Los Angeles Duplex - Trying to Make the Numbers Work

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Los Angeles Duplex - Trying to Make the Numbers Work

Matt Kautz
Landers, CA · Member since 2016 · 9 posts · 4 votes

Just getting started looking at investment properties in the very competitive Los Angeles area and found a duplex today with a highly motivated seller who needs to unload quickly.  It's a great area, units will be delivered vacant, and with some work unit rents can be increased significantly to market rates.  So, in theory it seems like it should be a great opportunity since there's plenty of room for negotiation on purchase price.

 Since this is my first property analyzed, I'm working for the first time with my cost assumptions worksheet, and no matter how much lower I go on price and higher on rent, I just can't make the numbers work.  In all likelihood it's not that great a deal (nobody hits a homer their first time at bat), but I'd love your opinion on my calculations to be sure I'm not over- or under- estimating anything.  

Screenshot below of the cash flow calculations I'm making... left side is what the offering price is, right side is with aggressive assumptions on increased rent/lowered purchase price.  As you can see, even if the purchase price were 17% lower and rents were 45% higher, cash flow is only breakeven. 

Feedback welcomed/appreciated.  Thank you!!!

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Christian Mkpado
Los Angeles, CA · Member since 2016 · 9 posts · 13 votes
10y

@Matt Kautz

Could you give more information on the location of the property such as a street name or zip code? That would help in determining the quality of the deal.

Given my knowledge of Los Angeles and the areas that would command ~$1M for a duplex, your baseline rents seem on the lower end, especially if you are going to put in ~$25K in to each unit. In my opinion this indicates 2 possibilities: 

  1. The purchase price is too high, and this is not a good deal. Could post your spreadsheet of sale comps in the area? This would help in determine if the purchase price the seller is asking is reasonable? Is the property off market or is it listed on the MLS? If this is an off market deal, make sure that you are shaving at least 6% off what you think the property would be worth on the open market as this is what the seller would have to pay a RE agent if they did list. Also, seeing as you said the seller needs to unload quickly make sure you shave off a few more percentage points given you are willing to move quickly.
  2. Your rent comps are too low. Could you please post what you are using as rental comps? Could you also post the Sq. Ft. of the units? Your aggressive rents seem more in line with what I would expect to get for a ~$1M duplex in a nice area of Los Angeles. 

A final parting thought: There are areas in Los Angeles where it is almost impossible to cash flow given the strength of the market and the amount of buyers who are buying purely on appreciation potential and don't care about cash flow. If this is one of those areas, you might consider flipping this deal. That being said, if this is in a great area and if you can get the numbers to break-even, I would much rather hold a break-even piece of RE in a great part of Los Angeles, CA than a cash flowing property somewhere else in the country. In the long run, strong markets (e.g. Los Angeles, San Francisco, New York) have outperformed the greater United States when you account for cash flow and appreciation combined. A word of caution: Do not purchase the property if you will need to dump cash into it every month, this will hamper your ability to scale your investing going forward. If you can answer the few questions that I posed above, I may be able to give additional thoughts. 

Best,

Christian M. 

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  • Account Closed
    Contractor · Los Angeles, CA · Member since 2015 · 887 posts · 323 votes
    10y
    Matt Kautz if the numbers don't add up for you then it's not for you. What about flipping it?
    0Reply
  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    10y

    Convert 2/1 into 2/2 then increase 1400 in rent, if that's possible. I just got a thought from someone last week that, it is not cash flowing at 0% down, it's not really cash flow property. I'm new to cash flow game, just trying to understand it also, so my assumption might not be standard. Plus, a lesson I picked up earlier on BP, don't make the numbers work for the property by adjusting it (like what wholesalers do, higher the comps, then lower the rehab costs), instead, let the real numbers run by itself.

