All Forum Posts by: Marcel Duarte

@Account Closed Thanks for the feedback! And yes, putting an algorithm together and finding those corollaries is my main focus. There are plenty of lagging indicators in this business, it's quite a bit trickier to identify the leading indicators. The nice part about real estate trends though is that they're typically slowwww. I firmly believe we can see these trends happening and react with enough anticipation. 

For instance, for the last two years the gap between development and demand in Denver and DC is rising (two of the cities with the most Millennial growth in recent years). We're starting to see landlords offer more and more incentives to tenants to fill vacancies. Pulling the permits issued from Denver shows us there is roughly double the amount of building happening in that market than before the last recession. Of course this is driven by Demand (fueled by large Job Growth and Pop Growth), but since Real Estate is an inefficient market with so many suppliers of inventory, it's predictable that with any jolt in Demand, there will likely be Over-Supply. 

Plus, thinking through Demand, we're beginning to see a lot of retailers (like the Colorado based Sports Authority) default - PacSun, American Apparel, Aeropostale... what this says about the larger economy, I don't know. From what I understand, much of the growth in cities like Denver and DC are driven by Tech Sector jobs, but we're also starting to see a decline in Venture Funding over the last two quarters. If this is actually the beginning to a downward trend in VF, then we can make the relationship that Tech Sector jobs will likely slow, therefore slowing RE demand in high-tech cities - gotta tangibly define those elusive and pesky corollaries though!

A market that is definitely already experiencing Over-Supply is Miami - a notoriously volatile coastal market. Last I checked, they're experiencing 29 month inventory for their condos. Over 3K condos are developed and on the market. Of course media is trying to tell Sellers to be patient and hold on, but these figures are just saying to me "little upside, huge downside". Eerily similar to pre-recession and 'bubble-like' qualities.

I 100% agree, you can make money in any market if you focus on the fundamentals.  As @Mike Dymski mentioned, cash flow is #1 priority. If buying in a Seller's market like today, I personally would just do a bit of forecasting to ensure the property would still be profitable with lower rents and higher vacancies. Personally, during the last recession, I saw properties furthest away from Tampa Bay's Economic Zones take the biggest hit, so I'd be extra careful to have appropriate forecasting based on that location factor as well. Sam Zell is taking the approach to liquidate his many of his suburban properties as well.

OK. RANT OVER. Need many more hours to appropriately flesh out this thesis. Even then, there will always be infinitely more unknowns than knowns. Many thanks for helping to think through this, just trying to best prepare and identify the biggest opportunities in the next few years! 

I believe in the Nuisance Increase. It helps to 1) train the tenants and 2) force appreciation of your investment year over year. As an example of #2 (the numbers may be very different than your situation, but the math is conceptually the same):

10 Unit Apt Building, increase rents by $20 each year, assuming expenses remain the same.

$20 x 10 units x 12 months = $2,400 in additional annual cash flow.

At a 10% Cap Rate, this adds $24,000 in property value.

With a 100 Unit building, the numbers are $24,000 in Cash Flow, $240,000 in added value.

David Lindahl's 'Multi-Family Millions' book introduced me to this subject in a very easy to understand way. I highly recommend that book.

Good luck!!

Hey Folks,

Curious as to what indicators savvy investors use to determine the market cycle phase? I'm using the framework described in David Lindahl's book 'Emerging Real Estate Markets': Buyer's Market Phase 1, Phase 2, Seller's Market Phase 1, Phase 2. He discusses using quantitative factors such as:

Demand:

1. Employment Growth (driven by commercial incentives and strong local leadership)

2. Affordability (correlation between price and income)

3. Absorption Rate

Supply:

1. Building Permits

2. Vacancies

I'm getting a gut feeling we're seeing seller's begin to flood the market (at least in Tampa Bay) and we're at the early stages of a Seller's Market Phase 2. That's just a feeling though and I'm really looking to put together a cohesive investment thesis to pitch to potential investors. 

