If you are buying when unemployment is 4%, you are buying trouble

192 Replies

@Saj Shah Whoa! don't get your panties in a wad.  Yes I was generalizing which means there are exceptions to the rule and you MIGHT be one of those who knows.  My point is and still is that if your investing now in California (especially where most of the residences live, large cities) that is damm near impossible to buy property with 20% down and cash flow positive.  My point is that if you do decide to invest (I call it speculate), you are investing for appreciation meaning in order to make money the market has to move in your direction.  

Hey, I love to visit California, nice beaches, generally good weather, but the high cost of living and liberal ideals are enough to keep me at bay.  Here in Austin, the hair dryer feel only last about 3 months, but hey thats what we have air conditioning and lakes for.  

Is it the crime rate in Oakland you enjoy  so much better than our warm summers?

http://www.areaconnect.com/crime/compare.htm?c1=Oa...

Have a good day.

@Joe Scaparra your words verbatim: "are you looking for appreciation.....go to California and become a speculator. Looking for cash flow come to Texas and become an investor. People in California who owned investment real estate before 2008 lost their shorts."

When you call all of speculators, expect some backlash. 

I am investing now, in large Bay Area cities, and yes I am cash flowing very nicely. I am not investing for appreciation, but it's nice that I can definitely expect it over the long haul. Prices could tank and I would be fine. 

The crime isn't bad here. Like all big cities, there are good pockets and bad pockets. 

You saying that anyone who buys now in California will not cash flow and that we are all speculators is like me calling you a redneck conservative just because of where you live. 

@Saj Shah Hey I like your spunk!  Unless we want to write a book here we are just throwing out ideas. Again if you can prove me wrong do it.  Most on here are not buying large apartment buildings.  I am talking to the mom and pops out there who are either thinking of investing or have a small portfolio of five properties or less.  My friend, this covers about 90% of us here.  Show me a small residential property in Oakland, in LA, in SF that I can purchase at 1% or better and you will prove your point.  I call it speculating when you are investing significant amounts of money on illiquid property that will only provide a profit in an up market from which you can't quickly exit with a profit.  

In Texas I can buy a duplex for $150k rent it for ten years and sell it for $100k and still make a decent profit.  I don't need the market to move up to make money.  That example is not a likely outcome as property in Texas over the last 10 years has significantly gone up and remained stabled during the 2008-2009 downturn.  

Oh, one last thing your comment "The crime isn't bad here.  Like all big cities, there are good pockets and bad pockets."  Sugar coating won't fly here it only weakens your credibility.  Peace out!

@Saj Shah

I don't like people generalizing California as cities like Fresno is way different from cities like San Francisco. I could see some cash flow positive properties but not a whole lot. I'm curious what are the large cities that you are currently investing in that is cash flow positive? when did you purchase these properties? Care to share? 

Yeah, unemployment percentages are by design misleading.  Been out of work for more than six months?  You're no longer counted as unemployed.  Are you a world renowned neuro-surgeon flipping burgers?  Guess what, you're "fully employed" when in reality you're "under employed."

Went through economics 101 back in the 90s, haven't trusted unemployment or GDP numbers since.

All this talk of increasing population ... I want that, but I REALLY want increasing population AND a structural inability to build more housing.

Give me an MSA where people want to live, but where authorities can't, won't, or insist on making it difficult to build and I'll show you potential for sustained high returns.  And, I couldn't care less what state that's in.

I disagree. When unemployment is higher, there are fewer buyers. Fewer buyers equals more anxious sellers which equates to better buys. It also gives you more opportunities for owner financing. I don't think you want to wait for great economic times when prices are rising. I also don't care what national trends are. I care about where I am focused. if you are going to stay in this game long term, you must adapt to all markets.

Originally posted by @David Song :

Joe Scaparra

Actually, speculation is fun, especially if you became multimillionaires by speculation.

Why not?

My guess is the biggest speculators who have made the most money in real estate have been the folks who owned a bunch of land in the Permian. 

I suspect going forward over the next decade we will see Texas continue to thrive as California increasingly beats up on those evil rich people.

@Matt R. , @Bart H. , @Nate Reed , @Amit M. , @Joe Scaparra , @Saj Shah , I've been so impressed so far that BP has been able to avoid most of the political junk given that real estate is the background of our president. This back and forth between Texas and California somehow seems like a microcosm of what I would have expected to see more of. Can't we all just shake hands, and both our states can secede from the union?? (I know it's come up in both places!). Heck, maybe we can form our own country and get something done by balancing each other out. Opposites attract they say!

I'm sure there are plenty of people who have lost they're shorts in Texas, just as they have lost their shorts in California. And there are also mom and pops who've made plenty of money in places like the Bay Area, especially over the last 7-8 years, just as I'm sure there are speculators in Texas who made plenty of money in areas like San Antonio. For all the talk about investment fundamentals (which are important), there's still an element of luck and timing that people don't talk about all that much. I'd also like to suggest that Texas and California are in different points of their market cycles, so doing a direct present-day comparison may not apply. 

