All Forum Posts by: Nick Robinson

It depends on what you're looking at. In general, we are seeing CRE not just office, but MF be foreclosed on and prices come down dramatically. It is especially evident when these properties go to auction there is very little demand. The issues in CRE are just getting started and if you're in areas where there was a lot of speculation, Sunbelt, Southeast, PHX etc. there is more downward pressure on prices. In those areas specifically a lot of units were built when everyone was moving to these areas now, we are seeing units come to the market as demand for housing units is falling. We know demand is falling b/c in a lot of these areas rents are flat to down YoY and vacancies are ticking up.

In terms of residential I know there are people that overextended to get in the homes they are in so the big risk to SFH is going to be a recession and a credit event, like most assets. To predict a "crash" 20% or more drop in houses is probably low but it is never 0. We saw the first AAA CLO lose money since the GFC 2-3 weeks ago, and as there are more defaults in CLOs from CRE the odds of a credit event become higher. Then you look at Japanese banks searching for yield b/c their carry trade is losing money are moving further out on the risk curve purchasing these CLOs. We have seen banks doing extend and pretend with CRE owners and moving to get a lot of this debt off of their books. Add in this is happening when the economy is weakening /in a recession is not good. The NBER will let us know if we are in a recession in a year so that helps(sarcasm).

The big issue with this is no one knows the contagion risk this has. Obviously if credit markets blow up and we already have companies firing and expressing concerns in the economy we are likely to see more firings. 

@Jason Riddle
I wouldn't and do not have a set percentage I put towards each. I think both are valid ways to create Cash Flow/Dividends it just depends on what do you want to use as your vehicle. When I invest in stocks, I have the same analysis as when I invest in RE. I want a strong dividend yield that has dividend growth. For example, if I buy a stock that makes a 4% dividend, and it has a dividend growth rate of 10%/year over in 10yrs I am going to have a 10.37% dividend on my original investment, and I can just reinvest dividends and really make money with compound interest. Just like in RE I want something that CF and can support the property and pays me to own it. The rents ideally will grow over 3.2%, which is the long-term rate of inflation I know government #s. Then the goal is to use that CF to invest more money into more property.

What makes RE in my mind better than stocks is that I can use leverage to improve my returns. I can do the same thing with stocks but margin loans are more volatile than RE loans so there is a greater probability of loss. Another big advantage of RE is depreciation which allows me to collect that CF tax-free. Should add an advantage of stocks is I can reinvest my money quickly where in RE it takes time to build up a down payment.

Remember the main goal of investing is to buy things that pay you to own them. So, in retirement the income you receive pays for a lifestyle that you want. For everyone that is different. If you want to retire in Arkansas obviously your CF number does not to be as high as someone that wants to retire in Newport Beach.

Quote from @V.G Jason:

Quote from @Nick Robinson:

@V.G Jason @Varinder Kumar

The reason you do not want negative CF is b/c of the risk involved. It is also not a model you can replicate. Every property you buy puts you in worse position financially. When this recession hits even if housing is not affected, which is unlikely, you run the risk of having your hours cut/losing your job which would make it hard/impossible to pay the debt. If you can’t pay the debt you will lose your asset and all equity in the building.

The risk is the total cost of PITI, from a monthly basis. You're already assuming full on capex risk, so that's a sunk cost you have earmarked. If a recession happens, you're running the same equal risk your tenant can't pay or that you can't find a tenant. If you evaluate that as your risk metric, cause that's the most conservative way to underwrite then you're not worried about a measly $200/mo cash flow. 

A recession may kill your underlying appreciation gauge, but it's also going to kill your monthly account of it too. And a lot quicker. If you're unable to withstand a recession, you're not properly situated to invest in these houses. Always keep healthy cash reserves or better yet quit leveraging through the gills.

This is why I don't come on to sites like bigger pockets or try to have a discussion with people. They either don't ready your responses, or they change the parameters of the discussion. The original post talked about losing $800-$1000/mo that is a lot more than $200. When you're talking about CapEx or PITI payment as a risk that is a reason for positive CF. You would not just say, "O I would have this payment even if I had negative CF." The point is none of those costs come out of your pocket and the building pays for all expenses. If your losing $1,000/mo when the property is rented and there are no issues the property has to appreciate $12k just to break even. 

We obviously have different thoughts about how to invest. I want to buy assets that pay me to own them, and you want to buy things that will be worth more in the future. Both can make money, but history has proven that being paid to own assets has a higher percentage of success.  

@Carlos Ptriawan

Tell that to the people that invested in tech stocks in 2000. I’m not even talking about the ones that went out of business. Look at Cisco still down $20/share abt 35%. Do things always appreciate? Watch NVDA it’s about to crush a lot of investors. The market stocks, RE, whatever have to come back to fundamentals at some point.

