Hey Guys & Gals, especially the folks that have been around for a few cycles of the RE market!
In the big scheme of things, I'm fairly new to investing. I've only been around post-crash and am blessed with a market filled with great cash flow opportunities in the residential (1-4 units) arena. As prices and rates start creeping upward, I can't help but wonder how this will effect my strategy down the road.
During the times when prices/rates are higher (which was the case before[boom], and inevitably will be again) and rents don't follow, what is a buy & hold cash flow investor to do?
Do people generally stop adding to their portfolio during these times?
Do they just keep the same criteria and have to scour/mine for deals harder?
Do they change their investment strategies all together?
I'm sure there are tons of views on this and I'd love to hear them!
I'd really appreciate the chance to learn from the experience and insight of those who came before me so I can better plan for my future. Please share your thoughts!
Thanks in advance :)
@Mehran Kamari
I think wise investor do all three of the things you suggested. While buy and hold may be your personal preference (it is also mine) knowing about other investment vehicles will let you ride you cycles where it's not plentiful in the buy and hold arena.
I think you could do several things with the cash:
- pay down your current mortgages faster and save on interest payments you didn't spend.
- fix up current properties to obtain higher rent (ROI on a $10,000 kitchen would be in direct rent increase?)
- Put some cash in with a hard money lender and get a nice return?
- Invest with someone reputable who does flipping?
I will always be looking for deals in my market, even if I don't have the money. If nothing else you'll notice when prices go up or down and it will help you keep your pulse on your area.
If you still have cash leftover and you're looking at other investment vehicles the old mantra of "zig when everyone else zags" comes into play. You should always be thinking of changing your investment strategy since the market changing is the only constant in investing.
What investment gets cheap when mortgage rates and home values are higher?
-Frank-
Mehran Kamari,
This is a personal decision for you to make. You must decide your own comfort level for risk vs. reward.
Personally, I stopped buying and developing real estate in 2003. I forecast even greater risk now than what I predicted in 2003.
I would only consider investing or developing in the present market under certain terms that provide me with great financial safety.
My first big real estate project was a large townhome development in Breckinridge during the high inflation and very high 21 percent interest days of the President Carter days of the late 1970s. I was in my 20s. I was young, knew all there was to know ... I thought, and followed selected advice that supported my beliefs.
At the time, I did not understand why my father kept telling me I was making a mistake. What did he know??? I had all this formal education in my history, loads of experience watching my father and grandfather ... so I was invincible and absolutely correct.
Months later, and thousands of dollars later, I went bust.
How about that, the old man with many years of experience and wisdom formed from experience was correct all along.
Needless to say, today if my father has a suggestion, I pay close attention to what he has to say. I also do my best to understand what help develop his opinion. You can bet it was from lessons learned.
My experiences over the years has molded my opinions. What I or others may offer are also only opinions for your consideration.
Yet, Mehran, you must find your own comfort level. This is your path and your career. The rewards will be because of you.
Best of luck.
Thanks for posting Mehran Kamari, being new to investing myself, I am very interested in this thread. I'm doing a bit of both but my thought process is to take advantage of appreciating prices, especially in Orange County by rehabbing and selling. Then when the market levels off or dips, concentrate on buy and holds.
Obviously this is a very general outline because I'm always scouring for properties.
Tom Goans Thanks for the quick response and for sharing your story. In the spirit of understanding what's developing your opinion on there being greater risk today, mind delving into some of the drivers you're seeing that make you feel this way?
Jimmy Hong I'm doing buy, fix & hold out of state. My thing is passive cash flow and I can see how if prices/rates continue to rise, the cash flow on my deals will become thinner. I've got to scoop up as many as I can right now!
Tom Goans - I sincerely enjoy your posts. Learning from you.
Mehran - Thank you for posting this - was minutes away from posting something very similar. I'm a buy/hold investor and during the last bubble, I sat out with the exception of selling off a rehab property (and stashed my cash). But, here's another bubble that's come way too fast (which makes me a bit skeptical, but...whatever). Time to learn new skills.
If the numbers don't make sense they don't make sense. I was buying like crazy in 2010 and 2011 when I could get 1-1.2% of purchase price in monthly rent. Now I could get .5-.6% in rent for those same homes. Consequently I haven't bought a buy and hold for about a year now.
I was able to complete 3 flips in the past year but even those opportunities are drying up.
@Mehran Kamari
I think wise investor do all three of the things you suggested. While buy and hold may be your personal preference (it is also mine) knowing about other investment vehicles will let you ride you cycles where it's not plentiful in the buy and hold arena.
I think you could do several things with the cash:
- pay down your current mortgages faster and save on interest payments you didn't spend.
