All Forum Posts by: Richard W.

@Account Closed hopefully the google link below works so you have access to the data

https://docs.google.com/spread...

@Kevin Bazazzadeh thanks very much, hadn't realized the extent of the opportunity zones in Houston

@Kevin Wood I'd actually ruled out Third Ward and Sunnyside due to crime (also Third Ward doesn't quite get the 5% cap I'd like, but that's only on average for the neighborhood, and it's not too far off). How would you describe crime in these areas, sounds like its not bad enough for you to worry about your own personal safety while there? (I only recently moved to the US, nor do I know Houston, so its hard for me to judge the reality on the ground of what maps show to be more dangerous areas!)

Below is a map of location of where the SFR REITS own in South Houston. Blue is American Homes 4 Rent and purple is Invitation Homes. They have tons of data obviously, and have generally been moving away from the cheaper homes across the country as their data shows poorer returns from these parts of their portfolios due to turn and maintenance costs primarily (I believe that's what I read). All the houses they own are pretty well kept and tend to be newer (built last 20yrs).

I've been thinking maybe don't bet against them and their data. So for example the parts of Pearland adjacent to the 288 provide decent commute times, and you can see some of their houses clustered there. Also in Fresno (but over 45min commute). Any thoughts on these areas would be much appreciated?

@Ryan Johnson thanks very much for the insight. I did a bit more data digging which I'll share, basically knocking some out primarily for high crime. Would you be happy to share which you are active in and any thoughts you have on them?

@Account Closed the data was from Zillow link below. I manually coloured by quartile, although I know excel does have a function for that I just dont know it! Once I tidy up my s/s I'll share with a link (if I can work out how to). I've also got rent growth and few other stats on there.

https://www.zillow.com/research/data/

@Kevin Wood cheers for the link, will read! Also for the neighborhood advice. 

Overall I'm looking for a buy and hold strategy but with a view to appreciation. i.e. provided I get at least a 5% cap rate (I'm financing at 30yrs @ 4.5%) I'm looking for the best combo of commute times, schools, crime and newer build/little upfront work to be done. I'm focused on commute to Texas Medical to hopefully reduce some of the dependency on oil price/industry (clearly at MSA level its still a very significant factor for Houston)

I'm looking for SFH in south Houston area. I'm targeting areas within 45mins drive in rush hour to Texas Medical Center. Mid to good schools (particularly elementary). Ideally 1% rule, but a little flexible if other criteria met. Built last 15yrs or so. Spend $140-200k (almost rent ready).

I've seen these areas in blue on image below have done well for appreciation last 5yrs (other colours show quartile of all neighborhoods for respective annualised growth). However some look to be high crime areas.

I've also seen that the REITS Invitation Homes and American Homes 4 Rent are active in some areas which is reassuring. They are also active in Fresno which is outside the 45min commute but perhaps I should consider.

Any input on which neighborhoods to target is much appreciated!!

I need to give the SFH vs multi-family more thought. I can see that if you can convert your multi-family to condos that gives you great flexibility/ a hedge to the two markets moving out of sync. I heard one BP podcast from somebody profitably doing this in CA. If anybody has links or thoughts on how I can learn more about this subject that would be great!

Could be an important factor as I weigh up strategy/market (e..g maybe some cities are much more restrictive about doing this, building code, zoning etc)

Hi @Llewelyn A., thank you again for a very detailed response! There's a lot to think about here and I've already re-read the post a few times!

To your question on 30yr mortgages in London/UK: they don't exist, at least not in the standard residential mortgage market. Here few people even go beyond 5yr fix. As a result there is a very strong feedback loop of rates policy to the economy here via the housing/mortgage market. 

Long dated fix mortgages are one of the attractions of US real estate for me. I think your point about the power of buying a property, choosing one that will at least appreciate with inflation, using the lender's money at a low fix rate for 30yrs, is underappreciated by many. So I totally agree about the benefit of focusing on growing major metros. Elsewhere I think there can be too much uncertainty as to whether house prices will keep pace with inflation.

