All Forum Posts by: Account Closed

Perhaps I should say it again, using an IRR to evaluate an investment with negative cash flows has its problems. Go read up on multiple IRRs or find something better to do. If rental income doesn't cover expenses and mortgage, investment decision = NO if positive cash flow is the objective (not deferred cash flow). Any part of that you don't comprehend? Go back to kindergarten for petty talks! What a nut!

Regarding institutional funds, that is a good question; although there are institutional investors with short term cash flow objectives, they typically can, if they want to, go long and wait on appreciation. Wouldn't be surprised if there are institutional players buying up in areas with negative cash flow. If they are exiting, its probably not because they cant wait.

And there is nothing wrong with pursuing a cash flow strategy... nothing guarantees the long run rate of return on any investment; which after adjusting for inflation and other opportunity cost may not be materially different anyway. If your primary goal is cash flow in RE, then you would probably buy in Detroit, Baltimore or areas with similar cash flow characteristics as opposed to say LA or SF.

The IRR, has its issues -- especially when talking about negative cash flow situations that may generate multiple IRRs but that is digressing from the point.

The purely cash flow oriented investor, typically invest to generate passive positive income -- usually monthly. They don't want to look at investments with negative monthly cash flow, regardless of actual cumulative returns 10 years from now.  

If rent in LA is $3500 a month and half of that is expenses, that means I only have $1750 to service the mortgage. But mortgage payment itself is almost $3800 at a 4.7% rate. So instead of generating a positive passive income from this property, I would be generating a passive monthly expense of almost $2100 per month. 

One thing you don't have to explain too hard to some investors is what income is and what expense is. A $2100 monthly expense for 10 years on a property or for however long the holding period is, is just not something they are looking at. It has nothing to do with whether they have the cash to spend. The philosophy is to let leverage do its job.

It doesn't make LA a bad market, someone still has to live there. It just means an investor whose investment objective is generating positive passive monthly income, may better achieve that goal in say Detroit or Baltimore or may have to look into bonds or a dividend paying stock, as opposed to crossing your fingers and waiting on appreciation while getting hit with monthly cash outflow throughout the holding period.

So if the number makes sense considerably in the long term... then as some way to avoid walking away from the market completely, the investor may then have to figure out just how much cash is needed for a down payment, to finance a lower principal balance, where they just break even and dont to incur a monthly cash outflow as previously discussed.

If its all about 7% per year on funds, heck there are bonds paying close to that with lower risk. What I can afford you can speculate about all you want but last I checked... I didn't enact current rent controls that many of the investors there are griping about. And rent controls get enacted because residents there, have no issues right?

Some investors want a positive monthly cash flow per month not 10 years from now. Some investors obviously just need to park the funds somewhere and get it out whenever... different motives.

If you are simply talking about which cities in the country have had highest average returns per year last 30 or 40 years thats just data... but there is a difference between the population in California and the population in Maine. You can't expect property prices to be growing at the same rate in both areas.

By the way.. if you review the link below, and if that applies to most areas in California, then we are only talking about 28% or so of the transactions being cash transactions. So there might be 69-70% of transactions using debt.

Introducing any sort of debt into the equation just throws off the numbers in some cases and doesn't make deal as profitable. Any multi family cash flow investor who utilizes leverage in any or majority of deals and expects or is used to positive cash flow per unit monthly, will always frown at some of the California numbers. This doesn't mean Cali doesn't grow at 7% per year.

And so if we are using the: Cash Flow + Appreciation view

Using a basic $750,000 property in LA, with debt in the mix, Cash Flow may of be negative, costing investor money just to maintain the property. 

If only making a 20% down by the way (which would be unheard of for anyone with cash flow motives in LA for instance), the investor would have to spend almost $15,000 out of pocket funds just to keep property by each year.  

Negative cash flow to the tune of $15,000 per year for 10 years is a gamble. The market doesn't guarantee the 7% per year. Market could tank just when you are about to exit so none of this is guaranteed.

The play (or shall we say pray), for many investors in the market there is appreciation - especially when using leverage.

http://www.sfchronicle.com/business/networth/artic...

 Sorry Andrey, but this just sounds wrong and possibly illegal.

Interesting... the more you try to be civil... the more you have a loose nut try to start an unnecessary argument.

If you are trying to brag about having some legendary imaginary investment skillz with a big Z to me, you barking up the wrong tree chuck... and if you dont have anything relevant or positive to add the discussion, find somewhere else to rant.

Most multi family cash flow investors buy properties with cash or use debt from a lender for most transactions... so if you are referring to any other non main stream, private money route or pooling of investor funds as some sort of rocket science then feel free to give yourself a pat on the back... feel better now!

The mere fact that you have to resolve to unusual or abnormal means to achieve normal results tells you there may be something fundamentally wrong. 

Market rent is market rent -- has nothing to do with your "skillz". Market rent ultimately determines cap rate if expenses aligns with market norms. If you need a hammer try Lowes or HomeDepot.

 What is the average price per room/door based on those listings? Any info on the average daily rate or occupancy/vacancy rate? 

 Malaga has 70 million visitors per year? Really? Is this number verifiable at all? Also what is the local economy like either in Spain generally or in specific markets? Any info on occupancy/vacancy rates, nightly rates etcc.?

To some investors the question is this: if the long term growth rate in LA property values is 7.14% per year, is that worth the pain of a 50% down payment on a $750,000 property just to achieve a 3% cap rate? Is that really the best use of the funds? 

Certain nooks in CA like Pittsburg or Richmond, if zillow's info in correct, have apparently grown year on year by an average of about 19% for each of the last 5 years...probably not a sustainable growth rate for 10 years but that would be the sort of growth rate per year that would justify 50 or 70 % down payments. 

Cap rates in some areas is below 2%. It has to make sense.