All Forum Posts by: Nick Robinson

@Mike Jay
The yield curve has already inverted.  Based on history there will be a recession in the next 6months to 2years.  The FED's QT program they want to impose is $95billion/mo. starting in May, $60B in treasuries and $35B in MBS.  Thats a pretty significant position change from 6 months ago.  The biggest thing I am waiting for is when something breaks, which it will, does the FED reverse course like they have over the last decade, or do they keep shrinking their balance sheet?  Only time will tell.

@Marcus Auerbach
It looks like the increased interest rates have not really affected the houses at the $350k price point.  How are the houses at higher price points doing?  Those are going to be the houses more and more influenced by interest rates.  At some point higher interest rates will slow down demand the question is at what point will it slow down.  With the record low inventory no one will know that number till we hit it.  There is also the fact that anytime there has been an issue since the GFC the FED has cut rates.  I would assume that the stock market crashes before the real estate market and then we will have to see how serious the FED is about raising rates.

@Ron Singh

If your long-term goal is to have multiple doors and have passive income with less involvement, I agree the easiest way to do that is through syndications.  If you want to physically own the doors than going to a larger multifamily, Triple net lease, mobile homes, storage units would be the way to go.  The more units/tenants you have the easier it will be to have a property manager in place to handle the day-to-day operations.

There are always pros and cons to any type of investing.  For instance, I live in CA but unless something changes dramatically, I would not buy rentals in CA because of the laws in place favoring the tenant.  Not just the fact that during normal times it can takes months to handle an eviction but things like rent control, raising taxes will seriously affect your returns.  You have to decide what you want out of investing and the risks you are willing to take.

Tax wise if you make under $100k you can write up to $25,000 of passive losses, from $100k-$150k you have diminishing write-offs the more you make.  Once you make over $150k you cannot write off any passive losses over the income on the property, but they will become unallowable passive losses that you can use in the future.  If you are a real estate professional, then you can write off an infinite amount of passive losses.

@Steve K.
I know all real estate is local but if you look at the US housing market real estate prices have a point when they go down in a recession.  Like I said real estate is local, so it depends what's going on in your market.  I am right there with you that the overall trend for real estate is up and RE will be worth more in the long-term than it is today.  Nothing moves in a straight line so there will be times when it is up and sometimes when it is down.  If you're looking for a personal home as long as you have a secure job and you plan on living in the home, you are buying for a long period of time 5+years you are more concerned about the payment.  If you are an investor as long as the building has a positive CF, and it yields a return that you are happy with keep buying or you may need to find a new market.  Where you will get burned by investments is being too liberal with your underwriting or anticipating huge appreciation or CF year over year.  Even though you may get a spike here or there it is better to run your numbers conservatively. 

@Andrew Hogan

I agree with you that you need to be a buyer throughout the cycle and not just try to time the market. Last year I bought a value add 14-unit in Mesa Az. All in I am just under $2.4m so I am putting my money where my mouth is. I am just saying that my base case is that the economy is in bad shape and unless the FED backs the market their is a high likely hood of recession and two-thirds of the recessions have a housing correction/crash/downturn since WW2. People also seem to think RE is a lot like the stock market but the last 3 downturns in RE took 4yrs, 4yrs, and 6yrs. So it takes awhile to go from the top to the bottom.

Next year I plan on refinancing the 14-unit and pulling money out and buying another building. The only thing that will change for me is what the interest rates are and the state of the economy/PHX metro.

@Jason Malabute
Jason just a couple of things about your analysis. The FED has only increased interest rates one time so far and that was March 16th.  Interest rates have been going up but that is not the FED raising them that is the market.  The FED controls the FED funds rate, which is the overnight rate banks give each other.  When the FED raises, the rate is does have some impact on the short-term bonds but the further you move away from the 1's and 2's the less the FED funds rate affects it.

I agree about there being a housing shortage.  I believe last time I looked there was about 240k houses on the market.  That is extremely low when you consider the last, I heard 1.2m to 1.5m listings would be a balanced market.  A counter argument to that is the 2yr treasury is at 2.342% right now.  If you look at a chart the FED funds rate and the 2yr treasury are usually the same.  The FED funds rate is .25-.5.  If they raise the rate up 2% that will cause a lot of panic in the market considering if they raise FED funds again, they will be very close if not invert the 2yr and 10yr treasury.  If the yield curve inverts there has been a 100% chance of recession since the end of WW2.  There is a certain point that if you raise interest rates, which is increasing the cost of the home, you will crush demand enough to hurt the market.  The question is what is that pressure point?  Is it 5%, 10%, 20% interest rates?  

My base case is the FED will continue to raise rates to fight inflation until they break something. The cure for high prices is high prices.  When you have a lot of speculation in the market it's time to sit back and reassess your positions.  Right now, the Reverse Repo Mart is paying a premium to actually own the collateral (most cases US treasuries).  This shows big institutions and banks are moving towards safety paying less than what a bond is yielding.  I am not saying that houses will go down 40-60%, but this would be a time to have some cash on you waiting for some deals whether they are in RE, stocks, etc. 

