All Forum Posts by: John Carbone

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Quote from @Joe Villeneuve:

Quote from @Michael Wooldridge:

Quote from @Joe Villeneuve:

Quote from @John Carbone:

Quote from @Joe Villeneuve:

Quote from @John Carbone:

Quote from @Joe Villeneuve:

Quote from @John Carbone:

Quote from @Joe Villeneuve:

Quote from @Michael Wooldridge:

@John Carbone from the sounds of things you are a long term investor that is working to replacing his income with CF. My w2 also funds pretty quick purchases for properties. 

I get @Joe Villeneuve point about rolling the equity forward into more properties faster. I’ll have to play with the numbers I think perhaps cashing out a bunch of equity about 41-53 would allow me to retire almost instantly instead of 55-56 as planned but there’s  a lot of variables. Still it’s an interesting dynamic to play with. 

I’ve never been a big fan of flipping and given that I have the income to invest 25% down consistently and quickly, my major goals has always been to replace the invoice to retire early. but it’s absolutely faster the way Joe is discussing. I’m just not sure how much faster. 

As you said, "play with the numbers", do the math.  You'll be very surprised.  Einstein was once asked what he thought the greatest invention of the 20th Century was.  His answer was "compound Interest".  What he said after that was more important.  "Those that understand it, will live off those that don't".

Isn't doing a cashout refi up to 80 percent the same thing though? Why sell the performing asset? I understand the math of doing 20 percent down payments for higher COC, but you are also using more leverage. Not saying leverage isn't a good thing, but it goes both ways. Granted, historically using leverage in real estate works out great as you describe, but until interest rates moderate and prices level off, I see no reason to jack up the real estate leverage. A 20 percent reversion in prices can knock you back multiple years.

 I think the leverage aspect is misguided. I’m glad that investors in general follow this advice. When they are underwater and foreclose like has happened before in my area, I’ll purchase from their banks with leverage then. 

How are you increasing leverage?  You have the same number of loans.
Pulling out more equity with a sale than a refi.  Also, when you cash out, the mortgage payment goes up, and the cash flow goes down as a result.
Keep in mind that all appreciation is based on the PV, so increasing your total PV is exponentially increasing future gains from appreciation.
REFI is a linear return, with a step backwards.  Selling and moving forward gets you an exponential return.
It's the power of the penny...and that has nothing to do with "every penny adds up".  I don't want them adding,...I want them multiplying...like Gold(fish).
If you took a penny, and every day you doubled the previous day's total, (so day 1 would be 2c, day 2 would be 4c, etc...), how much money would you have if you did this for 30 straight days?  Simple math formula.

Your assumption though is that by selling and buying bigger and better is that the returns will be equal to the previous deal in a linear manner. As expansion goes up, risk of performance also goes up. Selling and buying bigger doesn’t mean a linear compounding increase in return. In theory, yes, multiplying the Pennies, but what happens when that 8th penny is only “worth” 4-5 pennies. I’d rather have a 20 percent return with minimal leverage than a 3-4 percent return on 5x leverage relying on overpriced underlying assets continuing to return at the same levels they did over the past decade.  

Using my system, you're not concerned how 8 years from now will impact what you are buying today because you won't have the same property 8 years from today.  The system only needs to have a handle on the next 3-5 years max.  You can always design deals to make this work.

You're not always going bigger.  Part of the steps will be splitting into more than one.

If you start with 50k in equity, and move it when it grows to $100k, then again when it reaches $200k (remember, this could be 4 properties with $50k equity), then $400k, then $800k...that's only 4 steps...and if that $800k was 20% DP's, that's $4M in PV.  Now, the system I use isn't buying SFH or MF continuously...particularly as the equity/PV grows.  As the numbers get bigger, I start to move into different types of RE...more suited to returns from the larger numbers.

But your system does require 3 percent appreciation. We have had gains substantially above that last decade. A mean reversal to fair value over the next 3-5 years will make your strategy not work out for people doing what you are saying now. Variance and standard deviations can be deadly when just using baseline 3 percent in projections. 

You really have no idea what I'm saying do you.  How can I not benefit even more if the appreciation is greater than 3%?  The use of 3% is just to play on the conservative side.  IF the property appreciates 12% in a year, I'm losing even more money if I don't sell...and gaining even more if I do.

