Preparing for the next housing decline

[Cat Man Du]

My concern with rents is the number of rentals entering the market that were picked up dirt cheap. A $1000/mo rental picked up for 65k has room for many landlords to drop rents and compete with each other. I'm

This is what is happening in my area of Florida. The old 1% rule that Rusty depended on is toast. You now will have to buy at $50,000 and rent for $1,000 as the taxes are all going to jump with the economy just to keep up the services. My last rental this year was purchased for $27,500 and rents for $850 per month. I won't mention my older units that are around the 1% rule.:iagree:

 

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[Bilgefisher]

Bilge-

You may want to look for old posts here (by SteveO) and on richdad (by rusty) on why 1/1s have higher turnover and are much more work.

Not sure if you've read through lots of rusty's posts on the richdad forums, but they are perfect for what you're looking at. He was a regular contributor around 2000-2002 or so. Great, great info based on his years of experience owning lots of multifamily props (not SteveO 100-200 unit stuff-- more like duplexes-- LOTS of them).

-Russ H.

Thanks Russ. I will take a look at them. The thought of turn over did cross my mind. The problem I am seeing is finding cash flowing properties that have larger units. Not that it can't be done, I just need to learn how. My areas are also low income areas and tend to have lots of turn over. The better tenants are in the better areas, go figure lol.

 

[andviv]

This is what is happening in my area of Florida. The old 1% rule that Rusty depended on is toast. You now will have to buy at $50,000 and rent for $1,000 as the taxes are all going to jump with the economy just to keep up the services. My last rental this year was purchased for $27,500 and rents for $850 per month. I won't mention my older units that are around the 1% rule.:iagree:

Wait, you are expecting these changes and still are holding more units? If that is what's coming then why don't you simply get rid of them? Between insurance and taxes, FL is becoming prohibitive for landlords.

 

[Cat Man Du]

Wait, you are expecting these changes and still are holding more units? If that is what's coming then why don't you simply get rid of them? Between insurance and taxes, FL is becoming prohibitive for landlords.

Because they pay for themselves, but in todays market - can't get my equity back out! Stuck for the present with these, but am buying today. It's like stock averaging. :shruggie:

 

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[Russ H]

. . . The old 1% rule that Rusty depended on is toast. You now will have to buy at $50,000 and rent for $1,000 as the taxes are all going to jump with the economy just to keep up the services. My last rental this year was purchased for $27,500 and rents for $850 per month. I won't mention my older units that are around the 1% rule.

Since rusty isn't here to defend himself, let me put on his hat and do it for him:

Cat Man Du-

You might have noticed these posts were done years ago. It sure is easy to pick apart something like that. I'm sure I could do the same for anything you wrote that long ago, but why bother?

Let's focus on what can be learned today. Some of the stuff I wrote 10 years ago still is good advice. Other has changed w/the change in real estate markets.

 

[Russ H]

Bilge-

The B&B we're in the process of opening was once a 10 unit apt building-- ALL studios and 1/1s.

It was on the market for MONTHS (back in 2003-- 2004--2005, the heydey of the RE boom).

None of the REI's wanted to touch it-- since 1/1s were hard to make cashflow-- too much wear and tear, lots of younger singles (and couples) who did not stay very long, etc.

(but as the man says, your mileage may vary!)

-Russ H.

 

[Cat Man Du]

Since rusty isn't here to defend himself, let me put on his hat and do it for him:

Right you are. I should have just stated the 1% rule no longer applies and left Rusty out of it. I, also, read some of his RDPD posts and learned from them.:iagree:

Also, the real estate salesman were right regarding the 1/1's, but you were fastlane and saw a different purpose for the units.

 

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[hatterasguy]

Here's one of his summary threads:

Rich Dad - Welcome to Rich Dad!

This was rusty's website for a while-- not sure how up to date it is:

The Lazy Mentor's Reference Journal

Have fun.

-Russ H.

Wow thats fantastic. Good material from someone who knows what their doing.

The 1% rule seems to work OK in my area.

 

[Bilgefisher]

Bilge-

The B&B we're in the process of opening was once a 10 unit apt building-- ALL studios and 1/1s.

It was on the market for MONTHS (back in 2003-- 2004--2005, the heydey of the RE boom).

None of the REI's wanted to touch it-- since 1/1s were hard to make cashflow-- too much wear and tear, lots of younger singles (and couples) who did not stay very long, etc.

(but as the man says, your mileage may vary!)

-Russ H.

Its a very valid point. I had thought of converting one 3 plex into a 2 plex with a 3/2 and a 2/1. Add two one car garages and a privacy fence in an up and coming area. Ideas ideas lol.