@Sierra Johnson
I have mentioned this in some previous posts but if someone asked me about the market, I would say there is a higher probability that there will be a recession.  This is not just a feeling or a guess it is based on actual data and looking at different financial instruments.  Over the past year the fundamentals of the economy have been getting worse.  During the first week of December the Eurodollar futures curve inverted, which is projecting a worldwide recession.  The TIPS data in December was negative, the US treasury yields have been closer to inverting, and there is a spike in the REPO markets fails.  In all the recession since WW2 there has been a 63% chance that housing prices will fall.   

I would want to protect myself from downside risk by buying assets that produce positive cash flow.  I also would want to hold on to cash right now to take advantage of any opportunities that will come up while other people panic. 

@Jonathan Bombaci
Are you including your personal home as part of the 89.4%?  I look at personal homes as an expense more than an investment.  The equity put in your home does nothing for you because you have monthly expenses every month.  A better investment would be to rent the home out make positive CF.  I know a lot of people will say they can refinance their house but then you have a bigger expense every month.  The advantage of a house is living where you want to live, some people see it as a security, but I still would not see it as an investment, or I would see it as a bad investment numbers wise.  That does not mean do not buy a home just be aware of what you are buying.

In terms of your portfolio allocation, I want 80% of my portfolio to pay me to own it, 10% is speculative and 10% in safe liquid asset.  If your RE is making positive CF it does not cost, you anything to hold it.  If you are going to refinance, I would make sure the building will still be cash flow positive and you have reserves in the bank.  With that refinanced money I would be very careful investing in anything right now even before the Russian/Ukrainian conflict the economy was in bad shape.  In the first week of Dec. the Eurodollar futures inverted, and the yield curve for US treasuries has been getting flatter.  The war has accelerated this even more to where there is less than 25 basis points difference between the 2yr and 10yr treasury.  The economy has gone into a recession every time there is a yield curve inversion and after every yield curve inversion there has been a recession.  There is a very high probability of a stock market crash and since WW2 real estate has crashed just under two thirds of the time.  If you are refinancing it would be smart to take a step back and look for the next opportunity.  When people panic you will see deals come up and you just have to stay unemotional about your thought process/decisions.  The 10% speculative could be what we are talking about waiting to deploy that capital when you see a move in a market.  For the last 10% of your portfolio your goal is to protect/preserve your purchasing power.  This can be precious metals, specifically gold, you could hold on to more cash now if you think the market will move and there will be buying opportunities available.  

On your last comment about hoarding gold being silly.  Gold has outperformed the S&P 500 and Dow since 2000.  S&P500 in 12/1999 $1,498.58 to $4,328.87 that's a 2.89x, DOW 12/1999 $10,921.93 to now $33,614.80 that's a 3.08x, Gold was $278.40 in 12/1999 today it is $1,974.90 that is a 7.09x.  I am not saying to be a nut and go crazy but owning some gold protects your purchasing power.

@Mike Franco
It depends if you have a current tenant in the units you are talking about or not. Especially with SFR, but it applies to all rentals, if you have a good tenant that pays on time you do want to increase their rent, but I would not go all the way to market rent. It will cost more than you think to get a new tenant. It will take time to clean up the unit, getting it rent ready, showing the unit, signing a new tenant that may or may not be better. For example, let's say the rent is $1,000 if the market rent is $1,100 maybe I would go $1,050. That way your rents continue to go up, but you keep a quality tenant because it will cost him more to move than to stay where he is. If you do not have a tenant clean the units up and you can try pushing the market rent and if you are not getting any hits, you can adjust the price accordioning.

Just to do quick math to show how expensive it can be to get a new tenant let's say you make $500/mo in cash flow.  The rent is $2,500 and you want to raise it to $3,000.  That first month you do not collect rent, so you lose $2,000 and then it costs $3,000-$5,000 to make the unit rent ready.  If you do not have good systems in place and it takes you a month to get it ready and then another month to rent it out.  Thats $2,000 the first month, $2,000 the second month, and $5000 to make the unit rent ready.  Thats $9,000.  If you make an extra $500/mo it will still take you 18mo to get your money back.  What if the new tenant only stays a year? Then you have to pay to get it rent ready again.  

Just something to think about. 

@Tina Lee
Tina,
A business or even an accounting degree to go over financials for bigger properties.  I also want to stress the fact that if the main goal is to be a real estate investor, she does not need to go to school to do that.  The main goal would be to get a job that directly helps her real estate career or that makes the most money possible, so she has more capital to deploy on real estate.  It also seems like she wants to invest in real estate but not sure what she wants to do.  If that's the case, get a job and go to the local JC.  She can make money working and save a ton of money on school.