Best RE deals? We asked 500 RE investors

[Russ H]

. . . and here is what they said:

Best RE Deals

GREAT info, courtesy of Diane Kennedy.

Thanks, Diane!

-Russ H.

 

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[andviv]

I read that one. Thanks.

I agree with most of the statements.

I do have a concern/question... this one:

Many of the big investor pools are concentrating on single family residences, rather than multi-units.

Sounds very unrealistic at first sight.

If a big investor pool is buying to hold, how are they handling property management? Escalation is a huge issue when dealing with multiple properties in multiple locations (that is why multi-units are their preferred investment method after REITs). The PM overhead is just too much, or at least that has been my experience.

If these pools are buying paper interest on the properties then that would make more sense to me.

Again, I am talking out of my experience and understanding...

Russ, Bob, Kenric, Steve, phlgirl, all the other RE investors here, what is your take on this statement?

 

[Russ H]

I do have a concern/question... this one:

Many of the big investor pools are concentrating on single family residences, rather than multi-units.

Andres, some of these pools are just buying on spec.

In other words, they are getting the houses so cheap that they're not taking in tenants (too much risk).

Earlier last year, there were investors pools going into Detroit and buying houses in 100 blocks (100 houses at a time) for $5000 each.

The idea is, you can't even build a house like the ones they got for $150K.

So if they can hang on-- and not pay any prop taxes (defer them), they have close to zero costs.

Once the market upticks, they can get loans to spiff the places up, then flip them for resale.

It won't take many of these houses-- maybe only 1 in 10-- to make back the initial investment, if they can get $50K for them ($500K initial for 100 houses, sell 10 houses for $50K = $500K).

Even if 20% of the houses are a total loss (100- 10 sold - 20 lost = 70 houses left), if you can sell the remaining 70 houses for $50K each, you've got a windfall ($3,500,000 back plus the $500K, a 800% ROI)

I've oversimplified the numbers-- clearly, there will be carrying costs, some tax issues, attys fees, etc.

But overall this, to my understanding, is what's going on.

-Russ

 

[phlgirl]

Hey all -

If your concern is sheer cost, Andviv, I do think a REIT would be able to absorb the cost and still make a profit, given the right market. If the actual management of a nation-wide REIT is your concern - I would agree - you better have a performer in that role and someone willing to travel. : )

IF these REITs are connected directly at the source (and that's a big IF), they should be able to get the deals done in mass. I would think either right from the bank or perhaps one level out (a really good wholesaler/rehabber).

As you know, we are pretty much in auto-pilot mode in FL these days but friends are still very active and they are having conversations in this arena. I think it is a very specific market which can make this work. It is working class area with jobs, solid rents and a significant foreclosure problem. It is amazing how deep you can get these properties right now if you buy them from the bank. A management fee on one or a few houses will run you 12%, in our part of FL, but, with bulk, you can get 6-8%. I would think a central manager(s) would be absolutely critical, to manage/oversee the management companies.

It is interesting to think about. It would work in JAX but not in PHL (as far as I know). Depends on the requirements/payout structure of the REIT, I suppose.

As Russ mentioned, these folks may also be purchasing purely on speculation. Sad but true. Some people never learn. ***I recognize this can be a very profitable endeavor, for some - particularly the creators of the REIT. So may be many other types of speculative investments - I just personally don't care for the severe relinquishment of control, if you are the end investor and not the creator of the REIT.

 

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[Rickson9]

In my opinion, speculation during a downturn that the U.S. is currently experiencing is not as risky as one might imagine - especially when real estate in some areas are selling for prices far below replacement cost.

Although I wouldn't advise it, in some markets investors can literally purchase properties blindfolded and come out roses.

Speculation becomes increasingly dangerous as prices rise and ridiculously dangerous during bull markets. Neither scenario will be coming to the U.S. real estate market any time soon.

Best regards.

 

[Russ H]

In my opinion, speculation during a downturn that the U.S. is currently experiencing is not as risky as one might imagine - especially when real estate in some areas are selling for prices far below replacement cost.

Although I wouldn't advise it, in some markets investors can literally purchase properties blindfolded and come out roses.

Speculation becomes increasingly dangerous as prices rise and ridiculously dangerous during bull markets. Neither scenario will be coming to the U.S. real estate market any time soon.

Best regards.

Another really weird thing: Some of the housing sales in Detroit aren't going to investors.

They're going to people who grew up there, and moved somewhere else.

They're going back to visit family, and are buying a cheap house (almost in lieu of a big-expense, like a new car or vacation). They're not sure what they will do w/the house (sell it? retire there? let family live in it?), but for $5-15K, it's a cheap enough expense to them that they're willing to grab it now, just b/c it's so cheap!

-Russ H.

 

[phlgirl]

In my opinion, speculation during a downturn that the U.S. is currently experiencing is not as risky as one might imagine - especially when real estate in some areas are selling for prices far below replacement cost.

Although I wouldn't advise it, in some markets investors can literally purchase properties blindfolded and come out roses.

Speculation becomes increasingly dangerous as prices rise and ridiculously dangerous during bull markets. Neither scenario will be coming to the U.S. real estate market any time soon.

Best regards.

As a whole, I would agree that it is certainly less risky to perform speculative investing in the midst of a down economy, as compared with a stronger market. It all depends who is managing your fund. Who is making the decisions? The issue is, most people have NO CLUE who is actually managing the fund and even less about the end product itself. To me, this is no better than the 'contribute to your 401k, hope & pray' approach. If the fund manager really knew the industry/markets, why wouldn't they opt for both - cash-flow and possible appreciation (as a bonus)?

 

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[Rickson9]

If the fund manager really knew the industry/markets, why wouldn't they opt for both - cash-flow and possible appreciation (as a bonus)?