What metrics do you all use to help you see the bigger picture? Also, where would you obtain the necessary data? 

Thanks in advance!

As @Matt Lefebvre mentioned, what's the Market Value of the property? 

The rental income/purchase price ratio isn't too solid for a Buy and Hold investment at his asking price. But given that the owner is formulating his asking price completely independent of market value, it could be too high or too low. If it's too low and the Cash Flow numbers don't work, it may be flip deal.

If you subscribe to the school of thought that your offers should be independent of the asking price, it's worth a shot offering at the price you need to make the deal work. Who knows, he may have trouble selling at that price. He might come back to your offer after the summer, once it get's colder up there, and Florida starts looking better and better.

Good Luck!

Hey Jon, hello from a fellow Tampanian!

You may have noticed the rental market increasing close to 40% in some of the luxury apartment markets (Palma Ceia, Hyde Park, Westshore) over the last 2 years. IMO, doing a simple forecasting exercise may help to provide some insight.

A start would be to do Free Cash Flow and NOI projections based mid-low end of rent and increased vacancy. I think if 1) you still have after-leverage Positive Cashflow and 2) if the adjusted NOI still gives your property enough value to Refinance, you should be OK proceeding with the BRRR strategy. If you're still Positive CF with the adjustments but the valuation won't be enough to refinance, you may want to consider extending your time horizon by 5-10 years (assuming you believe the rent demand will still be around in a decade for that neighborhood). If there is no Positive CF with those adjustments and you believe the market will dip, it may be prudent to shorten your timeframe or come up with a creative way to cover/reduce the operating expenses so you can weather the downturn.

I'm curious what other folks have to say about this question though...

Price is increased by two factors - low supply and/or high demand. Everyone can agree, the numbers over and over again shows that we have low inventory (~4 months last time I checked, equilibrium = 6 months), which of course drives price higher.

But I also believe we have high demand. And I think this demand is being fueled by low interest rates and low down payment requirements. FHA loans only require 3.5% down with a 580 credit score, 10% down with a 500 credit score. Bank of America just rolled out a 3% down loan. People are attracted to those loans and they want to buy houses because of it.

What would happen to housing prices if the down payment minimum was increased to 20%? If this happened, I believe the housing market would come to a screeching halt because many folks wouldn't be able to afford homes. If you agree with this logic, then you also agree that the mortgage landscape affects demand and therefore impacts price.

I believe a downturn is inevitable, especially given our 'waffling' economy and my hypothesis that demand is artificially inflated with highly leveraged mortgages, which could result in a panic sell-off if a minor downturn results in too many underwater homeowners. Personally, I don't think it's time to sit out necessarily, but rather be very conservative and save cash for when the market does correct, probably in mid-2017.

I wrote a forum post on the relationship between Student Debt, Current Mortgage Terms, and the Impact on Housing Prices here.

On BP Podcast 170, with @Andrew Cushman, he said he made over 4,000 calls to get his first deal. Two take-aways from that - first is to keep pushing until you get a deal. And second is that's a lot of thank you letters and will end up costing a pretty penny to mail out.

Another thing to consider is your target market - depending on who you're talking to, a thank you letter may make sense. But any direct mail campaign, even with thank you letters, should be fairly targeted so you can mail to those folks over and over again without breaking the bank. Fortune in the follow up.

Good luck!

@Christine Ans Welcome to BP! There will always be so much to learn, that's what makes it fun. The BP Podcast is a great place to start!

How have folks here structured their realty business? I was thinking of doing an LLC with a trade name for my brand. In Florida, I believe you're required to set up an LLC as "FirstName LastName, LLC" if you're a RE Salesperson. But I think you can tack a trade name or DBA to that for branding purposes... I'm just not sure.

Anyone have experience with this type of thing? Thanks in advance!!

I agree, I've seen this happening in my market as well. You're almost being charged a "premium" to buy a distressed property. Unfortunately, I think some folks actually pay that premium. Which must mean they've calculated an ARV factoring in future market appreciation, which IMO is pretty speculative...