All Forum Posts by: George Gammon

@David ThompsonI'd love to switch gears a little and get your thoughts on some of the things that I've been trying to sort out.

As someone with a high degree of financial sophistication I'd imagine you're a little concerned about the fed having 4 trillion on their balance sheet, raising interest rates into a potential recession, and the national debt doubling in the last 8 years? I'm sure you'd agree that the american economy most likely would've gone into a depression without fed dropping interest rates in 2009 and massively expanding their balance sheet. What happens now if we slip into recession and the fed funds rate is basically zero? With the exception of QE and negative interest rates they're out of bullets aren't they? It seems price deflation, although not probable, might be possible, more so now than it's been in our lifetimes.  Looking at real estate practically from that lens what happens to the real value of borrowers debt?  How would that effect cash flow on leveraged rental properties?

Or looking at the flip side of the coin what are your thoughts on the fed going negative, doing QE4 and the velocity of money picking up substantially? With the huge expansion of the money supply we'd see some meaningful price inflation don't you think? If so, I'm assuming the fed raises rates to cool down the rate at which the dollar is losing value. We're probably not looking at Paul Volcker rates but at least going back up to 5%-7%. Taking that back to real estate what happens to commercial loans at 1.5 (or lower, I was just offered a loan at 1.25) DSCR, that adjust after 3/5 years? I just talked to my banker and he told my 40% of the commercial loans his bank does are adjustable. That seems precarious?

Do you recall Carter Bonds?  I was only 6 years old when those were issued.  I'm not sure you're older than I am but if so, as someone with a financial background, what was the economic atmosphere like back then when we had to issue bonds denominated in German Marks and Swiss Francs because no one would buy the US government debt denominated in dollars?  I'm assuming global markets were pretty nervous then?   

Finally, the only motive I have for posting on BP is fun, networking and thought provoking discussion.  I was a self made millionaire at 34, I retired at 38, I have a hard time allocating all my own money let alone someone else's.  Investors are the last thing I want.  

Looking forward to your insight,

George   

@Priti Donnelly I've got a bull/bear case for Japan.  I'd love to hear your thoughts.  

Bull case: In most countries outside the US, real estate is looked at as a savings account.  It's the most secure place to store value or purchasing power.  With the BOJ taking interest rates negative and for a variety of other reasons the Japanese people, at some point, have to become leery of JGB's.  Correct me if I'm wrong but the Japanese public are the largest holder of JGB's, therefore if confidence is lost, there could be a massive rotation from bond's into real estate.  This rotations of capital would put tremendous upward pressure on the real estate market.

Bear case: At some point the government debt will implode and the currency tanks.  You've got the asset but it's yen nominated.  If you spend money in another currency that could be a big problem.  Its a tenuous situation to say the least.  

Key things  I've learned investing in foreign and domestic real estate over the last 4 years...

1. Most American real estate investors ignore macro econ when assessing the amount of risk they have in their portfolio. IMO that causes them to make unforced errors. As an example, 2016 they're most likely underestimating risk in the US market and in 2010 they were most likely overestimating risk.

2. There are many countries/cities in the world where the micro, on the ground, clear titles, honest subs, good property managers, transaction costs etc. risk is lower than the US...granted most countries the risk is higher, but sweeping statements that all foreign real estate investment is riskier than the US is just false. US real estate as we all know is local. It's no different outside the US.

3. Foreign real estate investments, at times, can offer a higher overall RISK ADJUSTED return for certain investors.  It's not for the guy who just read Rich Dad Poor Dad and wants to quit his job to be a real estate investor.  Sophisticated investors with a lot of time, a lot of real estate experience, access to cash and a large portfolio, would be wise to give it some thought.

4.  Being area agnostic in terms of my investing works for me.  If I think I can improve my portfolio with a purchase in Europe, US, Asia, South America, Africa etc.  I'll explore the opportunity diligently and thoroughly, with an open minded, scientific approach.  I've made mistakes, but overall this has served me well.     