 

[andviv]

Because they pay for themselves, but in todays market - can't get my equity back out! Stuck for the present with these, but am buying today. It's like stock averaging. :shruggie:

Yeah, I know what you mean... I had the same situation and made the mistake of not selling when I was above water. When insurance and taxes increase and the rental market soften, cashflow disappears. If I had the chance again I would have sold as soon as the indicators turned negative. What cashflowed 12 months ago was negative a few months later (my properties were in the Tampa area).

Dropping the losers faster would have made a huge difference for me.

I agree with you, the 1% does not hold these days in FL, high taxes and insurance break that easily. And rents are not going up, based on what I'm seeing. Do you see anything different?

 

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[Russ H]

Its a very valid point. I had thought of converting one 3 plex into a 2 plex with a 3/2 and a 2/1. Add two one car garages and a privacy fence in an up and coming area. Ideas ideas

Another good one I heard was for when lots of beginning REI's are bidding on 4-plexes, but the market for 5 plexes is dry (no one buying-- due to financing problems).

rusty took a 5 plex (3-2/1s and 2-1/1s , and made it into a 4 plex (3-2/1s and 1-2/2). The locking door between the units would have allowed for it to be "re-converted" back into a 5 plex if needed.

That way, he could rent-- or sell-- it both ways.

Brilliant.

-Russ H.

 

[Dhappy]

If you buy older mobiles on land in FL then taxes and Ins are your friend. I'm in the tampa bay area and making a killing with rentals. Taxes and Ins together run $50 a month on most of my cashcow mobiles.

 

[andviv]

Dhappy, we need to talk... I will contact you next time I go down there and will meet with you if that's ok with you, I'll pay for lunch.

 

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[EasyMoney_in_NC]

I'm late to this party, but if you'll appease me, I'll add my .002 cents.

When I was a kid, my parents wanted me to go to college, get a great education and find a career that would allow me to do as my father did which was to stay with a company for life and retire with the pension etc....

Something in me knew that those days were soon coming to pass and that that way of living life would not be the way of my generation (don't ask me how or why I knew this, but I was right).

I have been in residential rentals now for at least the last 13 years + and have had a great run. Made a nice yearly passive income the entire time, pulled initial equity out of each home I built which afforded me to live pretty darn well.
My gut has been telling me for the last couple of years that the run (I like to call it the "party") is coming to an end, and I believe my area (like everyone else's) is now beginning to see the end. My vacant times went from days to weeks to 30-45 days now to 60 + days (something I've never seen here). I have 2 of my vacant properties now on the market for sale (slightly below current market prices). I think you have a decent idea (considering I don't know your circumstances).

I figure if all goes well, I'll "give away" a couple, sell a couple more for what I hope is a higher market value than current, and by the time I get to the last one's, I'll be able to really cash in (dollar cost averaging if you will).

Cap rates suck these days, tenant/landlord laws do as well (at least here) and to reduce rents is asking for a less than desirable tenant. As mentioned commercial is going to tank, which will undoubtedly drag down residential more. If you can get out now, I would, and wait for the dust to settle in a few years, jump back in if things start to look up. I too like silver, but I think its being held down by "other than" market conditions, so I'm not sure I go to heavy with saving in the form of physical product. Keep your money liquid and be ready to float with the tides.

There will be amazing opportunities in the near future, now is not quite the time, now is the time to hunker down, pay close attention and be ready to pounce. These are going to be some interesting times, and I don't think holding RE is going to be favorable for the next 10-15 years. Great time to buy coming if you have holding/staying power, but I like to make $$ and I don't see much of that happening in this climate any time soon. Time to take what money can be gotten out of RE and lay low

 

[Dhappy]

Sounds good to me, I love to talk about wobbly boxes.

I still think it is a great time to buy and be a LL.

LL got to lazy in the past and just put a sign out front and got a tenant.

Times have changed and this is a business not a hobby ,like so many people treat it.

It is all about the price you pay and marketing you do.

Cashflow is king ,networth and equity mean nothing to me.

 

[Cat Man Du]

Yeah, I know what you mean... I had the same situation and made the mistake of not selling when I was above water. When insurance and taxes increase and the rental market soften, cashflow disappears. If I had the chance again I would have sold as soon as the indicators turned negative. What cashflowed 12 months ago was negative a few months later (my properties were in the Tampa area).

Dropping the losers faster would have made a huge difference for me.

I agree with you, the 1% does not hold these days in FL, high taxes and insurance break that easily. And rents are not going up, based on what I'm seeing. Do you see anything different?