This is a very good question that I have wrestled with. Excellent! Would anybody care to share their experiences with finding investments that offer cash flow + appreciation and any observations that they've made?

 

[andviv]

I guess I can't speak from a wholebuyer/wholesaler experience. I've only dealt at a few-properties-at-the-time level and the costs and headaches were very difficult to overcome, and escalation has been a constant challenge.

When the success of my investment relies on the performance of a bunch of property managers, I need to spend a lot of time managing the managers.

I wonder, at what volume will this structure makes financial sense?

When I talked with Diane about this point, she made sure to reinforce the point of looking at locations with more than 40% of renters (which also means that less than 60% are home owners). I kinda overlooked this criteria as my understanding is that pretty much anywhere you would meet that number, or not? In any case, selling SFHs is usually easier than selling a multi, given the amount of potential buyers and lending available.

Also, she did mention the importance of going after cash flowing, less than 10 yrs old properties (reduced maintenance) and buying at around 50% of replacement value.

This is what I've known as "turn-key" investment properties. You buy and the investment starts producing, almost in auto-pilot mode, right away.

I guess this model fits Rickson9's passive investment model, right?

Well, the great news is that this thread has challenged me to take a new look at remote investment, real costs of property management, and how many real headaches I'd have to deal with if I followed this route.

I gues

 

[phlgirl]

Your concern about Property Management and the associated costs/management required are valid, Andviv.

When it comes to remote investing, in my experience, the property manager (and how effectively you manage them) can make or break your cash-flow.

It is not a completely hands-off experience. You must be engaged, tracking metrics and reporting standards. Remember, the property management company should only make money when YOU make money. If a house is vacant, there should be incentive ($) for them to get it filled. If a tenant is not paying rent, there should be incentive ($) for the property manager to get it filled.

We have weekly meetings with our Property Management company. My husband reviews all work orders with one person and I review the financials with another representative. We set goals, we talk strategy and we adjust when things are not progressing according to plan.

At any given time, you need to be willing and able to pull the plug on a given property management company and move to another. My point is, there need to be options in the area - not one management company, which you are tied to, good or bad.

I agree with Diane that you want a strong rental community. 95% of our properties are well over 10 years old but they were also completely rehabbed (new electric, plumbing, etc.), to make them almost like new. Regardless of age, you must factor in maintenance & repairs, vacancy and property management expenses.

For people who are capable of securing long-term financing and are willing to do the proper due diligence, I just cannot see why you would not want to pick up investment property in this market. Even if RE is not your focus, the tax incentives, the hedge against inflation, etc..... The long term benefits are just too great to pass up. I am bias, of course (and also currently locked out of long term money).

 

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[Rickson9]

For people who are capable of securing long-term financing and are willing to do the proper due diligence, I just cannot see why you would not want to pick up investment property in this market.

I would have to agree.

With regards to an unrelated aside, I have noticed that the owner-operated/family owned businesses that I invest in tend to have a few similar characteristics, 1) they employ very little to no long-term debt (this includes Fossil Watches, The Buckle, K-Swiss, Columbia Sportswear and American Eagle) and 2) they pay very little in dividends (except The Buckle).

Speaking for myself, if I partner with family owned business (by buying their stock) because I want the owners to champion my own interests. Arguably the CEO of the Buckle, who owns millions of shares, has the same interests as the person who owns a few thousand. I can trust that they will make decisions that will benefit themselves (and myself as a side consequence). A CEO who has no ownership stake, will not champion my interests as a shareholder. They will support whatever they need to do to maximize their compensation. As they should.

Also, if I partner in a company like The Buckle and they have shown to compound equity at high rates, say 20%, I would not want a dividend payout. Why? Because once the money is discharged from the company it goes from compounding at 20% per year to 0% - dead stop. In order to maintain the same pace of growth I will now need to find an investment that can compound my dividend payout at 20% or greater.

Investing in high quality publicly traded businesses is a double-edged sword - my net worth grows very fast with very little work on my part, but my disposable income is unaffected because very little free cash flow is used to pay a dividend. In short, to have cash, I would need to sell stock (and get off the gravy train as it were).

I would further say that it is almost impossible (as an investor) to have both maximum appreciation and maximum cash flow. To bleed a high quality company of cash for distribution to shareholders is to stunt it's ability to compound value effectively for it's owners. That is one of the consequences that I need to live with as an investor - my net worth compounds very quickly with no work, but I accept less cash directly in my pocket.

This is why I add real estate into my portfolio. My real estate will likely not compound as fast as a revenue/profit generating business, but will produce cash flow that I can use on a day-to-day basis.

Again, this is only from my limited investing perspective.

Best regards.

 

[andviv]

Rickson9, how much time are you putting per week or month into your RE investments, be it follow up with existing property management, or to analyze new deals?

 

[Rickson9]

Rickson9, how much time are you putting per week or month into your RE investments, be it follow up with existing property management, or to analyze new deals?

Hi andviv this is very good question! The best way to answer that is to say that I currently don't spend much time because most of the work has been done earlier (e.g. finding an agent, researching the city, properties, property manager, dealing with title, etc.). Most of my work was done with the research and talking with different people. During my research phase I was reading or searching for about 4 hours a day for 1.5 months.

Right now I'm looking to fill one of my properties so I'm touching base with my property manager about 3 times a week either by phone or email. If I don't have a vacancy to fill I would probably be calling them about 3 times a month. Keep in mind, however, that this is for one unit. I would imagine that if I had 1000 units that there would be more phone calls.

That is another trade off between stock and real estate. With my stock investments there is absolutely no time spent dealing with people. I just read the company report once a quarter. I hope this helps!

Best regards.

 

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