George

@Kevin Vanderweid I've got several single family properties in KCMO and some commercial in the Plaza area.  I know the MO side extremely well (street by street). 

I've bought homes from tax deeds to MLS. Currently rehabbing two homes there. Let me know if there's anything I can do to help.

George

@Adam NelsonI don't mean to bash the US market, I loved it in 2012, only to present the fact that there are other markets out there that are currently better in my opinion for certain types of experienced investors with time and cash.

If I was investing in the US right now, what would I look for and how would I structure the deal taking into consideration the macro? This is tough to articulate so let me tell you what I'd do first and then try to explain why.

1. I'd look for residential, single family homes or multifamily in A or B neighborhoods in cities where a 1%+ rent to value ratio is still realistic. Also I want linear markets i.e. Kansas City where prices don't go up that high in booms and don't go down that low in busts.

2. I'd want a property where I could add value. I want to be all in at 70% ARV because I want access to every dime in a line of credit.

3. I want to be all in for under replacement costs.

4. I want to pay cash and then pull out equity. But if I absolutely have to use front end leverage I'd make sure I'm using a fixed rate 30 year.

5. Assuming I paid cash and had the line of credit for 100% of what I had in the property I'd use that LOC in another investment asap. Once I did, I'd term it out over 30 years and fix the rate.

Now let me try to explain why...

1. I like residential because commercial has a lot of head wind because of commerce moving online, virtual workers etc. Also, in a down turn people still need a place to live but they don't need an office. Lastly residential is more liquid in general...that's huge for me.

A and B markets to get my risk as low as possible, the renters I want gravitate towards good school districts.  Most importantly it gives my US portfolio the greatest likelihood of keeping pace (or exceeding) the rate of inflation...I can't overstate how important being cognizant of inflation is in designing a long term portfolio and it's something most investors ignore.  

You want to make sure your rent to value ratio is high enough to ensure you'll never have to worry about being cash flow positive.

I want a linear market because inflation adjusted appreciation is a gamble, no one knows where the markets going. I could give you a very strong case for the market crashing and a very strong case for it going higher. Therefore, I look for a store of value. As long as the price of my rental property is going up with inflation I'm happy. I look at rental properties as cash in a savings account that pays me 8% interest and has no risk of losing purchasing power to inflation.

2. Being all in at 70% ARV gives me access to 100% of the capital I just invested. The additional equity is nice for the balance sheet and it hedges your downside. The market could go down by 30% and you're still at a break even if you were to sell.

3. All in under replacement costs hedges you against future supply coming on the market. Your market may have new home construction but they can't compete with you on price because you're all in for a lot less then they are on a sq ft basis. Also, having a property thats cost prohibitive to replicate can obviously put upward pressures on rents.

4. Here's where it gets tricky. I do all cash and then a LOC so I don't have to pay for money I'm not using. Once I find the next deal I can use the LOC and then term it out (fixed only 30 year preferably) and start making payments. The main reason I do this is so I have an equal 50/50 balance of cash and debt. I have the debt with the bank but I also have the cash in my pocket or more likely in another extremely liquid asset producing a return (I consider that cash as well). A 50/50 balance is important. The reason its important is inflation and deflation.

Price inflation reduces the purchasing power of cash but it also decreases the value of debt. In this environment wealth is transferred from lenders to creditors. Imagine borrowing $5,000 in 1900, investing it in real estate, and then paying it back in 2016...you win, bank loses.

In an environment of price deflation the opposite occurs. Purchasing power of cash goes up along with value of debt. Therefore, wealth is transferred from the borrower to the lender. Bank wins, you lose.  Imagine a rental property portfolio that has more debt than cash.  As price deflation occurs rents go down but your monthly mortgage payments stay the same.  Cash flow negative is then a possibility.  (This can also happen without macro deflation in C and D areas) 

No one knows what will happen. The economy want's to deleverage which is deflationary but central banks are printing money trying to produce price inflation in an effort to decrease government debt loads. It's incredibly precarious economic times, historically unprecedented.

