All Forum Posts by: Brent Seehusen

@Chris Seveney

I've been looking into this based on the idea of "buying when there is blood in the streets". The declining population is a real red flag though.  Also, unemployment is around 14% so rent collections could be difficult and the laws are tenant friendly there.  Throw in the high crime rate and it seems akin to investing in Detroit, albeit with some differences.  I would be curious to hear if anybody is investing there successfully.  I'm a buy & hold guy.

Bobbo - I was talking actuals not pro forma. Not everybody finances a $50,000 property, so for some people financing costs will be a factor and others it won't. I purchased a $70k property for all cash a few months ago, for example. Not everybody is comfortable leveraging their properties to the hilt as you are. My capex reserves are deducted prior to calculating NOI. I thought that's how everybody did it, but maybe I'm in the minority.

Now I agree that transactional costs will eat up a certain portion of profits, but if a property was purchased right it shouldn't be several years worth, but maybe a year's worth of cash flow, all costs included.  If the opportunity cost is great enough, I'm not going to cry about that.  If I can sell a property I've held for 5-10 years of cash flow profits, to reenter the California market during a down cycle, the opportunity costs of not doing so vastly outweigh the short term transactional costs.

We're both in agreement about buying California for appreciation.  My primary residence was purchased near the bottom of the last downturn for this very reason (late 2010).  My only difference with you is that entering the cycle at the right time makes a world of difference.  Buying when things are already overinflated relative to incomes and rent growth is a recipe for disaster that many have experienced first hand.  Growth markets tend to get out of hand and experience corrections, sometimes brutal ones.  It's best to buy when fundamentals make sense on Day 1 and not just count on past growth to continue indefinitely into the future.  San Francisco has experienced several 5-10 year stretches of zero appreciation over the past 35 years, so caution is warranted.

Speaking of Prop 13, you will lock in a lower tax basis by purchasing at cyclical lows, which boosts your long term profitability as well as your immediate chances at cash flow.

The sales commission for the $50,000 property would be $3,000 and as long as the property is greater than a 6 cap it will cover that in less a year.  Jus sayin'. :)

@Account Closed

I have checked that.  Most markets outside of California haven't shown much cyclicality other than the recent subprime bubble, which likely was a one time event.  The best markets for playing the cycle are San Fran, LA, and San Diego, although we could probably throw in Riverside.  I don't know about Honolulu.  Maybe you could shed some light on that?

I'm all in favor of buying for appreciation but I think the market dictates when your entry point should be.  If you buy near the bottom of the cycle, not only do you reap the most appreciation, but you also have a chance to be cash flow neutral or positive right off the bat.  If you buy after prices have gone up 50-75%, you take on more risk and reap less reward.

I think it makes more sense to shift to cash flow markets at that point in the cycle and wait out the California market.  Or shift out of real estate altogether and focus on other asset classes if the opportunity is there.  You can always reallocate those funds to California when the timing is right.

@Amit M. @Account Closed

The problem with counting on appreciation and HELOC'ing your way to the moon is that sometimes the appreciation fairy decides to take her gains away for very long periods of time. Then what do you live on? (A new buyer isn't going to start with any cash flow.)

See the multiple corrections that San Francisco has sustained since 1980?  The current boom market, while not quite as out-of-whack as the 2007 market, is still much more inflated than either the early 80's market or the early 90's market.  

Amit purchased in '97 when RE was probably slightly undervalued, but advising people to buy today with expectations of the same appreciation you experienced is bad advice, IMO.

I'm all in favor of buying for appreciation, but do it near the bottom of market cycles, not in the midst of a new bubble being rapidly inflated.  

Even somebody buying early in the formation of the last bubble, in say 2003, had to wait 10 years to enjoy any lasting appreciation. The current market is already more overvalued than that, based on it's relation to the long term trend line. Buyers today could be waiting a long time to cash in that HELOC money.

In the meantime, they will be waiting maybe 5 years before rent increases manifest into actual cash flow.  Then it will take another 5 years to break even on the initial negative cash flow they sustained.  How is that a good deal?

@Matt R.

 The most recent 3-4 real estate busts have been accompanied by nasty recessions (1974, 1979/1981, 1990, and 2008).  The 2001 recession was the only one that didn't lead to much of a real estate bust but it was considered pretty mild by historical standards.  So all we need to do is predict the next nasty recession.. Simple huh?

Well this chart from CrystalBull.com illustrates pretty convincingly that the past 7 recessions have been preceded by a negative yield curve, when short term interest rates are higher than long term rates.  This is the bond market's way of signaling there is no faith in our economy and a recession follows like clockwork within 18 months.  So keep an eye on the yield curve.

https://www.crystalbull.com/stock-market-timing/Yi...

The only problem with using this as a signal currently is it's basically impossible for the yield curve to go negative with the Fed holding short term rates at 0%.  So as long as that continues, I guess we have nothing to worry about.  

There were also plenty of local promoters that got torched by buying for appreciation at the exact wrong time in the mid-00's.  If the out of state promoters were selling opportunities in say Dallas back in 2005, that was pretty savvy advice in hindsight.  You have to look at current market conditions and not assume that recent appreciation will continue into the foreseeable future.  The optimal time to buy in SoCal for this cycle was 2009-2012, so people jumping in today shouldn't expect the same stellar performance of the past few years until we are in recovery from some future recession, which could be many years from now.  First, we need a bust to occur so there is something to recover from.

So in the mean time, I think people buying for cash flow and getting hefty returns in markets with improving employment, growing population, and low vacancy are probably making a smart move.  They don't need to hold forever.  There's no rule saying they can't redeploy that money in California when the cycle bottoms out in 5-10 years.

@Alex Vidal

Agreed.  San Francisco beats LA over the long term, but my concern is that a near term correction is needed to bring SF back in line with historical averages. The 30 year performance ending in 2015 is almost a full percentage point higher than that ending in 2010.  So either SF has experienced a paradigm shift or there is a bit of a bubble occurring as we speak.  Time will tell.

Good conversation, BTW.

 Sure, the LA metro as captured by Case Shiller shows similar appreciation.

10 Yr - 5.63% (Jan 2000 - Jan 2010)

20 Yr - 2.77% (Jan 1990 - Jan 2010)

30 Yr - 4.86% (Jan 1980 - Jan 2010)

Yet when you look at the past 5 years, San Francisco has almost doubled the rate of appreciation of LA.  So which one is the better play?

@Alex Vidal I thought we were discussing San Francisco's historical appreciation which would include a sample of all timelines, not just those that end today.  The period from 2000 to 2010 that Zillow studied is relevant because it shows that San Francisco does not out perform all other markets over various 10 year periods.  The year 2000 was not the worst time in history to be buying and there were not negatively amortizing loans, and yet other markets vastly outperformed San Francisco over that time period.

Of course any timeline ending in 2015 will show San Francisco dominating the long term averages (20 years, 30 years) because it is heavily skewed by the past 5 years of out performance.  That is just basic mathematics.  The problem is it may take 5+ years of under performance to get back to the actual historical rate of appreciation as measured across all timelines with different ending points.

Projecting short term trends into the future is called recency bias and it's a classic mistake that many investors make.  I think the San Francisco crowd has been blinded by the last 5 years of stellar performance into taking an unrealistic view of their future prospects.