All Forum Posts by: Jonathan Twombly

 That's the way to do it at this stage of the market - invest for cash flow and hold long-term.  If you do that, it doesn't matter what the market does in the meantime.  As long as you set yourself up in such a way that you are not forced to sell or refi on the downswing, then you should be fine.  

My concern is not for people like you.  It's for the people who are buying deals that don't cash flow on the expectation that they will continue to go up.  Or people whose strategy depends on getting out quickly before the market corrects.

Also, my comments are primarily aimed at larger (100+ unit) multifamily properties.  That boom started way before the housing market recovered and it's getting rather long in the tooth, with hardly any product left on the market to buy, deals starting to fall out because lenders want sponsors to put in more equity to make DSCRs work, etc.  I doubt it's going to be 2007 all over again.  But I believe a normal correction will happen sooner rather than later.

 It's a little bit of an exaggeration, and I'm not talking about the stock market.  For advice on that, I'm not your guy  . . .

 MF and SF are different and SF is definitely a lot more local.  To be honest, I, focused on larger MF properties, which have become a national market since the last recession, so what's I say may not apply to local markets for SFRs with strong local fundamentals.  That being said, however, invest for cash flow no matter what.  Markets can turn unexpectedly and if your investing for appreciation, that's when you will get hung out to dry.  

 "This time is different."  People saying this phrase is the number one most dead-on sure-fire sign that a major correction is right around the corner.  People should set an alert for this phrase and short everything when they start seeing it pop up.  

@Vivek Khoche and @David J.

I find it funny that posts about the impending correction get no traction here.  The other day I posted about how several articles in trade publications were talking about the correcting coming or already being here, and they got almost no engagement at all.

Now that's the surest sign of all that the bubble is about to pop - fingers in ears:  "I can't hear you!  I can't hear you!"

Another sure sign of a bubble about to burst - lots of articles in the press about how it's not about to burst.

@David J.  It depends on a few things, like what your objectives are and how long you want to hold.  If your hold period is the rest of your life, you will probably be okay whenever you buy, as long as you generate enough cash flow to cover all expenses, including capex and vacancy, during the down periods.  The problem really arises when the downturn comes after either (a) people invested for appreciation, (b) they overleveraged to generate returns, or (c) both.  Whatever you do, you need to plan for the downturn and make sure that you are covering all of your expenses and not coming out of pocket.  This is much easier when you buy at the bottom of the market than at the top.

I am sure that someone will say any market is good as long as you cash flow and hold.  Just make sure that you factor in the bad times too.  And you need to be extra-disciplined at a time like this, because people's tendency is to lose their discipline and start making assumptions that are too aggressive in order to make the numbers work.  I saw a good example of this yesterday where someone was offered a deal in which the exit cap rate was two points LOWER than the entry cap rate - which is crazy!  Conservative underwriting principles require you to use a HIGHER cap rate on exit under normal circumstances, but using an even lower cap rate than the current historically low cap rates borders on the fraudulent in my mind.

If you can raise rents without making any improvements, that's always the best. Your ROI is infinite.

@Deborah Burian

@Jason Howell  To answer your second question, less cynically, as for Wisconsin, my advice would be the same as anywhere else.  Follow large, massive trends rather than individual events.  Look for areas of sustained population growth and stable economic drivers.   For that reason, Madison could be a good bet.  I tracked it thought the Great Recession and the economy stayed strong, with unemployment never getting much above 6 percent, compared to more than 10% nationally.  Why?  Because Madison is anchored by state government, the U of W, and healthcare.  Those drivers are not going anywhere.  And they are insulated from the broader economy.  A FoxConn plant is going to lay people off in a recession, especially because their labor costs will be so much higher in Wisconsin than in China.  Those jobs will be the first to go, unless, of course, they decide for political reasons to take a hit because they want to keep the politicians happy.  (Sorry, I could not restrain my cynicism after all.)

@Jason Howell  These government giveaways have a tendency not to pan out in lots of cases.  They don't bring the number of jobs they promised, etc., because no one is auditing them.  Politicians are just playing for soundbites with taxpayer money.  Notice how the plant just happened to be in Speaker Ryan's district, not the district of some obscure, powerless congressman?  Seems to me this is more of a ploy to curry favor with a protectionist administration and a powerful congressman rather than an economically-driven investment.  FoxConn has 1,000,000 employees.  $7 billion to them is nothing.  If they wind up building the whole plant in the future.

@Deborah Burian Lots of investors use a rule of thumb of ROI = 20%/year for improvements. In other words, if you spend $5,000 and you get an additional $100/month in rent, you have $1200 more in rent/year and that exceeds 20% by a comfortable margin. If you can't get 20% then don't do it unless it's absolutely necessary to rent the apartment or it's a life/safety issue.