    2Reply
  • Kiersten Vance
    Real Estate Agent · Redlands, CA · Member since 2016 · 253 posts · 115 votes
    10y
    Hi Matt Kautz Where is this property located? Are the rents you are projecting accurate compared other similar properties in the area. If the duplex is in a high demand area, which it looks like it is from the price, typically rents don't cover expenses with just 20% down. Investors in these areas bet on appreciation and that land near the ocean or downtown will keep going up in value. If you have a motivated seller though, you might be able to work something out. Would be happy to look at it close with you if you would like. PM me!
    2Reply
  • Christian Mkpado
    Los Angeles, CA · Member since 2016 · 9 posts · 13 votes
    10y

    @Matt Kautz

    Could you give more information on the location of the property such as a street name or zip code? That would help in determining the quality of the deal.

    Given my knowledge of Los Angeles and the areas that would command ~$1M for a duplex, your baseline rents seem on the lower end, especially if you are going to put in ~$25K in to each unit. In my opinion this indicates 2 possibilities: 

    1. The purchase price is too high, and this is not a good deal. Could post your spreadsheet of sale comps in the area? This would help in determine if the purchase price the seller is asking is reasonable? Is the property off market or is it listed on the MLS? If this is an off market deal, make sure that you are shaving at least 6% off what you think the property would be worth on the open market as this is what the seller would have to pay a RE agent if they did list. Also, seeing as you said the seller needs to unload quickly make sure you shave off a few more percentage points given you are willing to move quickly.
    2. Your rent comps are too low. Could you please post what you are using as rental comps? Could you also post the Sq. Ft. of the units? Your aggressive rents seem more in line with what I would expect to get for a ~$1M duplex in a nice area of Los Angeles. 

    A final parting thought: There are areas in Los Angeles where it is almost impossible to cash flow given the strength of the market and the amount of buyers who are buying purely on appreciation potential and don't care about cash flow. If this is one of those areas, you might consider flipping this deal. That being said, if this is in a great area and if you can get the numbers to break-even, I would much rather hold a break-even piece of RE in a great part of Los Angeles, CA than a cash flowing property somewhere else in the country. In the long run, strong markets (e.g. Los Angeles, San Francisco, New York) have outperformed the greater United States when you account for cash flow and appreciation combined. A word of caution: Do not purchase the property if you will need to dump cash into it every month, this will hamper your ability to scale your investing going forward. If you can answer the few questions that I posed above, I may be able to give additional thoughts. 

    Best,

    Christian M. 

    3Reply
  • Matt Kautz
    OP
    Landers, CA · Member since 2016 · 9 posts · 4 votes
    10y

    Hi @Christian Mkpado, thank you so much for the very detailed response. The zip code is 90039, and this is listed on the MLS. I agree with you the sales price is too high. Looking at sales comps in the area I'd estimate it to be worth closer to $780k. I'm using places like http://www.zillow.com/homedetails/2201-India-St-Lo... and http://www.zillow.com/homedetails/2665-Benedict-St.... 

    That's great feedback about the rent comps being too low, but what I'm posting as aggressive is significantly above where they are now, and I'm not sure how far the $25k per unit will go... They need kitchen/bathroom work which tends to be expensive. But, the neighborhood couldn't be hotter, so let me know if this feels low. Square footage is 1,731/AS sqft 4,796/VN lot size. 

    Thanks!!

    -matt

    0Reply
  • Christian Mkpado
    Los Angeles, CA · Member since 2016 · 9 posts · 13 votes
    10y

    @Matt Kautz

    With that price I was thinking this was an Silver Lake / Echo Park / Atwater Village property. I think you need to get sharper and more confident in your numbers before you pull the trigger. I would suggest doing the following: 

    1) Put together a spreadsheet of at least ~30 on market duplexes in the 90039, 90026, 90027, 90029 area codes. If you can find more than that, even better. Redfin is a good source for data if you do not have access to the MLS, I find Zillow does not usually have info on current rents or expenses. I add the variables below in my spreadsheet:

    Raw Variables:

    • Asking Price
    • Building Square Footage
    • Lot Square Footage
    • Current Rent Roll
    • Expenses

    Calculated Variables:

    • Price / Unit
    • Price / Building Square Footage
    • Price / Lot Square Footage
    • Down Payment Required
    • Cap Rate
    • Gross Rent Margin
    • Principal 
    • Taxes 
    • Insurance 

    After I get all of these in my sheet I look at key variables like Price / Building Square Footage, Cap Rate and Gross Rent Margin. You should be able to see very quickly which properties are a better value. This is a much better method than just eyeballing comps. 