 Not arguing over appreciation. 2.5-3% in even a bad environment is usually safe. I’m asking the math you use to decide on sell vs refi. That has to be a far more complex decision. 

Nope.  Quite simple.  Two things happen:
1 - Cumulated CF = DP.  This means I've recovered all of my cost.
2 - Appreciated Equity gain equals original purchased equity (DP)

Not understanding why you are selling vs holding though. Unless your model assumes no future capital additions? And it’s a constant build off the original capital? 

I don’t see how it makes sense.

cashout refi seems optimal if wanting max leverage.

selling:
 —losing a low fixed rate mortgage
—-closing costs
—-needing to find similar property that will cash flow or better

— buying an overpriced asset at a high rate that will be difficult to refi later with negative equity 

seems like a good deal for a realtor. 

Quote from @Joe Villeneuve:

Quote from @John Carbone:

Quote from @Joe Villeneuve:

Quote from @John Carbone:

Quote from @Joe Villeneuve:

Quote from @John Carbone:

Quote from @Joe Villeneuve:

Quote from @Michael Wooldridge:

@John Carbone from the sounds of things you are a long term investor that is working to replacing his income with CF. My w2 also funds pretty quick purchases for properties. 

I get @Joe Villeneuve point about rolling the equity forward into more properties faster. I’ll have to play with the numbers I think perhaps cashing out a bunch of equity about 41-53 would allow me to retire almost instantly instead of 55-56 as planned but there’s  a lot of variables. Still it’s an interesting dynamic to play with. 

I’ve never been a big fan of flipping and given that I have the income to invest 25% down consistently and quickly, my major goals has always been to replace the invoice to retire early. but it’s absolutely faster the way Joe is discussing. I’m just not sure how much faster. 

As you said, "play with the numbers", do the math.  You'll be very surprised.  Einstein was once asked what he thought the greatest invention of the 20th Century was.  His answer was "compound Interest".  What he said after that was more important.  "Those that understand it, will live off those that don't".

Isn't doing a cashout refi up to 80 percent the same thing though? Why sell the performing asset? I understand the math of doing 20 percent down payments for higher COC, but you are also using more leverage. Not saying leverage isn't a good thing, but it goes both ways. Granted, historically using leverage in real estate works out great as you describe, but until interest rates moderate and prices level off, I see no reason to jack up the real estate leverage. A 20 percent reversion in prices can knock you back multiple years.

 I think the leverage aspect is misguided. I’m glad that investors in general follow this advice. When they are underwater and foreclose like has happened before in my area, I’ll purchase from their banks with leverage then. 

How are you increasing leverage?  You have the same number of loans.
Pulling out more equity with a sale than a refi.  Also, when you cash out, the mortgage payment goes up, and the cash flow goes down as a result.
Keep in mind that all appreciation is based on the PV, so increasing your total PV is exponentially increasing future gains from appreciation.
REFI is a linear return, with a step backwards.  Selling and moving forward gets you an exponential return.
It's the power of the penny...and that has nothing to do with "every penny adds up".  I don't want them adding,...I want them multiplying...like Gold(fish).
If you took a penny, and every day you doubled the previous day's total, (so day 1 would be 2c, day 2 would be 4c, etc...), how much money would you have if you did this for 30 straight days?  Simple math formula.

Your assumption though is that by selling and buying bigger and better is that the returns will be equal to the previous deal in a linear manner. As expansion goes up, risk of performance also goes up. Selling and buying bigger doesn’t mean a linear compounding increase in return. In theory, yes, multiplying the Pennies, but what happens when that 8th penny is only “worth” 4-5 pennies. I’d rather have a 20 percent return with minimal leverage than a 3-4 percent return on 5x leverage relying on overpriced underlying assets continuing to return at the same levels they did over the past decade.  

Using my system, you're not concerned how 8 years from now will impact what you are buying today because you won't have the same property 8 years from today.  The system only needs to have a handle on the next 3-5 years max.  You can always design deals to make this work.

You're not always going bigger.  Part of the steps will be splitting into more than one.

If you start with 50k in equity, and move it when it grows to $100k, then again when it reaches $200k (remember, this could be 4 properties with $50k equity), then $400k, then $800k...that's only 4 steps...and if that $800k was 20% DP's, that's $4M in PV.  Now, the system I use isn't buying SFH or MF continuously...particularly as the equity/PV grows.  As the numbers get bigger, I start to move into different types of RE...more suited to returns from the larger numbers.

