All Forum Posts by: Nick Robinson

@Andrey Rudenko
I have no doubt the timing of the attack was no accident.  He has always attacked or done something when there is weak leadership.  It is kind of interesting how all of his attacks have been right after the Olympics.  The West is not really serious about stopping Putin or trying to deter him.  On Thursday after he invaded the West in total, mainly Europe, bought $350m in Oil and $350m in other goods.  The sanctions that they have put on Russia are not very harsh and will probably not move the needle much.  Even taking them off SWIFT they only took off some banks and are still letting the Russians sell them energy.  Unfortunately, the West is not willing to sacrifice anything or does not want to suffer and is trying to avoid pain at all costs.  You have to have sanctions that will slow him down and that means we will suffer a little bit to make that happen.  As Thomas Sowell said, "There are no solutions; there are only trade offs."  The West, specifically Europe in this situation, decided to go green and the trade off was they would be heavily dependent on Russia. 

In terms of the yield curve the FED changes the FED funds rate, which is the overnight rate for commercial banks to lend each other.  This heavily influences the short-term bonds but does not affect the long-term bonds.  Long term bonds are inflation and growth potential.  When the FED raises rates, you will see the short-term bonds move faster than the long term.  If you want to see something real interesting almost every inversion of the yield curve was proceeded by 3 consecutive rate hikes by the FED.  The FED has done a terrible job of controlling inflation since it was created in 1913 and trust me that are not getting any better at it.

Quote from @Aaron Oetting:

@Nick Robinson my problem with this analysis is a government is not a for profit business so measuring it's success on a income to debit basis is like measuring fish on how well they climb trees.

Aaron, I agree with you completely that the government is far from a for profit business.  You can see throughout history the less government involvement the better in every situation.  I am kind of confused on your response talking about the government's income to debt ratio.  Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.  This includes everything including the private sector.  GDP is not just measuring "services or goods" that the government creates.  

Having a debt to GDP ratio of 125% basically means that if you take everything the US makes, in this case a year, and add it all up.  You would find that the yearly expenses are higher than everything we make.  Basically, for every $1 the US makes we owe $1.25.  If my post made anyone think that the government will produce goods and services or somehow, they will be able to get us out of this mess that is wrong.  In the 1940s the US government inflated the dollar so much that in nominal terms the debt to GDP ratio came back down under 100%.  That made the average person and people that were holding on to money poorer, but the government "fixed" the problem.  To fix the issue you CANNOT turn to government you want to turn to the private sector and remove regulations and restrictions and let them produce the goods and services.  The FREE market will have much better capital allocation than any government agency.

Quote from @Eric Janson:

If this leads to World War 3, then it would probably have an effect on the entire economy, but I don't think that will happen.  If it is a small skirmish or nothing at all, this will have zero impact on us here.  There is always a "sky is falling" story out there about real estate.  Sometimes they come true, but 99% of the time they don't.  I agree with the other statements.  Turn off the news and focus on what you can control.  The glass can be half full or half empty.  It is up to you how you see it. 

As far as people saying this will destroy the economy it has been in bad shape for a while. If you watch our debt/GDP were at 125%. Which is higher than it has been since the 40s. The big difference between the 40s and now is what kind of debt that is. In the 40s that was during WW2 so the increase in debt was a one-time fixed cost i.e., CapEx. Right now, most of our debt is expenses that we pay every year, social security, welfare, social programs etc., so that debt will not just disappear over time. In fact, most of it is tied to the CPI which means it's an ever-increasing expense. The only way to get out of this is to cut costs, I do not see the government cutting any social programs, this would be political suicide. You can use inflation to raise nominal GDP, but nominal GDP has to go up at a faster rate than you are increasing the debt. The third option is you need to produce more goods and services. The total debt would not be a big deal if you were producing enough goods and services to have a healthy Debt/GDP. An example using real estate if your total expenses and debt service was $2000/mo. but your property made $5,000/mo. no big deal, but if your income was only $1,600/mo you have some issues.

Besides the debt the Eurodollar futures curve inverted in early December and became a lot more inverted last week. The Eurodollar system is the US dollar outside of the US, which is about 79% of all total dollars. The Eurodollar is predicting recession in the world economy or less economic activity in the future. The US bond market has been getting flatter, which is the sign of a weak economy, and is getting closer to an inversion which has preceded every recession since WW2 and real estate has gone down in about two thirds of all recessions. The Dec TIPS data came down and basically predicted the same thing that we are not in a good situation.

This again goes back to my other post that your main goal is to minimize downside risk.  I bought last year, and I am a buyer in all markets, as long as I do not expose myself to risk.  Like you said no one knows when the next recession will be, and no one knows how a recession will play out.  They have done a pretty good job at kicking the can down the road but who knows how long they can do it for.  Since the GFC every time the economy, specifically the stock market, was going down they did deficit spending and QE to prop it back up.  It was no big deal since they were doing it in a time of low CPI.  Now the CPI has gone to 7.5% and the FED is left with a big decision. 


Rule #1 Do not lose money
Rule #2 Do not forget rule #1
  

@Alessandra Verbena @Matthew Irish-Jones

Matt,
I agree with you that trying to predict the future can be a very expensive game.  I think it is better to focus and place your bets on things that have limited downside risk.  All investing is RE, stock market, etc. is making decisions that grow your capital, but do not risk or minimize your downside risk to losing that capital.  For example, if you buy a property and bet 100% on appreciation and have a negative cash flow position that has a lot of downside potential.  Even though I understand the argument that in 10-20-30years that real estate will be more expensive.  In the short term that is extremely risky.  I read a post about 6 months or so ago on BP where someone bought a SF property and was losing over $2,000/mo. but justified it by saying he was getting like $3,000/mo. in appreciation.  This is obviously an extreme example but all you are doing is justifying to yourself that it is ok to lose money, but this has big time downside risk.  Whereas if you bought a property that was cash flow positive you mitigated your downside risk because no matter what that property is worth if you are making positive cash flow you will never be forced into a position that you have to sell and since real estate will be more expensive long term there is very little downside risk.  