    2) Get sharper on what the market rents are in those zip codes. Go on Craigslist, Zillow, PadMapper, HotPads and WalkScore to see what the market rents are in the property area. You made a comment about how your "aggressive rents are much further above where the rent are now". I would argue that the current rents do not matter at all. The only variable that matters is the current market rent in that area (i.e. the property's potential). Again, make a spreadsheet with variables to compare other rentals to yours. 

    3) Scheduled time to view rentals that are currently on the market in those areas. See the property in person. Take note of the price, unit amenities, finishes, square footage, wakability of the area, etc... This will help you understand your competition and what level of rehab the your units will need to compete. Also, this will give you more confidence in your rent estimates. 

    Note: If this property was built before 1978 there is very good chance it will fall under LA Rent Control. If this is the case you can only raise rents by 3% a year which may kill this deal for you. There is a way around it however... If you decide to move into the building you can kick out one of the tenants for the unit you will be living in, furthermore you can also kick out the other tenant for a family member to live in the other unit (they must occupy the unit for at least 2 years before you rent it on the open market again). You will still need to pay the tenants you are moving out a relocation fee which ranges from $8K - $18K depending on a number of factors (e.g. age, income, children, etc...) although this sounds expensive if the rents are far under market it can actually be very good deal (at a 5% Cap $1K in increased rents is worth an extra $20K in property value). If you use this strategy you could get rents up to market in ~2 years (and pay money towards a mortgage instead of rent). 

    Hope that this helps!

    Best,

    Christian M. 

    3Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Matt Kautz, where did you get the $780k comps from? On that second listing you quoted, an example of the sold comps (ie. will you make money if you pay more?) come up as: 

    1. SOLD: $675,000

      Sold on 4/21/2016

      5 beds, 3.0 baths, 2144 sqft

      2973 W Avenue 33, Los Angeles, CA 90065

    2. SOLD: $680,000

      Sold on 11/6/2015

      6 beds, 2.0 baths, 1772 sqft

      2248 Allesandro St, Los Angeles, CA 90039

    3. SOLD: $680,000

      Sold on 6/27/2016

      3 beds, -- baths, 1408 sqft

      3324 Casitas Ave, Los Angeles, CA 90039

    0Reply
  • David Eiges
    Real Estate Investor · Pasadena, CA · Member since 2015 · 33 posts · 9 votes
    10y

    @Matt Kautz Just my 2 cents, but as far as I understand (from limited experience) and speaking with a RE Agent/Investor in Silverlake, the 2nd property scenario would be looked at as a solid deal relative to the market. Something around 0.6% rent/price (GRM ~14) would be solid, and if you can get a little better than that 0.7% (GRM ~12) that would be a deal in Silverlake right now for MLS.

    Also, I don't think this is kosher for running a business analysis, but I've had to do it somewhat to justify purchasing and investment in LA...You can take into the account the tax advantages of RE ownership and the effect of purchasing on your take-home cash.  For the first couple years, you're going to have about 80% of your mortgage payment as interest and be able to depreciate the properties. 

    Using Scenario 2, assuming Land = $600k, building = $200k, and you have a separate full-time job (like me):

    80% X $3,104 + $200,000/(27.5 years x 12 months) = $3,089/month of tax deduction.  It depends on your individual income situation/tax brackets, but this could mean +$1,500/month of take-home cash at the end of the day.

    The other thing I've learned is that in LA particularly considering the current market, a full-timer RE investor (including buy-and-hold, not just flippers) is much more likely to be doing some Rehab or finding off-market opportunities. That being said, I'm not full-time, so there's a good chance I'll be hunting off the MLS with everyone else to get started.

    2Reply
  • Matt Kautz
    OP
    Landers, CA · Member since 2016 · 9 posts · 4 votes
    10y

    @David Eiges That's a great point, I hadn't factored the tax savings into my calculations at all.  Just so I'm clear, is the $200k you were including in your back-of-the-napkin calc based on the down payment? I didn't realize that was tax deductible.  

