This page has been archived and commenting is disabled.
The last to the party: Investors and flippers competing for small amount of inventory.
The data coming out on home prices is rather clear. Home prices are moving up steadily in the last year now increasing at a rate last seen in 2006. Of course, little of this is coming from wage growth but more from easy access to debt, investor demand, and historically low supply. One thing that people fail to remember is that during the last housing bubble, people were supplementing a lack of income growth with easy access to debt to add fuel to the housing market. This time, the easy money is being supplied to banks and hedge funds that are simply chasing higher yields. Anyone that has a hand in the housing business, especially in the grind it out rental business understands that it is no hands off endeavor. This is why it is surprising to see how much money is now being funneled into the market by brand new small time investors, especially in places like California. You know things are getting frothy when new money is willing to chase the rental business.
Investing big in Southern California
I saw this interesting post over on Redfin:
“We are a working couple first time buyers in La California. We have 300K$ down and were preapproved for 900K loan.
We never owned property before so we are seeking expertise advice and answers to these questions
1. We were wondering about what people who have gone this route have to say or give advice on that.
2. Is this the right way to go?
3. As we understand how important location can be, we are debating whether we buy it in Burbank N Hollywood Sherman oaks, La near USC or West Hollywood? Investment wise what would make the most sense?
4. Also for maximizing investments and cash flow what’s best 2, 3, 4 units or more is best?
5. What things do we look for when we go see the apartment?
6. What questions should we ask the seller?
7. What to look for in the surrounding? Besides school public transportation and safety obviously?
Any comment and/or advice is greatly appreciated!”
Think about what is being asked here. A first time buyer is looking to dive into a $900,000 investment property (almost $1 million) and has many questions that are basic for most investors even considering a $100,000 investment. So let us just pick a place in Burbank that fits the $900,000 mark:
283 N Florence St
Burbank, CA 91505
# of Units 4 Units
Beds 4 Bed
Sq Ft
Lot Size 7,379 Sq Ft Lot
Year Built 1947
The above place is a 4-unit property. The place is listed at $895,000. From the income sheet we find that the property will produce a gross income of $41,580 with expenses of $5,633. The expense amount is incredibly low in my estimation. From practical experience by the time all is said in done with taxes, insurance, vacancies, repairs, and just the operation of a mulit-unit you are likely to get a net operating income of something close to 50 percent of your gross income. Even with that said, the rents here are essentially $3,465 per month (or $866 per unit).
Let us assume this investor goes with this property. In more expensive areas of California investors are now buying to flip whereas in lower cost areas like the Inland Empire, more are buying to rent. From the initial notes, this potential buyer will put down $300,000 for the $900,000 property. Let us be generous and say that everything goes well and they manage a 60 percent NOI on their first year (meaning they kept expenses at 40 percent*). What is the cap rate here?
$24,948 / $900,000 = 2.77 percent
*Mortgage payments and depreciation are not considered operating expenses so that does not impact NOI
Keep in mind the above assumes a very optimistic scenario. In the end, this investor is going to be putting $900,000 at play for a 2.77 percent rate of return and they will be working for that money. If not, they’ll certainly be paying someone for that rate of return and this will cut into the overall rate.
Keep in mind we still need to factor the actual $600,000 mortgage payment. It looks like they were pre-approved and with everything said and done, the APR on this thing will likely get close to 4 percent on an investment property. So here is the principal and interest:
PI: $600,000 loan at 4% = $2,864 per month
The place is only producing $3,465 gross per month! Not factoring anything outside of principal and interest, which is big for a multi-unit, you are looking at a gross minus PI amount of $601. Bwahahahaha! What is amazing is they tried to sell this place for $1,000,000 last year:
Any seasoned investor looking at this is probably shaking their heads. Even the press now understands exactly what is happening:
“(Reuters) Home prices have been rising since last year, helped by investor demand and tighter inventory. The top five states with the biggest gains in prices were Nevada, California, Arizona, Idaho and Oregon.”