Let's hug it out everyone! (Or at least stick to the topic)

great thread - RE investors tend to be optimists maybe even more than other investors - it is probably more useful to look at local underheated markets rather than overheated ones like SF and NYC the ROI of a lot of places in NY are maybe 4% or less - only with tax planning do they make any sense - unless you are looking for a return of your money not a return on your money - other places have both. but you need a manager who is there and you can trust. RE is treated as a preferred investment in most of the US - very good breaks on it.

I understand why people jumpy about unemployment being low and the economy being good. But on a psychological level it kinda rubs me wrong how a good market in and of itself is seen as a reason for a crash. I'm not making a case from any amount of evidance or saying we shouldn't always be on guard for a crash. I'm just stating that we should be glass half full in regards to our economy, expect, and be excited when good things happen instead of accepting the norm as a bad economy. Glass is still half full. Maybe more
Originally posted by @David Song :

Joe Scaparra

Actually, speculation is fun, especially if you became multimillionaires by speculation.

Why not?

I agree, it can be fun, but I would rather bet on sure things now.

I made lots of money in gold and silver from 2001 - 2012. I also lost money on all kinds of stocks, including penny stocks, more than one of which turned out to be a scam.

Real estate has made me more money than any speculation ever has. I've never lost money on any property, investment or residence.

@Joe Scaparra Austin is a "blue" city in the middle of a "red" state.  I travel there 1 once a quarter in my W2 to meet Freescale Semiconductor who is now NXP for the past 15 years.  Bass concert hall is really beautiful and a great place to catch a show.  I also have a small factory up in Allen.  We were originally in Richardson 10 years ago and I moved it Plano and then to Allen 2 years ago.  I like to pretend I know something about the real estate market in Texas, California and the tech industry.

I will take your challenge just because I am tired of people saying that there are no deals in CA and you can't cash flow:

MLS40717720 

1707 28th Ave, Oakland Ca

6 plex all 1+1 units.

Almost 1/4 acre 10 min walk to BART (Bay Area Rapid Transit)

Rents at time of sale $5559/month

Originally asking price $749,000

Purchase price including fees $678,000

BP .08% deal at time of purchase

Closed Feb 2016

Only cap ex/upgrade since purchase was a water heater replacement.

Currently doing a refi with First Republic Bank: value of building $1.2M with a LTV of 60% will get $720,000.  Just to be clear, we will be zero into the building with an extra $42,000 in our pocket after closing and we will still be cash flow positive.

Oh, and this is not a 1 off, I have more personal examples.

I don't do this full time. I aim for 1 deal/transaction per year. This was NOT an "off market deal.  I found it on Redfin.

Anybody still think there are no deals here for the "mom and pop" investor?  Would anybody sit on the sidelines with this deal?  Inquiring minds want to know...


@Nate Reed

Speculation is the essence of REI. In 2009, anyone buying properties are speculating the price will not drop further significantly. Today, anyone buying are speculating prices will not tank tomorrow.

REI is partly speculation, partly controlled risk. Nobody is sure what will happen tomorrow.

People buying turnkey are speculating that the cash flow will continue, and no major cap ex are coming. 

Cash flow is speculation, that tenant will not trash the place, etc.

Risk taking is at the core of any investment, whereas speculation, or educated guesses, are guiding the risk taking.

Who is not a speculator?

@David Song There is risk in any investment or speculation, but to me there is a spectrum with speculation on one end, investments in the middle and "risk-free" assets (cash) on the other end.

At least with some real estate, if the value goes down but it was purchased correctly, it is likely to continue to generate cash flow for the investor.

Most speculations are usually not very good investments. In other words, they don't generate any cash flow (gold) or the underlying businesses are so crummy they are probably losing money (like mining). The *only* reason to own them is because your hypothesis that they will go up in value. 

I consider highly leveraged coastal real estate with negative cash flow to be more on the "speculation" side of the continuum.

Updated about 2 years ago

I would like to add that I don't think all coastal property is cash-flow negative, but that seems to be a common theme for Californians trying to invest out of state.

@David Song I'd rather become a multi-millionaire by investing instead of speculating.  Now at a cocktail party my investment stories would be boring to your speculation deals no doubt.  It's sometimes like stocks, everyone wants to talk about their winners but not their losers.   I on the other hand have 17 doors and have yet to sell one.  Nothing too exciting about that, but my portfolio I assure you was not built on timing or luck.  

Your quote "Speculation is the essence of REI. In 2009, anyone buying properties are speculating the price will not drop further significantly. Today, anyone buying are speculating prices will not tank tomorrow.REI is partly speculation, partly controlled risk. Nobody is sure what will happen tomorrow. People buying turnkey are speculating that the cash flow will continue, and no major cap ex are coming. Cash flow is speculation, that tenant will not trash the place, etc. Risk taking is at the core of any investment, whereas speculation, or educated guesses, are guiding the risk taking. Who is not a speculator?"