This is why I want a 50/50 split of cash and debt. Inflation, deflation or nothing and I'm 100% hedged.

5. I want that LOC termed out and in another highly liquid asset asap. As soon as I pull out that equity I've eliminated the risk of losing equity to a downturn in the market. If the market goes up you just take out more equity as the appraisal value of the house goes up (assuming you can get a good interest rate) locking in future equity growth.

The equity you take out is the cash portion of the 50/50 equation, we want it liquid so we could front run a deflationary cycle but we want it performing to maximize returns.  

Terming it out will lock in the rate.  If interest rates go lower you can always refi but you never expose your portfolio to interest rate spikes.  Remember the fed funds rate is close to zero right now.  30 year gives you the greatest upside if we get some inflation, and you can always pay it off sooner if you want.  

I think the take aways are:  residential in A and B areas in linear markets...make sure r/v ratio is 1%+...be all in at 70% and lower than replacement costs...make sure your portfolio is 50/50 cash and debt...get that equity out (fixed rate 30) and performing in something very liquid asap.  

Hope that helps, let me know if you'd like me to clarify anything.

George

@Brian LaceyAre foreign investors able to buy real estate in Vietnam? and can Americans invest in Myanmar yet?

 David, great points.  

1.  One of my biggest assets is I know what I don't know.  To your point, it's impossible to foresee every risk and therefore mitigate it.  But can't that be said for investments in your own neighborhood?  If Bernie Sanders gets elected and institutes rent controls in the areas where you have all your investments or you get sued (we all know how litigious the US is) causing you to lose all your properties is it any different than the narco rebel scenario?  And just because you live in the same city could you do anything about it?  And if you study the facts, exclude opinion, theres a greater chance of losing properties to rent controls in the states than narco rebels in Quito, Ecuador.  My point is there's just as much risk, if not more when you consider the macro, in the US as there is in select other markets outside the states but the upsides higher.  That's why I prefer diversification. 

2.  I totally agree, these types of investments are for people that have a large portfolio and are looking for better risk adjusted returns and diversification.  All the investments I'm talking about require 100% cash.  There is no way anyone in the states should consider this unless they've got experience, cash and time.   

3.  I totally see your point about wanting to be with in stones throw of a rental so if the water heater goes out or a pipe leaks, eviction etc. your on top of it and won't let it get to a point where it could jeapordize mortgage payments.  I think our posts are directed at two totally different investors.   

But at the end of the day it's like any other business.  You have to find the right people, train them well, and leverage their skills to make you money.  If you have great people working for you in Santiago, Chile or Lincoln, Nebraska you've made the ultimate hedge against downside.  

George

 I'd love to go.  I'll check his website for dates.

@DavidFaulkner,  I'm sorry if my post came off the wrong way David.  I didn't mean it as a tirade, only to be thought provoking.  

It's difficult to answer a question where the scenario has such a minuscule probability of coming to fruition.  But if narco rebels stormed into a city of 4 million and seized my condo I'd most likely be S.O.L. in terms of that one asset.  But that's why you calculate return on a risk adjusted basis and not an absolute basis.  And it's also why you diversify the countries and currencies in your investment portfolio.  You never want all your eggs in one basket.

Hope that answers your question,

George 

Christina, I'm a little concerned about rio negro because it's on the other side of the airport.  If it were me and I wanted land I may look more between the toll both and the airport.  They're moving the toll booth closer to the airport.  The land that is now on the airport side of the toll both that moves to the medellin side of the toll both could have some nice upside.  But as you've probably read I don't like land because of the lack of liquidity and lack of cash flow.

The areas around santa fe and el tesoro are great.  It all depends on who you're trying to target for rental or sale.  The colombians like the condos higher up near el tesoro and the expats like condos a little lower near santa fe and parque lleras.  Also if you've got time to self manage a condo and put it up on airbnb, the right condo in the parque llares area could produce massive amounts of cash flow.  

Let me know if you have any further questions,

George