With the bank foreclosures - it is now possible to buy cheap - especially if CASH. If I can continue to buy at under $50,000 and rent for around $1,000 - you're OK. My quandry is FLIP or KEEP - What a situation to be in. CASH talks to banks.:fastlane:

 

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[phlgirl]

I'm surprised by some of the content in this thread.

The way I see it, you want to be a borrower in the coming (not sure when) market. If you are losing money, that is one thing. If the business/investment is no longer sustainable, you must consider liquidation as an option. However, if the property makes a decent return or even holds it's own, the (near) bottom of the market is not the time to dispose of it.

The only reason for vacant rentals is not having an accurate rental amount - unless people are moving out of the area in droves. Are rents decreasing? Yep. Fortunately, nothing too crazy (yet) in my neck of the woods but a willingness to adjust quickly is essential in this market.

Property (and the economy as a whole) operates on a cycle. It has for hundreds of years and, unless the world is coming to an end (in which case who cares), it will continue to do so.

Interest rates will go up and some form of inflation is likely - it's just a matter of when. When it does, debtors will be able to repay the banks with cheaper dollars. In a break-even scenario, someone else is still paying down the principal on an asset you own.

It's a painful period? No doubt. If you MUST restructure, DO IT. All of that given..... if I could buy more, I certainly would.

Strictly my opinion.

http://www.wikinvest.com/concept/U.S._Economic_Cycles

 

[Bilgefisher]

Interesting things to note from a RE meeting I attended last night.

-Many arms are set to readjust these next few months that had introductory teaser rates of 1-2%.
-Banks took a bunch of losses in 2009 already and are holding back some inventory till 2010 to "spread the loss" out a bit.
- http://finance.yahoo.com/news/Homes...zb25hbEZpbmFuY2UEc2xrA2hvdXNpbmdwcmljZQ--?x=0
-Buyers tax credit set to expire Nov 30, 2009. The main hot market atm is the new home buyers market. 75-200k.
-Many congressional members are looking to extend the tax credit and make it available to all buyers who will be buying a primary residence. They are also looking at raising the income cap to 250k. The opens a very very large group of new buyers. Will it through us back into the same situation. Somewhat, but I would guess with far less speculation this time.


Here's my take for my market. I expect rents to drop somewhat based on the number of investors in one of the hotter RE markets. While we dropped 40% in some neighborhoods, it was enough for many RE investors to enter our market. $50k homes are very doable. Especially when they rent for $800-$1100/mo.

For me, my one rental is far to thin to hold onto. I will be selling that one and I will continue to evaluate the other. The 2nd rental is sec 8 and I don't see that rent dropping anytime soon. The property may drop a bit more in value, but the neighborhood is 60+ years old, near down town and starting to attract more money. Some middle to high end flips in the area and homeowners that are putting a decent amount of money back into the the homes. The house is a 2/1 on a large corner lot with expansion potential if I decide to sell.

I know I can turn my profit around and invest it into more houses with much better cashflow. Having 1 year of landlording mistakes under my belt, I am much more confident on my next pick. Now I need to plan on the sale of the 1 rental with 11 months left on the lease.

 

[phlgirl]

If you can cash out and re-invest at a better rate of return, at any time in the market, it is definitely worth doing.

Sounds like a good plan to me, Bilge. +++


(GO PHILLIES!!!!!!!)

 

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[Bilgefisher]

phlgirl,

I was hoping you would chime in. I value your opinion greatly. What you say makes good sense. I do think my market will drop a bit more, and I want to sell at least one rental and make some profit to reinvest for greater returns. My whole plan to begin with. I bought all 3 of my homes near this bottom and the rental have 15% and 20% equity while my own home has 30% equity. If I can do the same thing while the market is still down, I think I can increase my holdings. (note: I realize I will end up paying 7-8% commission and closing for each home)

I know I can buy better cash flowing properties from my new found experience as well.

 

[hatterasguy]

$800-$1100 a month rent is a fantastic number for a $50k house. I would run out and buy at least 10 of those if they existed in my area!

That price is certianly as low as its going to get. You can get a mortgage on a house like that for 1/3 the rent.

Once rent lines up with mortgage payments thats it, the property is bottomed out. Thats whats been happening in my area in the low end of the market for the past year. ($200k-$250k) Mortgage payments are lining up with rentals, so the market in that price range is rather "hot". IE people are offering over asking on some properties.

 

[andviv]

My comment about the $50K house renting for $1K is that rents in the FL market are being pressured down really hard due to high unemployment and at the same time costs are not going down --insurance and taxes are not decreasing, based on what I am seeing.

