Is it just me?
I look at most multi-family deals I come across - and most are in California - but all the same ...
Why do "investors" pay 2x or more for buildings?
Small town - 14k pop - 7 unit; sellers paid $499k; for sale for $299k; 2-0/1 @$425/mo, 2-1/1 @ $450 and 3-2/1 @ $525; 50% expenses, 1 unit vacant needing rehab before renting - worth by my estimation about $200k at tops using seller's numbers and rehab estimates.
Same town - new development on riverfront (remote area on the Sacramento River) put $5.525M into 12 units (all 3/2) short sale for $5.5m hard money @ 12%. Nice unit config but worth around $675k by seller's numbers if generous with cap rate
My town: 11 units @~$595k as a short sale; 4-1/1, 7-2/1; 3 section 8 tenants paying the highest rents so some upside in rents; paying both resident manager and management company (upside if get rid of resident manager); paid $600k; short sale for loan balance plus arrearages totaling ~$595k; now in foreclosure and still wants full asking. I put value around $390k by seller's numbers
My town: 190 units in best school district asking $9.5m, 21% vacancy, worth ~ $4.5m at 6% cap rate. Upside if vacancy filled. ($9.5m was a drop from original $12.5m)
My town: 29 units @ $1.63m all 1/1 at market rents; no remodeling since built in early 60s so not a lot of appeal to tenants. In best school district, but not big enough for families.
Nearby town: 32 units, paid $1.250m in 2007; asking $3.5m - decent mix; most rents at or close to market; only vacancy is resident manager's unit; good condition; etc. 5.96% cap rate but no foreseeable upside
With my investors wanting 9-12% COCR, I'm not finding anything worth buying. Half of the ones I find have negative cash flow to boot.
RE friends have said it was San Francisco Bay Area people applying San Francisco numbers to their investment, so they accept negative cash flow, and paying too much. I can do better with 8% dividend paying pipeline companies.
So, am I crazy?
I know, I know - look elsewhere.
The problem is you live in the perfect storm of investment hell known as California with low interest rates. Lots of people made $ millions in a 4 decade real estate investment paradise. People are used to investing with the assumption that 10% annual appreciation will bail out even the worst decisions. And lots of money made in various frenzies is still sitting around.
With interest rates negligibly low there's no value in waiting for the next boom. It's going to be hard to find what the rest of us think of as good deals there for some time.
Very similar to stock investment situation, a high dividend stock typically has no growth potential, while a growth stock yields no dividend. In the anticipated new high tax environment, investors would prefer higher growth to dividend.
Thank you for your replies.
Do these people blindly "invest" without knowing what they're doing? Multi-family properties do not appreciate - you can force "appreciation" by decreasing vacancy, raising rents or lowering expenses - thus increasing income, but not by a bubble in the market.
If it was rare for people to blindly throw money at an "investment" I might just shake my head - but this seems to be all too common (and what's with the HML???).
I do note that none of these have sold, so I'm not the only person who refused to bite. I guess I can wait and put an offer in at the foreclosure sale or at the estate sale when they have depleted their funds feeding their alligators.
You can go into any area pick the worst listings in the area and ask why would anyone buy these properties. If your not looking at properties that have sold and closed, those asking prices don't mean anything. Even if somebody was crazy enough to make an offer, they'll probably never get financing.
I am from southern Ca. And have left the state in the last 10 years because of the inflated prices and terrible cash flows. Once you start buying at 10-15k per door, it's hard to go back and pay 100k a door and receive a terrible cash flow.
That's crazy in any market. Here in Japan we've been "spoiled" by close to two decades of zero appreciation (although, if you ask the big boys, they seem to speculate on this changing shortly) - we've been trained by circumstance to look for pure cashflow (10-15% pre-tax), with any possible appreciation only the icing on the cake. Any other scenario is pure gambling from my perspective. I prefer poker, to be honest.
I have picked up several duplexes & SF homes at tax lien auctions up here in NY. These were originally purchased (by absentee LLC's) at a relatively high cost & although winterized etc they sat empty for 3-4 years & they let the taxes go into arrears.
The only reason that makes sense is that it was a tax loss strategy. (Canadians are into a slightly similar but very profitable strategy here in the depressed section 8 Buffalo area).
But my buys were certainly NOT @ the inflated valuations you are seeing in CA, in fact we stole them.
However, if you see them starting to move @ the high valuations it maybe a money laundering scenario rather than a tax loss strategy. (insert sarcasm here :).
You should look at DC. Take for example, a 1BR/1BA condo my friend rents in Clarendon/Arlington (suburb of DC). He pays $2,200 a month to rent the unit (he's an idiot).
Sounds great right? Well that 1BR/1BA cost $435,000, has about a 1% property tax, and monthly HOA of $320.
I then got into an argument with my friend the other day because he thought it was a "great investment" and the condo owner is "making so much money off of him." I plugged the numbers into my sheet and the owner is losing thousands of dollars a year to let him live there. No telling what will happen when the artificial job market in DC bottoms out (i.e. inefficient government jobs supported solely by tax payers) and outrageous rents like paying $2,300 for a 650 sq ft 1BR unit are no longer realizable.
That place has a CAP rate at about 3.0%. And this is typical of the "nice" areas of DC. Go to the ghetto/warzones, and you can maybe find CAP rates of 6%. DC real estate is outrageous, I'm really scratching my head as to how REIs in the area make any money.
Originally posted by Will K:
I then got into an argument with my friend the other day because he thought it was a "great investment" and the condo owner is "making so much money off of him."
Will - your story of the conversation with your friend made me laugh, scratch my head, and feel sad, more or less at the same time. Some sort of financial literacy course seriously needs to be taught in high school! Too many people only think to the depth of "spend some money for a condo, get an extra 26k of income", without thinking about how the numbers would work. This is worse than Rent-PITI=cashflow, this is virtually Rent=Cash flow thinking. What amazes me the most is that in order to be able to afford 2200/month, I'd imagine your friend has at least a decent to good job that takes some brainpower. It's wierd how people can be smart in one way, and yet so not smart in others.
The only way I can see for a landlord not to get absolutely slaughtered on such an investment is if they have owned it for many years (decades probably) and bought at a much lower price. And even then, it would make a lot more sense to sell if there is such a disparity between the value of the property and what it rents for.
Happy New Year all,
I'm glad to hear that I'm not alone - when you get a response from a realtor that the price I'm thinking about is not rational enough times, one begins to think it's me that's crazy and not the seller (or their even wackier realtor).
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