    0Reply
  • Matt Kautz
    OP
    Landers, CA · Member since 2016 · 9 posts · 4 votes
    10y

    @Christian Mkpado thank you, these are all great metrics I hadn't considered before. Also, great advice on the rental comps front, I realize I need to do a lot more research.  

    0Reply
  • David Eiges
    Real Estate Investor · Pasadena, CA · Member since 2015 · 33 posts · 9 votes
    10y

    @Matt Kautz Residential Real Estate is depreciated over 27.5 years.  However, you only can depreciate the cost of the buildings ("improvements") and not the land value.  See if you can find your properties on the assessor's page: http://portal.assessor.lacounty.gov/ which will give you an idea of what the value of the Land vs. Improvements is. 

    I picked $200k using the very scientific method of just roughing it...I looked at some example addresses from the Assessor's website to see what the land to improvement ratio typically is.  So, for your example, I assumed that the land at that $800k property is worth $600k and the building is worth $200k.  Totally back-of-the napkin, and I believe these numbers change when you purchase this property and it is re-appraised.

    0Reply
  • David Eiges
    Real Estate Investor · Pasadena, CA · Member since 2015 · 33 posts · 9 votes
    10y

    Also, depreciating is only for the "investment" part of the property.  So, if you're living in half and renting out half, only the rented half is depreciable. 

    0Reply
  • Jay Orlauski
    Realtor · Fresno, CA · Member since 2013 · 471 posts · 225 votes
    10y

    @Matt Kautz Hi Matt- its great that you are seeking out advice from experienced investors before jumping in head first. 

    I have gone over the numbers a few times and I am confused - perhaps somebody here can help clear things up for me. 

    The numbers don't quite add up and I'm not seeing where you are coming up with the $17 / month cash flow. 

    without getting too deep into the numbers - this is what I am seeing ( by the way I'm getting very similar numbers on my own cash flow sheet too) 

    Projected income:  $5230

    Projected Expenses: $1612

    subtract expenses from income, you get $3618

    now back out your mortgage  payment  of $ 3,104

    and you re left with $514 / month - not $17

    that's $6168 / yr cashflow or about 2.6% cap rate

    what am i missing here?  

    thanks in advance

    0Reply
  • David Eiges
    Real Estate Investor · Pasadena, CA · Member since 2015 · 33 posts · 9 votes
    10y

    It's $5,320, not $5,230.  He used the more conservative expense estimate of $2,199, not $1,612 to get the $17.

    0Reply
  • Mark Huang
    Professional · Los Angeles, CA · Member since 2016 · 45 posts · 8 votes
    10y

    Hi @Matt Kautz,

    I dont think this would affect your overall assessment of this property but I had 2 questions/comments on your model:

    a) Your total costs seem to double count your down payment. I.e. you say Cash outlay = $218,025. Yet $969k + 24.225k = $993,225. Unless I'm missing something shouldn't down payment not be considered a "cost" in this sense?

    b) Your utilities column is not summing correctly. Garbage ($36) + Sewer ($14) totals $50 yet it lists $100.

    Also how do you figure lowering property taxes from $11,628/year to $9,600/year?

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    I won't speak to this particular property, but will say that if you use BP calculators and think that their projections are indicative of the actual returns then you will never buy anything in LA. I've made a whole lot of money over the last 15 years investing in LA buy-and-hold RE (and have never lost a dime on any one property, all have way positive equity and cash flow today), and yet if I ran through the numbers on the BP calculators at time of aquisition, I'm quite certain that they would all predict minimal or negative returns ... it is a total joke as far as I'm concerned. The key element missing is appreciation (both forced and market appreciation in both rents and prices). If you don't factor in appreciation, LA looks like the worst place to invest ... when you do factor in the actual appreciation over the long term, it becomes one of the most profitable places in the nation. Personally, I look at the long term (over 10+ years, 30 years is even better if you can find the data) averages for rent and price increases and use that to underwrite to IRR. I also always look for deals where I can get a short term forced appreciation equity bump to insulate me from short term market fluctuations and hold from a position of financial strength ... who knows about the short term market, which is why I like to counterbalance the uncertainty with forced appreciation, but If you run your numbers this way, it will give you a clearer picture of your likely long term returns.