For one I am not a speculator.  I'm guessing you invest for appreciation otherwise you would realize cashflow at properties with rents below $1200 or so is a slam dunk, especially in Texas.   We all know of people who bought a property and either were forced to take a loss or foreclosure due to loss of job or economic downturn etc.  But that is not the risk of a positive flowing investment property.  Ask yourself, "When in my entire life have i ever heard rents dropping in half from one year to the next.  Rents don't drop in half unless you live in Detroit.  I'm not talking about rents starting at 4k and dropping to 2k, I can see that, I'm talking about rents dropping from $1200 to $600.  UNTIL THAT HAPPENS, CASHFLOWING PROPERTY in Texas is what investors do, not speculators.  

Your comment about tenants trashing the place is valid.  However, there again an investor calculates that in as well.  I bullet proof my property as much as possible.  1st off, I'm renting 1000sq ft units, not much to damage, 2nd, my flooring is very durable, either vinyl, laminate  or ceramic tile, 3rd I have their deposit to help offset damages.  

Here is the deal in a nutshell.  In Texas, I buy the property 20 cents on the dollar.  How, I put 20% down, get a loan and NEVER use another dollar of my money on the property.  The profit the first year is held back for maintenance reserve, the years 2-12 the profit is either used to pay down the loan for which I then own the property out right or I use the profits to buy additional properties.  

We live in a country with about 320 million people.  Our population growth rate is 1%, that is 3.2 million new people EACH YEAR in America.  This means the country is growing over 3 Austin's a year or 41 Redwood City's a year.  Texas is the fastest growing state, so we are getting more than our fair share of new people, couple that with properties that are still reasonably priced (except Austin), with exceptionally low interest rates, and lastly a culture where duplexes communities thrive and are plentiful to invest in.  So the small fry doesn't have to buy that apartment building to get started in real estate a duplex in Texas will do just fine for the speculator....no I mean investor.    


@Arlen Chou, I'm not a big fan of your deal if you look at it at time of purchase.  Since you are using this as an example of cash flow positive then we must analysis it from a cash flow position at time of purchase. I personally start with the 1% rule, this property doesn't do that, if it did the rents would bring in $6780 per month.  However, your value as an investor is the ability to recognize below market property values or rents.  Your expertise may have helped you in this purchase...good for you.   However, if the true market value at time of purchase was $678,000 and the one year hold appreciated to 1.2 million, is it then possible that the the market could have move in the opposite direction and if so where would your cashflow be.  I'm guessing that before refi you were in a negative cash flow situation, but not entirely sure.  

Now we know 20/20 hindsight is always perfect and looking in the rearview mirror yes indeed it appears you have a very nice purchase.  However, you must still be somewhat cautious as if you were not cash flow positive with the initial buy at $678k are your now cash flow positive at $720k.  I know you took cash out, great but if a downturn happens and you get into financial difficulty could this property become a liability?  If indeed the property is worth 1.2 mil then at 1% the property would need to bring in 12k a year to meet the 1% so I guess this property for the next buyer would certainly not be a good cashflow property eh.

Updated about 2 years ago

I meant to say that if the property is indeed worth 1.2 million and cash flow is the goal then you would want 12k a month not a year for rent

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From Joe, “The new buyer need $1.2k rent to buy $1.2 million property.  “

One question always in my head.

People always talk about buying apartment buildings (5+ units) is good because of the forced appreciation.

Forced appreciation usually happens when investors buy a distressed property, fix and upgrades the properties, then raise the tenant rent to top dollars, so the cap rate is good, to have the effect of forced appreciation.

But then an upgraded top dollars rent apartment buildings is not a good buy for the next buyer because there is no forced appreciation anymore.

Building is upgraded already. Rent is in top dollars already. There is no way to have another forced appreciation for the next buyer.

Why would I buy an upgraded top dollars rent apartment buildings if I cannot sell it at a higher price to the next next buyer? 

@Account Closed , People buy for different reasons. Maybe you wouldn't buy at top dollar, but there are other people who would. It might be because they don't want to deal with a run down building so they're hoping for turn key, or it may be they're just looking to park their money somewhere. Or they may also be bad investors!

If you're on BP it likely sounds like a stupid idea, but many of the people here are more hardcore investors who want to juice as much as possible out of the deal. If real estate is not your main gig, then you may have great income from your W2, where you'd love to take some tax write offs while the tenants help pay off the building over time. 

@Mary L  You are correct and therefore the goal of the buy is appreciation.  I've got no problem with that, in fact I do that a lot even with my duplexes.  However, even when I buy my duplexes they are cash flow positive day one and that is because cash flow is my primary objective.  I think investing for appreciation is fine and if your in California then it usually is your primary objective.    

I have bought distressed duplexes here in Texas that I could have not done an thing to them and sold them for 90% more than I bought it for but I decide to put a little equity in them and significantly raise the rents.  But nonetheless if I were to rent them out without any upgrades they still cash flow positive.  I am totally focused on CASH FLOW.  I will keep these properties until either i or my spouse dies, at which time the properties can be sold tax free!!!!  I like that and I like the cash flow.

Account Closed, I'll also add that while there's a bunch of debate here about the speculative nature of buying for appreciation, there are many folks in the Bay Area who believe in the value of longterm appreciation due to local circumstances. So, that's another reason someone might not mind sitting on a negative cash-flow property out here.

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