reason is the aggregate demand for credit is much much lower than in 2006 era lending.

In fact, global demand for credit is arguably at 30 year low. Hence the negative interest rates (something economists long thought practically impossible) in Europe.

Interest rates are likely to be almost permanently (if you define that as say, the next 10-20 years) lower than historical norms.

In addition to that, as of December 2014 US Household formation was at 2Million per year. As of March 2015 US Housing starts are at an annual rate of 1Million per year. Compare that to 2000-2006 annual Household formation average of 1.35 million per year and the 2004-2006 annual Housing Start rate of 2.2Million.

Put simply, we way over built for a decade in housing, and we're way underbuilding (and have been) for the last 5 years.  Rents therefore almost assuredly going to continue to rise because they have to.

That's the thing with Commercial Loans, the financing is weighted almost entirely on the strength of the property/business. If your apartment building is making money then you'll find financing. Also, because the loans mature every 5 years, the lender has less long term risk of default, which means they are more lenient than if they were lending for 30 years. Lastly, it makes pulling equity out of the building more feasible (and if you're letting your equity just sit in buildings, then you're not taking advantage of the #1 reason to invest in real estate in the first place....Leverage).

I honestly do not know a banker worth his salt that does not do a site walk personally on any CRE loan. And do not confuse SFR with commercial real estate, they are very different in just about every aspect. The 'common sense' motif doesn't fly because it is common sense to lend on shorter maturities with shorter amortizations. The 30 year note is what is insane, it's also no coincidence that the U.S. is the exception, not the rule, in offering 30 year notes on SFR in developed countries.