    1Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    10y

    It's not you or your numbers...it's the market. Especially Santa Monica, you won't find a property here that will cash flow. It's why so many locals here (me included) invest out-of-state. Your best hope would be to head for the Inland Empire or somewhere, but honestly the numbers really won't work well either.

    I wish it weren't true, as I've love to have some investment properties here on the west side, but unless you're going in as an all-cash investor or just going into it for the appreciation potential, you won't find anything.

    0Reply
  • George Gammon
    Flipper/Rehabber · Las Vegas, NV · Member since 2016 · 174 posts · 251 votes
    10y

    @Matt Kautz

    Matt, the best advice I can give you is, for a moment, ignore everyone on BP.

    The people who've posted on this thread, and who post through out BP, are well intentioned and give very good advice... if you're only concerned about the micro details.  

    What they fail to recognize is the macro economic environment is more powerful than the micro details. What housing market didn't go up 2001-2006? What housing market didn't go down 2007-2011? Not to imply the micro doesn't matter, it does tremendously, but only after the macro economic picture is thoroughly understood and incorporated into your overall risk assessment. And always remember, projected ROI is worthless without adjusting for risk. Try to get into the mindset of Risk Adjusted Return not ROI.

    My guess is you haven't considered the macro, so please do so first and then revisit the advice given on this thread.  I'll try to give you some things to ponder.

    First, what makes housing prices increase? when the amount of money (purchasing power) is growing at a faster rate than the supply of housing.  That can happen through a population increase, real wages increasing, investor inflows or an expansion of credit available.  

    Here's a chart of the inflation adjusted home prices in Los Angeles going back to the late 1980's

    Please notice housing prices in LA have increased by roughly 50% in the last 5 years or so.  Now consider in that time the population of LA has increased by about 3%-4%.  So assuming these population numbers stay consistent, based on population alone, is it more probable that prices go up or down from here? 

    On a side note:  no one would dispute the fact the US (and LA) was in a housing bubble in 2007.  The prices today are almost where they were in 2007 at the height of the largest housing bubble in US history...at the very least, that should make LA investors pause.  

    Next is a chart of LA housing prices relative to average house hold income.  Remember higher incomes means more money chasing housing.  

    Home prices in LA are currently 50% higher than their historic norm when compared to household incomes.  Based on incomes being so much lower than housing prices is it more probable the prices go up or down from here?  

    Next chart is of foreign investor inflows.

    As you can see here real estate foreign direct investment has sky rocketed lately.  But please read the fine print.  This is based on deals of 2.5 million plus.  How will Chinese billionaires, wanting to get money out of China before the yuan devalues, effect the price of a duplex in LA?  I would assume not much but I don't know.  Based on these data is it more probable the market goes up or down?

    The last main way money, or purchasing power, can outpace housing growth is through the expansion of credit.  I'm going to omit this chart because it's rather cumbersome.  But I have the numbers from federalreserve.gov.  According to the federal reserve total US mortgage debt at the beginning of 2007, the peak of the greatest housing bubble in US history, was about 13.7 trillion...at the end of 2016 it's 13.9 trillion.  Based on credit expansion is it more probable housing prices go up or down? 

    Can prices go up from here Matt? absolutely, but if they go up what will push them higher?   

    One could argue that it doesn't matter because housing prices always come back.  Unfortunately this doesn't take into consideration the opportunity cost of not having cash to buy if prices go down.  And never let anyone tell you housing prices have "recovered" they've only reflated.  That said, if housing prices do go down where will the money come from to drive prices back to the inflated high water mark? Since the current prices aren't supported by population growth or household income, another "recovery" is far from certain... 

    Don't get me wrong I'm NOT saying housing prices will go down.  I'm no where near smart enough to know that.  What I am saying is the macro data suggests theres a higher probability that prices go down then up.  