But your system does require 3 percent appreciation. We have had gains substantially above that last decade. A mean reversal to fair value over the next 3-5 years will make your strategy not work out for people doing what you are saying now. Variance and standard deviations can be deadly when just using baseline 3 percent in projections. 

You really have no idea what I'm saying do you.  How can I not benefit even more if the appreciation is greater than 3%?  The use of 3% is just to play on the conservative side.  IF the property appreciates 12% in a year, I'm losing even more money if I don't sell...and gaining even more if I do.

You are misinterpreting what I’m saying. If housing goes down, which even the most optimistic (James) is saying 7 percent, that wipes away 2 years of “equity gains”. If it does 20-30 percent which is my projection, you are wiping away 5-10 years, which could be a lost decade for housing if we get stagflation after the drop. Also, there are selling costs associated with moving real estate transactions. It’s pretty simple to see what your saying. Leverage = optimal but you assume real estate only goes up. 

also, why bother selling low fixed rate mortgage assets now to get double the interest rate? Just because your “system” worked so well before doesn’t mean it’s the best thing to do right now. 
 

Quote from @Greg R.:

Quote from @Greg R.:

Quote from @Greg R.:

@John Carbone @Carlos Ptriawan @Bruce Woodruff @Michael Wooldridge

@Michael Wooldridge

@Michael Wooldridge@Michael Wooldridge@Michael Wooldridge@Michael Wooldridge

Here is link to WSJ article, need a membership... https://www.wsj.com/articles/h...

Waiting on your response @James Hamling 

I’m not shocked at the 20 percent discount. Here in tennessee I know a builder who has been doing a spec home every 3-4 months with a crew. He told me he is all in for around 400k per build and he was getting 1m for these all during Covid. I think he’s down to 800k for them now, and he will stop when it’s around 700k and revert to building for actual clients. The cost to build being ridiculously high is a MYTH now. Yes, costs to build now are still higher than pre Covid but nowhere near the premium builders are claiming, it is just gouging. Lumber and oil prices are down and they are able to source at lower prices now. Homebuilders will need to build or else their stocks go to 0. We have a temporary market imbalance. 

these tradesmen are going to get hit pretty hard as long as rates stay this high. I hope they saved and invested, based on what I’ve seen over the years, they are likely the driver behind the $1000+ a month car payments. 

the construction shortage bubble has already popped as well: 

https://www.google.com/amp/s/w...
 

Quote from @Bruce Woodruff:

Haha, I 'retired' a couple years ago and wish I was still swinging that hammer....

 Atleast we aren’t all on a forum discussing matlock reruns! 

Quote from @Michael Wooldridge:

Quote from @Bruce Woodruff:

Now this has just been overthought by a ton guys.....It's just Real Estate. Prices and rates go up, Prices and rates go down. Some of the reasons we understand and can control, some we don't and can't.

But it's fun to talk about I guess......

Have to kill time between business somehow right?  

This is what happens when everyone earns income from passive real estate investments. Become 70 year olds in nursing homes, only decades sooner. (I’m joking) 

Quote from @Michael Wooldridge:

Quote from @John Carbone:

Quote from @Carlos Ptriawan:

The problem with the chart is it uses an aggregated number of nationwide houses

However more detail here, if we see the statistical distribution in this chart :

It's easily understood that MoM price reduction changes only occurred in less than 25% of the available market, mainly CA/AZ/WA/NV only. So @James Hamling also has point here saying that his MN market would not be affected even with larger interest rate, as the deviation in the mortgage payment is still within 1 sigma deviation. His market is still at making an all-time high. While CA market price regressed to the 2020 level.

Can’t give James a pass because of his market. Going back 2 weeks he was saying 20 percent nationally was impossible. Nobody on here other than him cares about Minneapolis market. It’s all been based on the national median home value, no cherry picking markets. 

Well then do you not get a pass? If just the markets @Carlos Ptriawan listed have the big drops at 20%. Nationally won’t hit 20% either. Unless you are interpreting James saying the markets wouldn’t drop at all? Which I haven’t seen him say.  

That data Carlos posted though is a double edged sword to both of your arguments. 

No, I won’t get a pass, national median home value has to drop 20 percent. I’d have to find the post I made for the exact amount that was peak.  James initially said no drop, then he was 5-7 percent as “adjustments”. I don’t disagree with the charts, generally though markets tend to overshoot on the way up and the way down, which is why my floor is 20 percent. I think Carlos is right on fair value though. 