Helped? The market is being driven by this. In SoCal 35 percent of all purchases last month came from the all cash crowd. The only reason you would buy a place like this example is if you believed in solid appreciation. This is what many of the flippers are doing. Buying a place, fixing it up, and selling it into the current momentum for a quick profit. The fact that people are considering diving into the current game in LA and OC for rental cash flows boggles the mind, especially new investors looking to put down $300,000 on a $900,000 property that will throw off a yield lower than you can get in regular bonds.
Saving $300,000 is no small task. I'm curious as to what the perspective would be on buying a place like this?
Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information.»
- advertisements -
Alternative: I'd take the $300k, convert it to RMB, stick it in the bank for an easy 5% insured bond. Pull in some 7700 RMB a month and looking at *very* conservative appreciation of the RMB over the course of a year, be sitting on a return of 6.67% without even trying... with the benefit of not having an old shit house that's just begging to go underwater at a moment's notice and no $600k loan to worry about either.
Who gives a flyin' fuck about Kalifornia? The stupid assholes deserve to go even broker than they already are. I hope all those union fucks are among those levered to the hilt. It'll be fun to see them lose everything.
No inventory shortage in Florida, and I've seen most of the state in the last couple of months.
A few dozen houses for sale in my neighborhood. Haven't seen a single looker. Hell, I haven't even seen a real estate agent, in April and May. When Cali's overpaid "public servants" get their asses handed to them instead of a pension this will go south mondo pronto.
Don't EVEN try telling one of them that regarding their precious, er I mean pension, they get downright hostile!
Taxes for City of Burbank LA County are 1.x% of what you paid, 900000x 1.071625%
Or $9645 per year in taxes alone assuming the brain dead renter population doesn't vote anymore bond issues, and assuming you're OK with a declining volume of services without substantial tax increases every year going forward forever.
Insurance $1400 (assuming you have no losses)
EQ insurance $1200 (assuming you have no losses, loss add $90,000)
I'm at $12,245 not $5633 (9645+1400+1200) and haven't added in management nor maintenance yet.
Run away as fast as you can!
Imagine what the earthquake insurance is.
Imagine if SoCal gets the big one.
Anyway you slice it they will be lucky to break even.
More than likely they'll get sued by a tenant or visitor and have to sell.
If the property is so great, why is it being sold?
Why didn't it sell for $1 million?
1947?
Ugh.
1947: Needs new plumbing from top to bottom. Asbestos will be encountered after work begins and contractor has excluded hazardous materials handling or abatement. While the plumbing and patch work are being inspected by the city they notice some structural modifications from renovations past and make YOU correct them. Of course all the while you are receiving NO RENTS due to the previous abatement of hazmats. When you have finished the places are nicer than before so you consider increasing the rents only to find so many available apartments everywhere you end up taking $800 a month...
I guess Cali is lots different then where I live. Not much selling here. Several houses on the market for sale and a couple for rent just sitting there for several weeks now...more like "the old days" meaning pre-2005. And this is the so-called, "peak season."
As realtors are fond of saying, "All real estate is local" and in my 'locality' sales are slumping badly.
Never give a sucker an even break.
Just sold our house in MN and breathing a sigh of relief. Now we rent and save. And save. And...see where 'normal' interest rates take us.
We had a purchase agreement within 24 hours of listing, and when that fell through had another within a day of re-listing. It is true that inventory is tight. But only in certain locations.
You just can't fix stupid.
This next housing crash is going to be much more devistating that the last one.
You picked an extreme example of stupidity. I'm buying 20 houses a month. My true cap rate is 10-15% un leveraged. I don't use leverage but I would if I could. My cash on cash would be 50-75% if a bank would finance 75%. But they won't. Thank basal iii for that. I'd be buying more f it weren't for blackstone, cornerstone etc crapping up the market. They are bidding up prices to 7-8% cap rates.
Net income averages 60-65% of gross income FYI. You had that part right.
I be smaller. I am buying 1 house a month and getting between 10-15%. My costs are in the 35% rate. I am not leveraged. I am income driven and location anal. Big REIT's are driving up prices here too to the 6 to 7% region. I want that much return to offset risk of rent reductions as these new yahoo's learn that excel sheets in the sky with bernanke rent increase assumption baked in can be traps.