    There you go Matt...always remember to focus on the RISK ADJUSTED RETURN and not just the ROI, think in terms of probabilities, and look at the macro before you look at the micro. Hope this has helped. Good luck.

    3Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @George Gammon, I doubt that "everyone on BP" ignores the macro, or advises us to so ignore!

    Quite the reverse. It's just that factoring in the macro detail is so OBVIOUS, it shouldn't need to be emphasized at every turn! And also, let's not forget: all Real Estate is LOCAL! Cheers...

    1Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    Perhaps compare to this one 11554 La Maida St, asking 850k, very hot hood as well, two houses, pool, 9000 sqft lot, plus non conforming studio, 10 rated elementary, 8 rated junior, future tear down mansion future maybe and IDK if any rent control as the houses seemed to be "grandfathered" but zoned R1 SFR hood. Probably way more initial cash flow, most likely better future profits and Burbank/Universal/Hollywood and more studios close by. The biggest difference between the two hoods you can see with a google drive by. Just an example but there might be even better LA locations for your price range. Good luck! @Matt Kautz

    0Reply
  • John P.
    Investor · Vacaville, CA · Member since 2016 · 433 posts · 249 votes
    10y

    @George Gammon that's a great analysis.  I tend to think macro. I always like when the entire real estate market is going down and people say "ya, but it doesn't affect my neighborhood because it's so desirable..."  Ya!  Things are different from hood to hood but macro trends persist.

    It's way above my knowledge but it seems your numbers don't factor in inflation when you compare 2007 numbers to now!? That has to play a part as that is basically 10 years ago. Even low inflation will change the numbers somewhat over that timeframe. 

    Also, with interest rates so low people can borrow cheaper than ever.

    Also, with the stock market scaring people there are many investors looking for other opportunities.

    Lastly, I have bought some properties in your city. I have bought some nice properties in Summerlin recently.  They are still well below the market hights of 2006.  For example one sold new in early 2005 for $440k and I recently bought it for $310k.  I paid a lot more than the flipper who bought it 6 months earlier but he fixed it up to move-in condition.

    I am not suggesting your analysis is wrong. I just don't think the signs are as clear as you indicate. 

    0Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y
    Originally posted by @George Gammon:

    @Matt Kautz

    Matt, the best advice I can give you is, for a moment, ignore everyone on BP.

    The people who've posted on this thread, and who post through out BP, are well intentioned and give very good advice... if you're only concerned about the micro details.  

    What they fail to recognize is the macro economic environment is more powerful than the micro details. What housing market didn't go up 2001-2006? What housing market didn't go down 2007-2011? Not to imply the micro doesn't matter, it does tremendously, but only after the macro economic picture is thoroughly understood and incorporated into your overall risk assessment. And always remember, projected ROI is worthless without adjusting for risk. Try to get into the mindset of Risk Adjusted Return not ROI.

    My guess is you haven't considered the macro, so please do so first and then revisit the advice given on this thread.  I'll try to give you some things to ponder.

    First, what makes housing prices increase? when the amount of money (purchasing power) is growing at a faster rate than the supply of housing.  That can happen through a population increase, real wages increasing, investor inflows or an expansion of credit available.  

    Here's a chart of the inflation adjusted home prices in Los Angeles going back to the late 1980's

    Please notice housing prices in LA have increased by roughly 50% in the last 5 years or so.  Now consider in that time the population of LA has increased by about 3%-4%.  So assuming these population numbers stay consistent, based on population alone, is it more probable that prices go up or down from here? 

    On a side note:  no one would dispute the fact the US (and LA) was in a housing bubble in 2007.  The prices today are almost where they were in 2007 at the height of the largest housing bubble in US history...at the very least, that should make LA investors pause.  

    Next is a chart of LA housing prices relative to average house hold income.  Remember higher incomes means more money chasing housing.  

    Home prices in LA are currently 50% higher than their historic norm when compared to household incomes.  Based on incomes being so much lower than housing prices is it more probable the prices go up or down from here?  

    Next chart is of foreign investor inflows.