@Russell Brazil I liked the way you put this earlier. 

Why is it no one doubts that inflation happens yet so many are skeptical when we call the same economic force appreciation?

I'd maybe just qualify it to say that over the medium/long term one should be able to bet on appreciation (provided there is inflation) for all US housing stock in total, but of course that doesn't mean it holds in all individual markets (back to @Llewelyn A.'s example of his friend Steve!)

@Llewelyn A. understood thanks very much, that really helps me understand how you think about risk/return and have the contingency plans in place for those initial years where cash flow is tight. 

In my view this argument on whether or not weighting towards higher appreciation/lower initial cash flow markets is sensible or not cannot be answered unless you have a specific time-frame in mind. 

My feeling is that if you have a 20-30yr time-frame you are likely taking larger risks/speculating by betting on markets where initial cash flow is high but the market could see both property price depreciation (in real terms) going hand in hand with rents not keeping pace with cost inflation. @Fred Heller let me know if you disagree?

I've got a couple more follow on questions if people have the time!

1) In London where I've invested (or maybe speculated!) to date, I felt that one could identify the waves of gentrification that sweep through neighbourhoods (people renovating, new transport links, new cafes/bars/restaurants opening etc). Its a city without enough houses being built and no more space. I can see that you might be able to do similar in NYC and position for appreciation. However to be more analytical:

a) which are the top 3-5 stats you look at to try and pick neighbourhoods that will see price and rent appreciation over the next 3 years?

b) can I think about other growing MSAs in the US like DFW in the same way? i.e. these cities with way more space and with industry/employment more scattered and less concentrated in downtown. I worry that I may try and apply my experience in London to other US cities where it's completely inappropriate!

2) With multifamily one of my concerns is that cap rates across the board are repriced upwards as the US/world economy exits this period of exceptional monetary stimulus. As the Fed unwinds their balance sheet (i.e. sells all the bonds they purchased under QE) and possibly hikes rates more than expected, you could see all rates of return (e.g. 30yr treasury rates, corporate bond yields, high yield etc etc) widen. Surely cap rates get dragged upwards in this scenario too, with commercial/multifamily prices therefore dropping?

This is one reason I'm thinking to start with a small SFH portfolio where prices are more pure supply/demand for housing and not driven by the yields global investors demand over and above risk free rates.

Any thoughts much appreciated!

@Llewelyn A. thank you for the detailed posts and s/s numbers, they are very helpful as I weigh up what strategy I should pursue. It's clear one can't rely on initial cash flow alone and must project future cash flows; as others point out costs could grow faster than rents (e.g. rust belt towns with declining population).

Where I'd be interested to hear your thinking is on reserves and the liquidity of the properties you buy.

e.g. with hindsight you can always point to which of these two properties provided a greater total return over ownership:

a) zero/low cash flow property (on day one) that pays down mortgage, but appreciates and cash flow builds as rents outpace costs (i.e. your Brooklyn example)

b)  higher cash flow property (from day one), but lower appreciation and lower growth of cash flow as rents and costs grow with inflation only (e.g. a stable Midwest city perhaps)

I would tend to agree that if you can get it "right" and can predict rent growth etc then property a) likely offers potentially higher returns.

The difficulty I have is thinking about the risk embedded in making these predictions upfront coupled with the inherent illiquidity of property. When you have a low/zero cash flow property your margin for error is lower, e.g. when things go wrong (unexpected void periods, needing to await insurance claim etc) you may quickly bleed cash and reach a crunch point.

I'd be interested to hear, perhaps in the context of your total portfolio, how you build in contingencies to protect against this? Reserves would certainly be one aspect of this, or lines of credit against equity in other properties, or perhaps certain properties in your portfolio that are more liquid and/or earmarked to be the first to unwind (sell) to free up capital if unexpected events lead the total portfolio towards a possible crunch point.

Overall it appears to me that zero/low cash flow properties may only offer better risk/reward in a larger portfolio or where cash can be found from elsewhere (salary etc) to guard against negative events.

Thanks!