@Adam Glouner
I agree with @Joshua Noth if you have a stable long-term tenant that is paying you on-time and not destroying the property they are worth their weight in gold. Especially being your first rental and being cash flow positive $550/mo is great. A couple things to think about if you remove this tenant to renovate how much will that increase rents? For a SFR it would have to be a substantial increase to kick a quality tenant out. When factoring in your costs remember it is not just renovation costs, but you are losing money for the monthly mortgage during this time as well, along with locating a new tenant. The new tenant may not be as "easy" as these long-term tenants, and it could potentially increase your expenses monthly. When you finish your renovations make sure you are using a conservative ARV for your property. I see post all the time of people expecting these huge ARV numbers after renovation, but SFR do not work that way. It is based on comps. You can always raise their rents yearly and as their rent slowly increases, they may want to move out and then you can do the renovations, or you just keep increasing your cash flow. I would also suggest that before you bought the property you knew there were long-term tenants. You should have thought about what you wanted to do before you bought the property and run your numbers and see if it made sense to renovate it immediately or just collect cash flow and renovate sometime in the future.

The last thing that I would make sure you are aware of is about 3 months ago the Eurodollar yield curve inverted, US treasury yields are getting flatter and the current TIPS data did not look good.  Add in the Ukraine situation and a possible attack by China to reclaim Taiwan.  This would be a time to be more conservative and see how everything shakes out over the next couple of months.  The newer you are to RE investing the more at risk you are and right now there are a lot of different factors that would make me more conservative.

@Jason Malabute
Agree with your final statement is that you should never invest borrowed money to invest.  (I guess never say never because there are always will be situations where it could be to your advantage).  A refinance is different because you locked in that rate and payment for whatever terms you agreed on.  
The FED is talking about raising rates a lot more aggressive than a 50-basis point hike to the FED funds rate.  It looks like they will do a 50-basis point raise in March.  The market is projecting 7 rate hikes this year.  There is a lot of uncertainty in the market right now and there is a higher probability of downside risk than a benefit.  The Eurodollar market, US dollars outside of US, is the 2nd biggest market in the world.  The yield curve inverted the first week of December and has stayed inverted the past 2.5months.  This week the inversion has increased to 21-basis points.  The Eurodollar yield curve acts a lot like the US treasury yield curve.  When there is an inversion there is a very high probability of a recession, 90%+, in the future.  If you look at the US treasury yield curve it has been flattening more and I believe on Friday, the delta between the 2 and the 10yr was 46-basis points.  Every recession since 1900 has been proceeded by a yield curve inversion and every yield curve inversion preceded a recession.  Just under 2/3rds of all recessions have seen a real estate crash since the end of WW2.  When the FED raises rates the raise the FED funds rate, which is the overnight lending rate for US banks.  This has a high correlation to the 1yr and 2yr treasury yields but DOES NOT or very minimally affect the 5yr, 10yr terms.  When they do this rate hike in March you will see the delta between the 2 and 10 compress very quickly.  The long-term bonds, 10yr, are set by the market and are growth and inflation potential in the economy (Irving Fisher).  The FED even did their own study when they tried to prove they can control the 10yr and they found with the trillions, about 5, they have added to their balance sheet since the GFC at most they affect the long-term treasuries by 15-basis points.

I think the last time I looked there is supposed to be, depending on supply chains, about 1million housing units completed around Q2/Q3.  That would greatly increase the supply.  I saw the other day that homebuilding has dropped 4% so far this year.     

In summary there are a ton of cross currents on a macro- level but there is a higher probability of downside risk.  That does not mean do not buy now. I would be very cautious with what I do run my numbers very conservatively, positive cash flow, very modest if any rental rate hikes in my projections. If you are buying risky investments, negative cash flow, betting on appreciation over the short term you are playing with fire.  Watch the 2yr and the 10yr treasury yields.

@Jason J.
Without knowing any prepayment penalties or anything else about the loans I would take the 7yr.  My reasoning is currently in this market there is a lot of uncertainty and there is a greater downside risk to prices right now.  The Eurodollar Futures, US Dollar outside of US, inverted early December which is projecting lower economic activity worldwide in the future.  You basically look at it the way you would look at the US bond market yield curve inverting.  Speaking of the US yield curve it has become increasing flat which is showing the market believes we have a weak/something is wrong with the economy.  If the FED stays with their stance to raise FED funds rate in March and have 7 total hikes this year, I would project we would see a yield curve inversion.  Thats important because it is over a 90% chance that we will have a recession in the next 14months, if that happens.  Every recession since 1900 has been preceded by a yield curve inversion and every yield curve inversion has been followed by a recession.  Out of all the recessions since 1900 just under two thirds of them have come with a real estate crash. I want to minimize my downside risk as much as possible.  Watch the 2yr and 10yrbonds.

@William Coet
Yes, you can 1031 from a 3unit to a SFR as long as the home is used as a rental. The one thing you may need to be careful of, unless you are going to a more expensive area, is you need to 1031 into a more expensive building or you will be taxed on the difference between the two buildings. Most of the time if you are 1031 you want to move yourself into a better position. Most people my take a SFR and buy 2 SFR or move the money to a better area. Usually, people do not move down in unit count. What is the reasoning for moving your triplex into an SFR?