    As you can see here real estate foreign direct investment has sky rocketed lately.  But please read the fine print.  This is based on deals of 2.5 million plus.  How will Chinese billionaires, wanting to get money out of China before the yuan devalues, effect the price of a duplex in LA?  I would assume not much but I don't know.  Based on these data is it more probable the market goes up or down?

    The last main way money, or purchasing power, can outpace housing growth is through the expansion of credit.  I'm going to omit this chart because it's rather cumbersome.  But I have the numbers from federalreserve.gov.  According to the federal reserve total US mortgage debt at the beginning of 2007, the peak of the greatest housing bubble in US history, was about 13.7 trillion...at the end of 2016 it's 13.9 trillion.  Based on credit expansion is it more probable housing prices go up or down? 

    Can prices go up from here Matt? absolutely, but if they go up what will push them higher?   

    One could argue that it doesn't matter because housing prices always come back.  Unfortunately this doesn't take into consideration the opportunity cost of not having cash to buy if prices go down.  And never let anyone tell you housing prices have "recovered" they've only reflated.  That said, if housing prices do go down where will the money come from to drive prices back to the inflated high water mark? Since the current prices aren't supported by population growth or household income, another "recovery" is far from certain... 

    Don't get me wrong I'm NOT saying housing prices will go down.  I'm no where near smart enough to know that.  What I am saying is the macro data suggests theres a higher probability that prices go down then up.  

    There you go Matt...always remember to focus on the RISK ADJUSTED RETURN and not just the ROI, think in terms of probabilities, and look at the macro before you look at the micro. Hope this has helped. Good luck.

     Good post. There are many factors to consider obvisiously. Perhaps sometimes micro can overcome some macro. There are past examples of LA pockets that did fine relative to last GFC. How this can happen is always having more buyers than inventory supports and in some exclusive areas this is the normal...almost regardless of the rest. Take Santa Monica for example, 2006 median 850k, 2011 median 825k, and now 1.2 ish. Keep in mind the historical limited supply in certain areas can mitigate risk even more than some overall macro stuff. Some of those locations might not be affected like the average locations can be. Exact location mitigates risk maybe more than anything else it seems. 

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  • George Gammon
    Flipper/Rehabber · Las Vegas, NV · Member since 2016 · 174 posts · 251 votes
    10y
    Originally posted by @Brent Coombs:

    @George Gammon, I doubt that "everyone on BP" ignores the macro, or advises us to so ignore!

    Quite the reverse. It's just that factoring in the macro detail is so OBVIOUS, it shouldn't need to be emphasized at every turn! And also, let's not forget: all Real Estate is LOCAL! Cheers...

    Brent I'm not suggesting that BP members advise others to ignore the macro economic picture.  I am suggesting that in the forums, blog and podcast, the majority of discussion is around micro.  In my opinion it should be at a minimum 50/50.  

    Real estate investors usually have a bottoms up approach, and have a tendency to get myopic.  I think we are doing a disservice to new investors who, I believe, for the majority, are oblivious to the broader risks to their investments or potential investments.  

    Regarding your final two points: 

    1.  If the macro picture is "obvious" to you, you're far smarter than I am.  I'd love to get your views on where interest rates will be in 5 years and whether the US will experience inflation, deflation or stagnation over the same time frame.  Lastly, are US housing prices going to be higher or lower in 5 years?  

    2.  Real estate is local similar to how stocks are individual.  I don't know of a local real estate market that didn't go up in 2005 nor do I know of a real estate market that didn't go down in 2009?  There may have been some, but they're far and few between.    

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  • George Gammon
    Flipper/Rehabber · Las Vegas, NV · Member since 2016 · 174 posts · 251 votes
    10y
    Originally posted by @Matt R.:
    Originally posted by @George Gammon:

    @Matt Kautz

    Matt, the best advice I can give you is, for a moment, ignore everyone on BP.

    The people who've posted on this thread, and who post through out BP, are well intentioned and give very good advice... if you're only concerned about the micro details.  