Look at it a different way. $866 isn't very expensive so vacancies shouldn't be much of an issue. Say they average 1 month per year. 11 months at $3465 equals $38,100 per year in rents. They will be paying out $34, 400 in mortgage plus say $8k in expenses for a cost of $42,400 annually. This means they will need an additional investment of $4,300 per year.
They will also be paying off their principal averaging $20,000 per year. If the house price stays the same, they will improve their financial position by $15,700 per year. $15,700/300,000 = 5.2% annual return.
This does not include several facts about housing. Over 30 year periods housing generally rises significantly. Over 30 years rents also rise significantly.
I think it would be safe to say the place should be worth double, at a minimum, in 30 years and rents should doube as well. If rents increase at 2.5% a year, they will collect a total of $1.67 million in rents. Their total expenses would be $1.47 million at 1% increases (biggest cost is fixed). So cash out of $200,000 plus $1.8 million in property worth means they turned $300,000 plus $4300 per year into $2 million and a net rental income of $60,000 per year. Works out to about 6% a year. I doubt an investment in bonds will bring that over the next 30 and stocks are a big if. May be be better deals out there but this is not the worst investment.
Actually CA property taxes aren't capped, the base rate stays the same (unless the renter mob votes to increase it) but the actual tax basis increases 2% every year, that 900000 building is next year taxed at $918000 Then 936360.the year after and so on, and rents may not keep up, rent control has been enacted in multiple CA cities.
They would have been better off buying $300,000 in farm acerage with the cash they had and leasing it to a farmer, applying for conservation easements, and not having to deal with tenants.
I am a Realtor and CCIM, 99.9% of the residential crowd out there has no clue what or how to figure a cap rate,and neither do bank underwriters. I am amazed how dumbed down our population has become, no wonder cash is king. Advice: Invest in a strip club , the IRS has no clue how much cash is flowing in, and even though strippers are high maintenance, you don't have to give them an eviction notice and watch them fight you in court when you tell them not to come back. Hire a couple of Outlaw/Hell Angels for security and play hard.
Trust me, every strip club owner I know has a lot of liquid obama money stashed away
Doesn't Obamacare strip off 3.9% of your rent income from now on?
Gee, where is all that "inventory...."?
If snap goes to 4 k a month, 22 million illegals will....snap up these houses, or rent them...oh wait....
What they are hopeing is to push this housing boom again and then deflate it, but this time being on the other side of the bet and making money on the downside.
Great article.
Gee...what to do with 300k and a 900k loan possibility? How about investing the 300k that you HAVE in a couple small dives in rural Iowa, fix them up and rent them with an option?
The amount of shadow inventory where I live north of Tampa is ridiculous, but with it off the market the available inventory does indeed seem tight and prices have again climbed. This will end in tears again.
I wonder, what is happenning to the shadow inventory in Detroit? It is falling apart. Pirces for crappy houses are less than 10K. The government is letting things fall apart. Thousands of houses essentially potnetially leaving the "inventory" pool. In my city I am amazed at how many older houses have been condemed and used for fire department practice. These were houses that a few years ago would have been starter-homes and fixer-uppers. Now, with no buyers, they just burn them. Lots small empty lots in one neighborhood which people want to turn into postage-stamp parks.
I forgot to mention that in the neighboring twice-failed development, Connerton, building has started again under three separate builders and is going great guns. On spec. Idiots!
it is hard to believe someone as math challenged as these prospective buyers could have raised 300 grand being paid to work by someone.
Inheritance?
English as a 2nd language? (The grammar seemed a bit funny, but that might be for other reasons.)
the guys driving this price action are already looking for a way to get the next leg moving higher. not in my wildest dreams did i think a collapsed Wall Street, housing bubble and economy could get to where we are now (all time record highs) in 5 short years. i imagine there are some real pros waiting for something of a sell off in order to get back in as well. with interest rates "at or near zero forever" we're all speculators now...all in the search of more liquidity to speculate with. eeks. "when do we start generating economic growth here and jobs?"
I live in a place where, "if it don't sell raise the price." I've seen it work time and again. Rich people are just as stupid as poor people.
Ya, someone I know saw a house listed for $x million on a flyer... then it went up a few hundred thousand and the person was like "WOW, it is worth that much!". On and on this went as the price went up for another few flyers and the WOW remained.