- fix up current properties to obtain higher rent (ROI on a $10,000 kitchen would be in direct rent increase?)
- Put some cash in with a hard money lender and get a nice return?
- Invest with someone reputable who does flipping?
I will always be looking for deals in my market, even if I don't have the money. If nothing else you'll notice when prices go up or down and it will help you keep your pulse on your area.
If you still have cash leftover and you're looking at other investment vehicles the old mantra of "zig when everyone else zags" comes into play. You should always be thinking of changing your investment strategy since the market changing is the only constant in investing.
What investment gets cheap when mortgage rates and home values are higher?
-Frank-
Great post. Looking forward to responses. I personally just went the lending route with a chunk of my cash. I couldn't find deals that I thought made sense in my main market so instead of overpaying I did a short term loan to a reputable rehabber. Even this reputable rehabber is only making about 10% profit or less on his deals. They're just doing 5-7 deals a month instead of 2-3.
There are still markets that cash flow, granted not as greatly as 4 years ago. Are you mainly investing in 1 market? Have you looked into other (less glamorous) markets?
Stephanie Dupuis I've had this on my mind for a while now and am glad I made the post! Right now, I'm being real picky about the cash flow of the properties I'm acquiring so that I can weather the storm even if another bubble comes. With good financing, if it's generating income, it wouldn't really matter if a property is underwater for the time being. Let's just hope employment doesn't take a hit and we don't lose tenants like people did in the crash! I'm hoping I'll be in a position to scoop up more properties if/when things go on sale again!
Albert Hasson Thanks for sharing that, it seems that flipping is a good option to build a big capital stack while prices are rising. Then when the sale comes, it's hungry hippo time! I think it would be smart to follow Brandon Turner's advice and not take on a flip project that I can't turn into a cash-flowing rental if things don't work out as planned.
Frank O. I agree, it's smart to be aware of the different strategies so I can switch it up if the market calls for that. I guess we have to take what the market gives us. I like the idea of using the cash for lending in a high priced environment. Awesome.
Curtis N. Thanks for sharing, I like that. Frank mentioned it as an option above and it's great to see that you're actually doing that already. What do you think about trying to JV partner with the rehabber on some deals instead of just lending?
I'm mainly investing in 1 or 2 markets right now. I'm sure as things dry up that I'll be able to find some untapped spots that haven't recovered all the way yet. Especially with the strong presence we have here on BP in many different markets.
I haven't bought any buy-and-hold investments in 5 years now. I stopped buying before the peak and have been focusing on purchasing land to develop recently in and around downtown Austin. Once all of this in monetized and we hit some target leverage metrics in our overall portfolio I will start buying more long-term assets again. I'm hoping to hit this mark early next year.
There is always opportunity out there. You just have to move the money around to where the risk-adjusted returns make the most sense.
Mehran Kamari - I would love to do a JV with them as it would probably be more lucrative for me but unfortunately his numbers are so tight I can't do much better. The good thing is that he is very reliable and prices his houses very aggressively so they usually sell within 1-3 days. Then I get my return and we will do another deal which generates another origination fee (point). Working with him also gives me the opportunity to learn from him, although I haven't had much time to do that yet.
In my position - What terms would you go for on a JV with a guy like this?
Hard to find "untapped" markets these days but there are quite a few that have unique economies that make for less appreciation which tends to mean they have less of a bubble. If appreciation is a large part of your buy and hold strategy, however, these markets may not be the best option.
Mehran,
To provide some explanation to my opinion of the current bubble and the possibility of a major market correction in just a couple of years, I take in a number of considerations that include world issues, US issues, and if considering an investment, local issues.
World
-- Even the largest U.S. lender has been experiencing a winding down of its economy for the past several years. From what I have read several times, they have reduced and even stopped buying U.S. debt.
-- The world economy continues to struggle and face huge debt. The media is paying less attention to this issue, but it still exists. Much of the U.S. economy relies on selling to the rest of world. If a company in your community is struggling to make sales in foreign markets, this affects employment, pay salaries, and has an even broader affect outside the company - even the server at a restaurant will make less because the company employees eat out less.
U.S.
-- Did you notice the price of pizza from the major chains up to 2006? Around $16.00 for a large. During the “Great Recession”, most chains dropped the price to around $10. Last year, most of the chains tested the $12 level. A couple of months ago, the largest chain once again reduced its price back to $10.
This could be a barometer of the middle-class economy.
-- I follow Walmart - its sales and promotions. While Walmart is raising some prices, especially food, it continues to lower other prices.