Quote from @Carlos Ptriawan:

The problem with the chart is it uses an aggregated number of nationwide houses

However more detail here, if we see the statistical distribution in this chart :

It's easily understood that MoM price reduction changes only occurred in less than 25% of the available market, mainly CA/AZ/WA/NV only. So @James Hamling also has point here saying that his MN market would not be affected even with larger interest rate, as the deviation in the mortgage payment is still within 1 sigma deviation. His market is still at making an all-time high. While CA market price regressed to the 2020 level.

Can’t give James a pass because of his market. Going back 2 weeks he was saying 20 percent nationally was impossible. Nobody on here other than him cares about Minneapolis market. It’s all been based on the national median home value, no cherry picking markets. 

Quote from @Carlos Ptriawan:

Quote from @John Carbone: depression with massive layoffs - not what the fed is going for. It’s a bit more complicated though, because food is up a lot (not likely to come down) and have you seen car payments lately? The bubble in the car market makes housing seem sane to a certain degree. I think food and transportation costs are going to drag housing a bit further from baseline levels when all is said and done. 

All these food and transportation inflations are actually happening because of one factor only: During covid, the shipping freight charge is raising 400% because (sometimes) the port closes or no workers.

It's all a logistical issue.

Now about your STR in TN, it raises because of cheap lending from Fed, same as in CA, the price goes up $300k without reason.

Yeah, I would say our mountain town is in for 30-50 percent drop even with strong rents like we still have now. Even when shipping opens back up if oil stays high I don’t see that subsiding. Eventually the Covid excuse needs to go away with supply chain issues. I think 35k is the new minimum income now going forward though which increases floor on housing. 

Quote from @Carlos Ptriawan:

 John here's what Fed/you want is the west coast to reduce the price to 20% ; then there is no inflation.
The peak of $1,4k truly doesn't make sense as 6 months earlier it was only $1,2k. This is the result of FOMO buyers
are overbidding property hence triggering inflation.

Yeah and also in vacation markets like tennessee and Florida for example. I agree it’s getting there quickly, 3 more months of this and I think fed objectives could be met. I also think there is upper pressure in inflation from the bottom rung of society. The floor for homes has likely doubled from 100k to 200k as a result of anyone with a pulse being able to make up to $20 an hour. These are likely very “sticky” unless there is a depression with massive layoffs - not what the fed is going for. It’s a bit more complicated though, because food is up a lot (not likely to come down) and have you seen car payments lately? The bubble in the car market makes housing seem sane to a certain degree. I think food and transportation costs are going to drag housing a bit further from baseline levels when all is said and done. 

Quote from @Carlos Ptriawan:

 Funny I got busy with conference calls but I literally almost said the same thing. Those two seem to be on opposite end of the spectrum, and both making good points. I think you and I mostly fall somewhere in the middle. but I think outside of the fact that they both seem to dislike each other. There's been some good discussion ignoring the taunts on both sides. 

Both of their argument is accurate to their own market. So let's see the impact of six percent mortgage rate :

median household income San Jose: $120k
median household income Twin Cities: $50k

average Zillow home price Twin cities: $300k
average Zillow home price San Jose: $1,400k

Average mortgage payment with 20% down and 6% interest rate.
San Jose: $6700/mo
Twin Cities: $1,430/mo

San Jose's mortgage to gross monthly income : 0.67 ratio
Twin Cities mortgage to gross monthly income : 0.34 ratio

So cost of living in high cap rate like SJC is twice than Twin Cities.

So how do people in San Jose survive and afford mortgages?
Simple, by having both husband and wife working, each making $120k, so the household income of $250k is the new middle class.
(btw $120k is like intern salary in tech co. these days).

....And this is where I seriously Think FED is incorrect in their inflation calculation. They should make individual adjustments to their CPI calculation specifically to OER targetting specific city. Simply aggregating UShome ownership is not accurate. As not too many people buy the home anyway and cities like those inside CA has different affordability ratio. I think they have an archaic system and inaccurate methodology. The OER component is actually the one that drives CPI as it's the highest weighting factor.

My whole argument has been nationwide drops of 20 percent minimum. I even said in the beginning individual markets will out perform (due to the reasons you mention). Jim has been defending the nationwide market by giving minessota data. I won’t argue with the math in some markets.