What if you were up 20% b/c of appreciation in ‘06 and you had to sell the property in ‘11 you would have been down 40%. In the early 90s you would have been down to.

I agree long term the nominal value of things will go up but that doesn’t make it a good investment.

@V.G Jason @Varinder Kumar

The reason you do not want negative CF is b/c of the risk involved. It is also not a model you can replicate. Every property you buy puts you in worse position financially. When this recession hits even if housing is not affected, which is unlikely, you run the risk of having your hours cut/losing your job which would make it hard/impossible to pay the debt. If you can’t pay the debt you will lose your asset and all equity in the building.

Quote from @Bill B.:

@David Dachtera

Lately I’ve been accused twice of insulting people when I ask questions, so right up front. This is not an insult, it’s a real question. 

You say: "Investing" for appreciation is NOT investing, it's speculating (read: gambling).

Are you saying almost all stock investing, which is almost entirely based on appreciation is gambling? I certainly feel that way about bitcoin and probably silver/gold, and at least a little about stocks. It’s always bothered me when people won’t invest in real estate without cash flow but they’ll GLADLY invest in stocks with NEGATIVE cash flow, praying for appreciation.

This is the exact reason I stopped investing in stocks. There was no way I could buy enough stocks to generate enough cash flow to live on. When I retired I didn’t want to “hope I died before I spent all my savings”. That and having zero control over if they went up or down each day or even over time got me to real estate and changed my life. 

Again, honest question and not aimed solely at you. I’d be happy to hear anyone’s opinion, you were just the latest to say it and I thought you might still be online. 

 All stock investing is not speculation, but I agree with you most people it is. Thats why most people cannot beat the market or do not get the returns they think they will. If you buy the index, S&P, it pays you 1.8% every year, but if you look at the individual companies you can buy companies in there that are more fairly valued, that have better financials and pay a higher dividend. If you invest in financially healthy companies that pay a dividend that also grow their dividend you can beat the market over a long period of time. Problem like investing in CF properties is it is slow it's not sexy and you won't get rich overnight. You can beat the S&P market index just buy buying an equal weighting by 1-2% or buying the index based on fundamentals by 3-4%

Let's look at two big examples of speculation Nvida and SF RE. Nvida is trading at over 119 P/E ratio. If you are buying that stock, you are buying it literally just b/c you think someone will pay more for it tomorrow, Greater Fool Theory. When you buy SF RE w/ negative CF you are betting on appreciation continuing to climb and you being able to hold it w/ a negative carry every month. This is speculating that someone will pay more for the asset then you did. Yes, it can work out and you can make money, but it is gambling. 

@Bradley Shuhart
In terms of the original question I would not buy anything w/ a negative CF, unless it was b/c I was renovating it and a conservative analysis told me those futures rents can make me a decent return. In your example to lose $1k a month before any unexpected expenses come up, which they always do, is ridiculous. I especially would not be taking on risk w/ the yield curve inverted and us literally being on the precipice of a recession. Even if you think RE will not be affected can you say for certain your job and pay will hold? If you look at history buying any asset while the yield curve is inverted is usually not what you want to be doing. My advice would be sticking the money in a 6mo T-bill make your 5.5% and watch how things play out. If you really want to buy something watch how LD UST, $TLT, performs during a recession. 

I would be very cautious buying RE right now. If you’re buying any RE right now it has to be CF positive using conservative underwriting. When the yield curve inverts that’s a precursor to a recession every time. Just b/c we have not had one yet does not mean it is wrong. Recessions do not happen all at once they build over time. Why would you even risk buying assets before a recession? The bond market has been projecting low growth and inflation potential. The fed raised the funds rate 525bps and the 10yr only went up 210bps.
The bonds are telling you it was never inflation it was intervention by central planners. Shut down the world economy that caused supply shocks at the same time you have government stimulus which artificially raised demand. So it was closer to the late 1940s where there is a transitory spike in inflation. It is not like the 70s which saw a secular rise in inflation b/c lending kept increasing. Banks have been lending less since Feb. how can you have inflation w/ a decrease in lending? You may ask what is the difference the price of goods is still going up. The big difference is as that stimulus is taken out of the system the prices will come back down. Not necessarily to the same level they had been but they will still come down. 

If you look at case Schiller home prices since 1900 there is a clear historic trend line. During the GFC it brought houses back to that trend line. If you look at Milton Friedman plucking model to get back to trend we would need to see deflation to get back to the historical trend line unless you believe something has forever changed the system. 

The rental market has softened and we are seeing rents flat to negative. Vacancy rates are on the rise and the amount of units on the market is increasing. In the CPI shelter is the largest and a lagging component. If you look at service prices less rent over the last 6mo annualized it comes out to .6%!! We are getting close to a credit event. To make the rental market worse we have seen a record number of Multifamily Housing Units under construction at the same time vacancy is increasing. Not to mention the median rent nationwide is about a $1000 less than the median mortgage with 20% down. Monthly payments have to come down which likely will be a mixture of price and rates. 