Walmart is also a barometer of the middle-class economy. However, it is also a reflection of the upper middle-class. Have you noticed the type and age of the autos in the Walmart parking lot? Among them are Benz’s, SUVs, and many newer autos. I shop at Walmart. While in line, I will make comments to observe reactions. Most are very negative towards all segments of the economy and the country leadership.
-- There are two prominent competitors in the sales of men’s business suits. For years, one advertises new major discounts every week in order to drive sales. The other did not and stayed with the long-standing business plan. A month or so ago, the founder and company leader of the stay-the-course company was immediately fired and replaced. Now, this company too is advertising discounts to help drive sales. In 2006 and prior years, when the economy was considered strong and personal attitudes were to spend, these companies did not continuously promote discounts. Sales were good and they did discounting prices was not necessary. Even now in what some consider a good or growing economy, the sales of men’s suits and business clothes struggles.
-- A US government report released in April 2013 stated the actual number of people working in the US workforce is at 1992 levels. Very alarming to me.
-- Personal buying power in the US continues to decline and has not kept up with the inflation of life’s essentials, such as food, transportation, taxes, and insurance.
-- Consumer debt is on the rise once again. Attitudes towards debt is returning to that seen in 2006.
-- Government furloughs. Even state and local governments are having weekly furloughs. This will be an influence on the economy.
-- The number of people depending upon government assistance.
-- The number of people needing local charity assistance.
Real Estate
-- The real estate market is flooded with “investors” trying to squeak out a tiny profit and get rich quick.
-- The real estate market is once again over leveraged - in my opinion.
-- Prices are greatly inflated from the huge flood of “investors” competing to make it rich.
-- The same euphoric attitude as seen in the early 2000s is once again appearing among “investors”.
-- There is a huge amount of uneducated and unskilled people influencing the real estate market.
-- The affect of rising interest rates, and the possibility interest rates could go above 10 percent, is being over discounted and ignored.
The list goes on. All of the above is not a scientific accounting, just a personal observation.
Nevertheless, for these reasons and more, I feel the real estate market is in a big bubble and the market will soon experience a huge correction. Once again, many “investors” will be quickly forced out of the business, foreclosures will become a major problem, and financial institutions riding the wave will once again need taxpayer’s assistance to survive.
This is just my opinion. It is not necessarily correct. Just my viewpoint. I have seen many economic ups and downs in my lifetime. Alarming to me is the swings are becoming larger and occurring more frequently. Also alarming is the growing number of people who ignore issues.
Sorry this was so long.
Bryan Hancock
I like the way you put it! You're operating on a whole other level, and that's awesome. I saw your web page in the marketplace and the project looks great. I wish you the best with it.Curtis N. Make the time to get around him and learn while you can. That's a great opportunity. As far as terms go, Maybe 50% of the profits. You would take on more risk, but he seems to be efficient at selling these properties.
The benefit to him would be, he wouldn't have to worry about holding costs. I can imagine the holding costs of having 7-10 different flips going on at a time can be very stressful, even if he is making profit. He may be able to trade less for some of his profits.
Tom Goans
Very interesting observations, these barometers give a good pulse on what's going on around the world and I'm glad you took the time to go into detail here. There is certainly no need for an apology!
I need to do some more research on the main job providers in my current target market, Milwaukee, to see how "susceptible" the area is to some of the things you mentioned above.
Real Estate:
Do you feel smaller markets with low appreciation/high cash flow will be hit hard as well?
I need to do some more research on the main job providers in my current target market, Milwaukee, to see how "susceptible" the area is to some of the things you mentioned above.
Real Estate:
Do you feel smaller markets with low appreciation/high cash flow will be hit hard as well?
Mehran,
In Colorado, Friday has now become known as Furlough Friday. This is because so many government agencies furlough government employees on Friday, not just the Department of Defense. This receives little media attention, but it is a reality. This same procedure could be affecting the communities where you invest.
In my opinion, the coming real estate market correction I am forecasting will follow similar paths as the period from 2007 to 2010. The entire real estate market will suffer with the most pressure on highly leveraged borrowers and properties. As during the 2007-2010 period, many real estate markets will most likely experience a decline greater than 20 percent.
Have you noticed how many "investors" today are once again willing to walk away from real estate debt? This is a growing expressed attitude.
Tom Goans
I've heard the argument that homeowners/investors with more equity in their properties become targets for foreclosures if they start getting behind on their payments. The bank will be after the equity and is less willing to work with the person on ways to keep them in the property.
Seems like backwards thinking to me since less leverage = stronger cash flow and a less of a chance of getting behind on the payments to begin with. But then you aren't maximizing the power leverage LOL! Your thoughts?
