Thursday, August 12th, 2010 at 7:35 AM
Investment Properties
Posted on Thursday, August 12th, 2010 at 7:35 AM in Real Estate Investing | 15 Comments » | 
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I respect Clearfund’s opinions, but I have to disagree that 1 percent a month in a crap neighborhood will produce much cash flow on a highly leveraged property. Your collection losses, tenant turnover fix-up costs and capital improvements on these old units will eat up the cash flow that looked so good on paper.
Anyone willing to pay 11 or 12 times SGI in a bad area and 20 times SGI in a good area especially for 50 or 100 percent vacant properties in need of work should admit up front they are buying for appreciation, not for cash flow.
Another Investor | August 12th, 2010 at 8:47 amI think Clearfund presented the 1% formula for what it is, a decent screening tool, nothing more. It is a quick and dirty formula check that investors use to see whether a property is worth further investigation.
Sometimes “forced” appreciation, meaning the investor buys with a plan to do something to improve the property and its income makes sense even when it does not paper out currently under screening formulas.
Kingside | August 12th, 2010 at 10:12 amI think this show another reason why the government needs to let some of the banks and `homeowners` go. People living rent free or barely hanging on don`t invest in their properties. Investors or flippers put money into those properties right away. The sooner the houses are put on the market, the better. We can take the medicine (lower housing prices) now or drag it out for the better part of a decade.
swm | August 12th, 2010 at 11:39 amThis video hits close to home for me.
I spent some time earlier this year seriously looking at duplexes/multi family in central San Diego. I had naively hoped to pick up a duplex in Clairemont that would cash flow – but the prices didn’t pencil. We made offers that provided us cashflow from day 1, but they were rejected outright. Someone bought the units. But the person that purchased the place is losing money every month. We went to an open house for a 3 unit in Normal Heights… It was a madhouse because the list price was decent… overheard other potential buyers on how much over the list price they’d go… too high and it doesn’t cash flow, but that didn’t bother them. That one still hasn’t closed – was listed in Jan and it’s still contingent despite the ‘best and final’ deadline being in Jan.
The investment market for residential doesn’t make sense in central San Diego.
San Diego just doesn’t have the right math for investment properties. At least not yet.
UCGal | August 12th, 2010 at 12:17 pmI don’t see any “forced appreciation” here, unless you can put some money into these, lease them up and flip them to a greater fool on a higher GRM. If you hold them, you had better be prepared to write checks.
And I think AGI, anticipated gross income, is more accurate than GSI/SGI, scheduled gross income, for these units. If there is no lease, the income is not scheduled.
Another Investor | August 12th, 2010 at 12:44 pmSome people are just looking for an income stream to live off of so you might need to compare real estate investing with cd’s or annuities at least in the low end. What kind of income stream you can get out of $200K these days
5 year CD (1.5%) 200*0.015 = 3,000 per year
livingincali | August 12th, 2010 at 3:07 pm5 year annuity (5%) 200*0.05 = 10,000 per year
200K rental @ 10x AGI is 20K per year – 4K for Taxes/Insurance – 2K (10% property management fee) – 2K (1% total property value maintenance) = 12K in income. You might even be able to push up towards 12x AGI if you’re a cash buyer only looking for an income stream.
How about this one?
http://www.redfin.com/CA/San-Diego/4495-Campus-Ave-92116/home/5296790
jeshappy | August 12th, 2010 at 3:36 pmyes, another round please…
osidebuyer | August 12th, 2010 at 3:54 pmAnother Investor – You owe it to this quality blog to identify where I suggested investing in a ‘crap neighborhood’ or to be ‘highly leveraged’. My original quote was that seeking leveraged appreciation was a super fools game. My numbers were based on all cash purchases.
Don’t type words in my mouth!
Kingside – thanks for seeing my screening advice for what it was, a starting point to get you going down the road in the right direction.
clearfund | August 12th, 2010 at 5:48 pmSorry, Clearfund, I guess I was not clear. What I was saying was that your 1 percent rule does not generally apply in those neighborhoods, especially on a highly leveraged property.
I have bought in better neighborhoods outside of California for 1 to 1.25 percent per month, but can only do about a 6 percent cap rate unless the properties are new and require minimum capital improvements. On older properties, the roofs, A/C units, furnaces, and hot water heaters are always waiting to get you. And I factor in management expense.
Once you get outside the rarefied market that is coastal California, most investors are looking for 1.5 to 2 percent, especially in low-income, high turnover neighborhoods.
And we are in complete agreement that it is a fool’s game to bet on appreciation. To date, there has always been that high income person that thinks rents will increase faster than expenses in coastal California. It’s true that demand will probably always outstrip supply in places like San Diego, but there may be a limit on how many people can afford ever increasing rents.
Another Investor | August 12th, 2010 at 6:24 pmYes, betting on appreciation is probably a fools game, but hedging against future inflation using long term fixed debt against the right asset, maybe not so much.
Kingside | August 12th, 2010 at 6:58 pmLike the video Jim. It was good to see another side of the market.
We asked you about the multi-plex market at the Bubble Info 1st annual BBQ last weekend so it was good to see what options are available.
For older 2-4 plexes in Phoenix right now you could find 2% rent/month from a distressed seller. Certainly not the CA coastal market so the upside is limited of course.
David Overfield | August 12th, 2010 at 11:07 pmDavid Overfield’s comments demonstrate the implicit assumptions folks make about San Diego real estate. The buyers are people who are betting on appreciation.
If you are willing to buy vacant or largely vacant multi units in low income, heavily Hispanic neighborhoods in the Phoenix area, you should be able to do better than 2 percent, “all in.” “All in” to me is the acquisition cost, the repairs, and the lease-up costs, including rent loss. The risk is the vacancy. Right now there is a large number of vacancies, supposedly because of 1070.
I’m curious how active the Asian immigrant buyers are in your area. Up here in the Bay Area/Silicon Valley, they are a huge factor in the small multi-unit market. These folks tend to think about owning property for generations and cash flow for their grandchildren. A lot of overseas money looking for a safe haven comes into the market through these buyers. Cap rates have always been low up here, but the influx of these buyers seems to have driven cap rates lower and GRM’s higher over the last 15 to 20 years.
Another Investor | August 13th, 2010 at 8:02 am“Right now there is a large number of vacancies, supposedly because of 1070.”
Interesting. My property manager for a multi-unit I have in Escondido tells me he started getting innundated with calls from Arizona Hispanics a couple of weeks ago.
Kingside | August 13th, 2010 at 8:12 amSB 1070 is a concern I hear from landlords, RE investors, etc. So far there hasn’t been a large exodus from Phoenix.
Essentially numbers that I’ve seen are a 4-plex purchase price (remember distressed sellers) of $100k – $150k. Rents about $500-$650/month. Figure $5k/door for fix up (you’d be surprised how much that buys you these days).
As for vacancy and occupancy, the tenants stay only 6 to 18 months on average.
Believe it or not, these types of 4-plexes sold for $350k – $450k during the peak bubble. I toured one a friend bought for $400k that is sadly worth only $100k now.
David Overfield | August 13th, 2010 at 11:23 pm