Based on that understanding, I think the reasonable plan is to flip instead of hold these days.

I am happily surprised to hear from Cat Man Du that this is not what he's seeing.

Cat Man Du, I'd like to talk to you more in detail about what you are seeing, will PM you.

 

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[Cat Man Du]

My comment about the $50K house renting for $1K is that rents in the FL market are being pressured down really hard due to high unemployment and at the same time costs are not going down --insurance and taxes are not decreasing, based on what I am seeing.

Based on that understanding, I think the reasonable plan is to flip instead of hold these days.

I am happily surprised to hear from Cat Man Du that this is not what he's seeing.

Cat Man Du, I'd like to talk to you more in detail about what you are seeing, will PM you.

I am in a unique market. I deal in the age restricted 55+ communities. The tenants have to be at least 55 years old and the association checks them out credit wise as I do myself. Many of these tenants are on SS and work as well - They are the least worrisome tenants as they are mature and have more than one source of income. Both of my recent FLIPS were in these types of communities and both were sold for CASH. I am seeing alot of CASH sales in almost all properties that are under 100K. There is money out there that has been waiting for this time.:fastlane:

 

[andviv]

Smart move, dealing with a specific niche. Rep ++

 

[DiceMan]

Quick question. How does someone with not much money get into real estate? I just started my first job like a month ago so I don't have too much money. I've been putting some of my money into stocks and silver. Anyways possible to transition into real estate by maybe say 6 months to a year?

 

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[Bilgefisher]

Diceman,

There is 100's of ways to get into RE with no money.
Bird Dog, Hard money, Joint Venture, Wholesale, Property manager, private money, LOC's. etc etc. The key is to take action and start working towards the goal. Read 1000 guru books on Real Estate and every single one will have the same premise. You must take action now. There is not one excuse that should prevent you from getting into the business.

Not as a brag, but an explanation, I got in with 0 credit (not bad credit...no credit) and no job, obtained a LOC and did a joint venture. I made 5k. Boy was I disappointed. If I knew then what I know now, I would be jumping through the roof with excitement. Those little few thousand dollar deals are an excellent way to get started. Especially when you have no cash.

 

[DiceMan]

Diceman,

There is 100's of ways to get into RE with no money.
Bird Dog, Hard money, Joint Venture, Wholesale, Property manager, private money, LOC's. etc etc. The key is to take action and start working towards the goal. Read 1000 guru books on Real Estate and every single one will have the same premise. You must take action now. There is not one excuse that should prevent you from getting into the business.

Not as a brag, but an explanation, I got in with 0 credit (not bad credit...no credit) and no job, obtained a LOC and did a joint venture. I made 5k. Boy was I disappointed. If I knew then what I know now, I would be jumping through the roof with excitement. Those little few thousand dollar deals are an excellent way to get started. Especially when you have no cash.

Any book recommendations?

 

[Bilgefisher]

Any book recommendations?

Honestly. No. I have yet to read a real estate book that is very good. I have read over a dozen books on the subject. Every book has some good ideas, but I'm not sure that reading 220 pages is worth 2 good tips. You are far better off networking with investors in your area and picking up ideas with them. Till then, I recommend reading Biggerpockets.com It is largest RE forum on the net and can answer every question you have related to the subject.

 

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[hakrjak]

We need to all look to the lessons of the past 5-10 years, and make sure we learned from those lessons. It sounds like many have not...

For me, the #1 lesson people should look at is: Home prices are DIRECTLY tied to incomes in the long run. In the early 2000's -- Myself and others were SCREAMING that there was NO WAY in hell a landscaper making $35k a year could afford to live in a $500k home in southern California. That type of market based on speculation was CLEARLY unsustainable.

Now in this market -- Everybody is predicting that home prices will rise again soon, but we still haven't seen the jobs that were lost replaced, and incomes are stagnant going all the way back to about the year 2000. This causes high inventory, which also weighs on prices.

In order for another run up in Real Estate, we need to see people earning more money, and the unemployed need to be put back to work. If you live in an area with high unemployment relative to the rest of the country -- You are higher risk than the rest of us.

The banks are holding onto foreclosures right now -- Hoping for the market to either bounce up, or with the intent of spreading out their losses. This also seems to be causing this market's pain to spread out over a longer period of time. As long as their is a steady stream of cheap REO's ready to flood the market at any time -- Neighborhoods will be subject to having their COMPS destroyed anytime a couple of REO's come on line for sale. This has happened to me PERSONALLY this year -- With 3 REO's hitting the market in a neighborhood that I have always been very successful flipping in the past.

Cheers,

- Hakrjak