What do you think is a safe cushion of equity to have in a property you're holding, in this volatile market??
I've heard the argument that homeowners/investors with more equity in their properties become targets for foreclosures if they start getting behind on their payments. The bank will be after the equity and is less willing to work with the person on ways to keep them in the property.
Seems like backwards thinking to me since less leverage = stronger cash flow and a less of a chance of getting behind on the payments to begin with. But then you aren't maximizing the power leverage LOL! Your thoughts?
What do you think is a safe cushion of equity to have in a property you're holding, in this volatile market??
Mehran,
Property Equity
Logic suggests to me the lenders would have a higher interest in foreclosing on properties with a higher equity position for two reasons: 1) the impression the borrower would be more motivated to obtain new financing and payoff the present lender, thus, saving the present lender time and money; and 2) a property with more presumed equity would be easier to dispose of should it become an REO.
If this is what lenders are doing, I do not know.
One thing I do with my borrowers and recommend to people who are offering seller financing, if the possibility exists, it is a much better business decision to renegotiate the loan than the long and costly process of foreclosure. I DO NOT WANT THE PROPERTY BACK. I have postponed payments for up to 4 months. Working with payers usually turns them into the best payers in the portfolio.
A safe cushion equity position? This is really a personal comfort level decision that requires contemplating many variables and options. Just the definition of equity is debatable. Properties now are considered to be financially “upside down”. Everyone of the upside down properties has an appraisal in the file folder from a professional claiming it is worth more. With this in mind, is the presumed equity position in any property a reality or a reality 1 year from now?
On the other hand, debt is clearly defined. It is my personal belief that less debt is more desirable. It offers greater flexibility, more competiveness, and less stress.
For an example outside of business concerns:
You have a family tragedy that requires funds. You need to raise money quickly. You have a property with an estimated market value of $100,000 and a loan balance of $25,000. You should be able to quickly sell the property for a discounted price to get the money you need today.
This is just my opinion and my business approach. It is not necessarily correct, the only way to do business, or the best business approach for everyone. Everyone investor must find their own personal comfort level and the methods that work best for themselves and their future plans.
Mehran Kamari, please explain in more detail this comment
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
" I need to do some more research on the main job providers in my current target market, Milwaukee, to see how "susceptible" the area is to some of the things you mentioned above. "
Not to step on toes, but I know you and Dawn have a partnership
Jenkins Ramon
Since I'm focused heavily in Milwaukee, I'd like to know everything I can about the things that affect the main market drivers there.
Example: Jobs are important because they are linked to net population growth/decrease and the general health of the local economy. I want to know who the major employers are in the area. I'd like to know more about the future of the industries those companies deal in. How they're doing will have a direct effect on the future real estate market and, in turn, how decisions will made down the road regarding my/our portfolio.
I'd like to have my pulse on the market drivers so to say... And yes Dawn and I have a partnership, I don't really know what you meant by your comment.
Racine, a city south of Milwaukee, has a similar culture to Milwaukee and a very strong company called SC Johnson there. If SC Johnson were to ever leave Racine, the city would be devastated. As such, that one company owns a lot of real estate and has a lot of pull in the city. However, if that did happen, I'm sure that people from Racine would flock to Milwaukee or go elsewhere.
Milwaukee has quite a number of companies there. Among the largest employers:
AT&T
Aurora (health care)
BMO Harris
Columbia St. Mary's (health care)
Froedtert Health
GE Healthcare
Harley-Davidson
Kohl's Department Stores
Northwestern Mutual (insurance)
Potawatomi Casino
Roundy's (supermarkets)
WE Energies (utilities)
People always need health care, they're going to need supermarkets, and utilities.
The main problem I see in Milwaukee is the school system. I'm not sure why people (certain politicians especially) think that having an un-educated lower class population (and keeping them there) is a good idea.
Dawn, I totally agree
Biggest pulse in city right now is housing requirements
GMAR sending local agents weekly update
Email Example :
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
“ Update on Residency in Milwaukee
Last week the GMAR reported that the issue of residency among
City of Milwaukee employees seems to be in limbo, however, on
Thursday MPS sent its employees a letter letting them know that
they will not face disciplinary action if they move outside of the city.
Regarding police, fire and employees in the City of Milwaukee, on
July 10th the Milwaukee Police Association filed suit against
the city asking a judge to issue a
temporary restraining order that would
force the city to allow the provisions of the governor’s budget that
eliminates residency as a condition
of employment with the city. “
It is actually better if the requirement IS in place -- having the police live in the city they protect is advantageous.
Albert Hasson Help me understand this. How is it that the value of your rent is half what it used to be? Did you lower rent?