    What they fail to recognize is the macro economic environment is more powerful than the micro details. What housing market didn't go up 2001-2006? What housing market didn't go down 2007-2011? Not to imply the micro doesn't matter, it does tremendously, but only after the macro economic picture is thoroughly understood and incorporated into your overall risk assessment. And always remember, projected ROI is worthless without adjusting for risk. Try to get into the mindset of Risk Adjusted Return not ROI.

    My guess is you haven't considered the macro, so please do so first and then revisit the advice given on this thread.  I'll try to give you some things to ponder.

    First, what makes housing prices increase? when the amount of money (purchasing power) is growing at a faster rate than the supply of housing.  That can happen through a population increase, real wages increasing, investor inflows or an expansion of credit available.  

    Here's a chart of the inflation adjusted home prices in Los Angeles going back to the late 1980's

    Please notice housing prices in LA have increased by roughly 50% in the last 5 years or so.  Now consider in that time the population of LA has increased by about 3%-4%.  So assuming these population numbers stay consistent, based on population alone, is it more probable that prices go up or down from here? 

    On a side note:  no one would dispute the fact the US (and LA) was in a housing bubble in 2007.  The prices today are almost where they were in 2007 at the height of the largest housing bubble in US history...at the very least, that should make LA investors pause.  

    Next is a chart of LA housing prices relative to average house hold income.  Remember higher incomes means more money chasing housing.  

    Home prices in LA are currently 50% higher than their historic norm when compared to household incomes.  Based on incomes being so much lower than housing prices is it more probable the prices go up or down from here?  

    Next chart is of foreign investor inflows.

    As you can see here real estate foreign direct investment has sky rocketed lately.  But please read the fine print.  This is based on deals of 2.5 million plus.  How will Chinese billionaires, wanting to get money out of China before the yuan devalues, effect the price of a duplex in LA?  I would assume not much but I don't know.  Based on these data is it more probable the market goes up or down?

    The last main way money, or purchasing power, can outpace housing growth is through the expansion of credit.  I'm going to omit this chart because it's rather cumbersome.  But I have the numbers from federalreserve.gov.  According to the federal reserve total US mortgage debt at the beginning of 2007, the peak of the greatest housing bubble in US history, was about 13.7 trillion...at the end of 2016 it's 13.9 trillion.  Based on credit expansion is it more probable housing prices go up or down? 

    Can prices go up from here Matt? absolutely, but if they go up what will push them higher?   

    One could argue that it doesn't matter because housing prices always come back.  Unfortunately this doesn't take into consideration the opportunity cost of not having cash to buy if prices go down.  And never let anyone tell you housing prices have "recovered" they've only reflated.  That said, if housing prices do go down where will the money come from to drive prices back to the inflated high water mark? Since the current prices aren't supported by population growth or household income, another "recovery" is far from certain... 

    Don't get me wrong I'm NOT saying housing prices will go down.  I'm no where near smart enough to know that.  What I am saying is the macro data suggests theres a higher probability that prices go down then up.  

    There you go Matt...always remember to focus on the RISK ADJUSTED RETURN and not just the ROI, think in terms of probabilities, and look at the macro before you look at the micro. Hope this has helped. Good luck.

     Good post. There are many factors to consider obvisiously. Perhaps sometimes micro can overcome some macro. There are past examples of LA pockets that did fine relative to last GFC. How this can happen is always having more buyers than inventory supports and in some exclusive areas this is the normal...almost regardless of the rest. Take Santa Monica for example, 2006 median 850k, 2011 median 825k, and now 1.2 ish. Keep in mind the historical limited supply in certain areas can mitigate risk even more than some overall macro stuff. Some of those locations might not be affected like the average locations can be. Exact location mitigates risk maybe more than anything else it seems. 

    Great point...When you take it to a neighborhood level, in some markets, that's certainly true.  I haven't researched it beyond the markets where I have or have had properties, but in those markets there were no pockets that didn't rise or fall with the tide.  Sounds like I should've bought in Santa Monica.  ;)  

    I like to take a top down approach to investing, that doesn't mean I ignore the down. I'm trying to get the bottoms up guys (especially new investors) to never ignore the up.  

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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    Evaluate Rent Control on the property - - much of L.A. is strictly controlled and that severely limits your choices.

    0Reply
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