Like others have mentioned we haven’t even brought up $1.6T of commercial loans need to be rolled over. We all know at minimum a lot of syndicators ran very aggressive #s and we are already seeing capital calls. Add in student debt payments start in September that avg. $400/mo per person. So demand is already crashing and more discretionary money is going to go towards student bills. Yeah I am going to sit this one out. Just like in all recessions there will be a premium for safe liquid assets. Long term bonds and Precious metals. If history plays out PM will crash initially then take off. 

@Scott Trench
I think you need to dive a little deeper into the economic numbers and look more at history. In history the Fed always massively cut rates when a problem arises/breaks. I agree what they say they are going to do but the fact is if you look at history, they are always wrong b/c they are looking at past data. Like trying to drive forward looking out the rearview mirror. There has not been a recession where we have had a positive steepening with the curve uninverting by the long end going up. What happens is all yields fall and the short end just falls faster. The Fed has control of the curve from 2yrs and under. They do not control LD UST. The yield curve has been predicting low growth and inflation potential for almost 2 years now. 

GDP terrible numbers Q1 was boosted by a one off from auto sales in January. Without that it would have been negative. Outlook for autos is flat to declining for the year so that doesn't look promising. Manufacturing continues to struggle which always falls first going to a recession. Without goods what is the service sector going to sell me. Look to Germany/Euro Zone or China. EuroZone usually leads us by a couple of months. Look how Germany had a hit to manufacturing and now their services rolled over. In a recession things do not move in a straight line.

Employment that is easy to debunk. that is a late cycle indicator. No one gets fired before the recession. New orders are contracting, and now backlogs have been contracting. If you read reports employers are labor hoarding b/c they want to hold on to their employees. As they run through their backlogs and see that the recovery is a pipe dream, they will begin with the layoffs. Most of employment numbers are coming from retail and hospitality, which in general are lower paying jobs and you are losing jobs in higher paying sectors. Over the last two months 1000 PT employees were hired and 600 FT employees were fired. Thats why your unemployment rate lowered b/c there are more workers in the work force.

I do agree with you that people who think the Fed cutting rates is a good thing are sadly mistaken. If you look at history, it is never a good thing when the Fed cuts rate and usually the bottom of the recession is after the yield curve un-inverts and Fed is done cutting rates. Economy, stocks, assets have been inflated but government intervention. Whether that was lockdowns, shutting down the world economy, which led to supply shocks, or you talk about the one-time stimuli that was injected into the system. These all led to speculation and one-offs. Ca had a "surplus" not b/c of anything to do with policy or economic growth it was b/c they were given money by the federal government. Now they have a bigger deficit then before the pandemic. Retail savings accounts spiked when we were getting stimulus monies. Now the stimulus stops and we are below pre-pandemic levels, right before student loans are going to restart.

You do not move out the risk curve when the yields are inverted. There will be a premium for safe and liquid assets. Make sure you have reserves, you are cash flow positive, and you protect your assets. Which everyone should have been doing for the better part of 18months.

Assuming you ran your numbers conservatively the return is about the same, but I why do you think appreciation is guaranteed? Over the long-term Real Estate will become more expensive but over the next year or two maybe a little bumpy. How are you going to get a cost segregation study to a new build?

I would take the 5%+ on the T-Bills and look for a better deal. When you're taking on leverage and risk you should be looking for a better return than what you can get from UST. Since you are not taking out a loan you probably will have to pay some taxes on CF and on the TBills you will have to pay federal taxes.

As long as you are CF positive, and you plan on holding the property for a longer period of time it will work out.

@Ned Carey

I agree with you. When you look at rents they are down YoY in 57 out of the 100 biggest metros. When there is a premium of over double the price of rent that is not sustainable. Either home prices need to come down or rents need to come up. I don’t see any indication that rents are coming back up substantially. In the near future there will be increased inventory in some markets as a lot of MF construction has taken place recently. I saw someone reference the CPI. The shelter component is a lagging indicator and if you noticed it rolled over awhile ago. Starting to trend in the same direction we see in real time. There is a higher chance of a recessionary deflation than anything else. 

Interest rates going down will not increase demand. Remember the FED doesn’t want to cut rates but they will. They won’t be cutting rates because anything positive is going on. They always say they are not cutting rates and then the system breaks and they cut aggressively. Look at June‘07-Oct‘08 Fed cut 525bps and the bottom of the national market kept falling till Aug ‘12.

All that being said RE is local and if the building CF that allows you to hold a property through rough times. I would definitely not be speculating on property appreciation w/ negative CF and I personally would not be flipping right now especially if you have never done it. Be very careful taking any risk while the yield curve is inverted.