All Forum Posts by: Serge S.

Deborah B. I would say the verdict is still out. I'm over 6 months in and even with my negotiated deal I have not been able to offset water expense. The submetering company is not doing very well collecting and the fees for the equipment rental and read fees eat away at the income that actually is coming in. IF had 100% collections the water expense offset would be close to 75% and for me that would be additional income of around $1k per month. Unfortunately the best check received to date has been $100.

In PHX metro I would say that rents are flat while asking prices are increasing very fast. Property tax and insurance have increased making the sourcing of cash flow properties that much harder. There is a lot of inventory for tenants to choose from and tenants are very price sensitive. $25 on asking rent can mean the difference of renting in a week or a month.

What I find most interesting is page 13 ... look at the vacancy rate. They try to explain it away by saying most properties were purchased over the last six months but they started buying in 2009 and have nearly 50% vacant. I'm sure there is very little cash return but cost of capital is low and the appreciation is there. I also disagree that the fragmented market is in need of the good ole corporate touch. I simply don't believe they can manage more efficiently than the experienced local buyer.

J Scott very interesting strategy ... I wonder how difficult it has been for you to source these properties. Are you finding that the hedge funds will not buy rehab properties so you just target those. In my market they buy fixers also if they meet the other criteria. Thus sourcing the same property they are after is difficult as they are buying in all venues. How are your margins on these deals as compared to your flips circa 2010-11? Are you still actively buying FHA flips?

The hedge funds are trying to securitize rental income just like they did mortgages. They are happy buying at 5% cap rates all day and they do know how to calculate expenses. Right now there is no security market for rental income but if a market can be established then watch out ... yields on rentals will get very squeezed. They are betting that this market will in fact materialize and the funds that bought early enough (before this market exists) will be able to either unload at lower "risk free" caps and/or sell back into this new market where inventory is perpetually lean and prices high. Its a risky play and there will be winners and losers but I wouldn't be quick to bet against hedge funds. If a bubble does form and subsequently collapse I would bet that it will be the new investors and homeowners that get hurt and not the hedge funds. They will be long gone by then and creating new markets out the scrap heap that is left.

Here in AZ they are very active and one of the bigger ones (Colony Capital) is based in Scottsdale. The best advice is stated here, buy what they don't and enjoy the price appreciation they are creating. Primary buyers as usual will have the toughest time of it.

Definately a hot market for SFR, land and multifamily. We have an estimated net 60,000 people moving into metro PHX with an estimated 15,000 new homes that will be built in 2013. This is down from 60,000 in 2006 but double the prior year. There is a clear lack or inventory and no shadow inventory in sight. One of the foremost PHX RE experts is calling that there will be a chronic shortage of housing. I have seen swings where a 3/2 in Gilbert sold for $65,000 in 2006 and is listed today for $145k and was off the market in one day w multple offers. Pinal county is lagging a bit. Quite true that the players of 09-11 that bought AND held are reeping the benefits today. One side effect if your entering the market today and starting out- its very hard to cash flow. In 2010 $60k could have bought you $1400 in rent. Today it will by you $700 and you will be outside of Maricopa County. I would not be setting up shop here as a buy and hold investor unless you really knew what you were doing.

Will Barnard How exactly do you source your notes? Local investor deals or do you have a preferred source?

$1700 w a $1k deductible is way too high. I pay $600-$900 on my quads. It makes a big difference on how far away from a hydrant your property is and in AJ there are some that can be a ways away. If you have multiple properties try a broker to shop your properties like Brown and Brown. Foremost is also fairly competitive.

In my market today, $5k in net income would require approx $8-9k gross rents assuming you self manage. You could find C class SFRs at an average buy in of $50k that command an average of $800 rents. Mind you it wouldn't be easy in metro PHX, you would have to compete and know how to buy. This is cash on cash so 10 of these houses using $800k in capital will buy you your $5k monthly, really not the greatest return. If I'm sitting on $800k I'm not sure I would deploy it today on 10 C class SFRs for that return.

Alternatively my 32 unit MF grosses $10k and nets around $5k. Today its probably worth the same $800k. Back in 2009-2011 you could have found ways to get those same 8 houses for $400k rather than today's $800k. That 32 unit that is performing today and worth $800k could have been had for $200k. Timing matters.

Joel Owens Thanks for chiming in. I definitely understand the benefits of of the large stable NNN play. Unfortunately that's not the investment that works for me right now. I get all the negatives you mention about the small commercial deal and for you as a broker clearly the bigger deals make that much more sense.

But ... playing devils advocate and taking the approach where I am comparing a mom and pop commercial deal as you call it to residential. You say the returns are lower while the work is higher, is this really the case?? Considering commercial property is basically a cap rate function of the lease and that unoccupied space is discounted 20%-40% due to the lease up and capex risk, if the numbers work then I see how it could be a really decent niche.

Say you can buy medical commercial space, 2k sq feet unoccupied distressed with rent rates of $3k net monthly with little necessary build out (not a shell space). At a 10% cap and leased this building should be worth around $300k. If you can buy it for $150k and have the cash reserves to stomach the lease up risk (and capex) then I would see this as a great alternative to a $150k house that rents $1500.

Also I see some upside in capital appreciation. Whereas residential will most like see modest appreciation (my market at least), I see this class of commercial still having a lot of room for upside. I think at the end of the day the comparison of this smaller commercial play to the true NNN larger investment is not a fair comparison. I'm more interested in comparing the smaller commercial purchase to a residential SFR. Definitely different but in this market I think it may make sense and be a niche worth exploring.