Economic "recovery" only for the rich

[blazerboy30]

$1500/mo on a $60K purchase? Please, tell me more about how common 30% cap rates are. Markets for even Class C properties are 15-17%, and you're not charging $1,500/mo. They're out there, but they're temporary.

I also like the part of the "math" where property taxes, maintenance costs, association fees, utilities (in some cases) and vacant months are ignored.

Obviously it's free, risk-free money. Arbitrage, baby!

 

[maxiep]

I also like the part of the "math" where property taxes, maintenance costs, association fees, utilities (in some cases) and vacant months are ignored.

Obviously it's free, risk-free money. Arbitrage, baby!

It was such a ludicrous example, I didn't even bother with the loan calcs, T&I and R&M. Not to mention that if you're willing to pay $1,500 a month for a $60K property, you could easily purchase one much nicer.

 

[Denny Crane]

Awesome. There are lots of things wrong with that assumption, but let's look at a simple one:

You're just assuming that people will be forced to move to the location of your rental. Good luck with that.

I don't assume anything other than the casinos nearby will stay in business and the workers got to eat.

 

[maxiep]

I don't assume anything other than the casinos nearby will stay in business and the workers got to eat.

Should you also assume that cap rates will shrink as the number of investors increase?

 

[blazerboy30]

I don't assume anything other than the casinos nearby will stay in business and the workers got to eat.

And there won't be layoffs of those workers. And those workers won't consider living with roomates during a downturn which decreases demand for rentals.

By all means, continue with your assumption that rental homes are risk-free investments that get you to "using house money" in less than 4 years.

 

[Denny Crane]

It was such a ludicrous example, I didn't even bother with the loan calcs, T&I and R&M. Not to mention that if you're willing to pay $1,500 a month for a $60K property, you could easily purchase one much nicer.

First of all, it's not a ludicrous example. I know several people who bought those kinds of properties by the dozen.

Second, I did the leg work of working the MLS listings and produced ROI statements for a number of those deals.

Third, where do you get the idea there's some sort of "loan calcs?" The properties are all paid for with cash. The lenders won't lend on those anyway because they fear the associations will go under. They only lend on sites with like 80% of the units rented.

Fourth, the association fees are typically under $200, and the DEPRECIATION is about $200.

Fifth, property tax is about $40/mo.

 

[Denny Crane]

And there won't be layoffs of those workers. And those workers won't consider living with roomates during a downturn which decreases demand for rentals.

By all means, continue with your assumption that rental homes are risk-free investments that get you to "using house money" in less than 4 years.

My assumption is my rent was $1600 and now it's $2300.

EDIT: It's been unoccupied for a month for the past 6 years, 3 different families rented it.

 

[maxiep]

Denny, I think the point BB30 and I are trying to make is that while there are certainly individual examples of such properties (I have a few of them myself in my personal portfolio), it isn't normal and it's certainly not a long-term outcome. If there's a market with a 30% Cash on Cash return, then that market will be flooded with investors seeking returns. At a 30% annual return, you would be smart by leveraging as much as you can below a 30% interest rate and purchasing as many of these properties as possible, increasing your CoC. Of course, you can't because they don't exist on a large scale. And that's our point.

 

[Denny Crane]

Denny, I think the point BB30 and I are trying to make is that while there are certainly individual examples of such properties (I have a few of them myself in my personal portfolio), it isn't normal and it's certainly not a long-term outcome. If there's a market with a 30% Cash on Cash return, then that market will be flooded with investors seeking returns. At a 30% annual return, you would be smart by leveraging as much as you can below a 30% interest rate and purchasing as many of these properties as possible, increasing your CoC. Of course, you can't because they don't exist on a large scale. And that's our point.

There is some risk involved. The association could go under. You now have a building that has a roof blow off, air conditioning fails (in Vegas, that's an emergency), the grass isn't mowed, etc. Nobody will rent a place that's not kept up.

The trick for us was to pick out the units in complexes that were in desirable locations, reasonable cost of upkeep, high % ownership or occupancy (we looked at the county records for each property), etc.

The thing is, no matter what happens other than the place burning down or the casinos going out of business, the places are going to shed ~$1500/mo in cash each. And the rents will go UP, not down. Even if it's 5% every 5th year.

They did exist on a large scale. But the banks wouldn't lend on them. That's why virtually every one of them was an all cash sale.

If the banks would have lent, I'd have bought a couple myself.

There were a number of single family homes in the $100K range with similar rent to price characteristics.

The CoC argument makes little sense. You'd still have to put down a lot down to make up for the mortgage interest rate. Something like 4.5% for a 20 year loan on investment property. That's just to break even, and then you ARE banking on appreciation or paying off the loan to capture a comparable return.

 

[maxiep]

There is some risk involved. The association could go under. You now have a building that has a roof blow off, air conditioning fails (in Vegas, that's an emergency), the grass isn't mowed, etc. Nobody will rent a place that's not kept up.

The trick for us was to pick out the units in complexes that were in desirable locations, reasonable cost of upkeep, high % ownership or occupancy (we looked at the county records for each property), etc.

The thing is, no matter what happens other than the place burning down or the casinos going out of business, the places are going to shed ~$1500/mo in cash each. And the rents will go UP, not down. Even if it's 5% every 5th year.

They did exist on a large scale. But the banks wouldn't lend on them. That's why virtually every one of them was an all cash sale.

If the banks would have lent, I'd have bought a couple myself.

There were a number of single family homes in the $100K range with similar rent to price characteristics.

The CoC argument makes little sense. You'd still have to put down a lot down to make up for the mortgage interest rate. Something like 4.5% for a 20 year loan on investment property. That's just to break even, and then you ARE banking on appreciation or paying off the loan to capture a comparable return.

:bangshead: Sigh. Okey dokey. I guess you really do know it all when it comes to RE investment. Good luck finding that 30% IRR; according to you they're everywhere.

And here's a simple rule: Until your marginal return equals or is less than your interest rate, you borrow as much as you possibly can.

 

[Denny Crane]

:bangshead: Sigh. Okey dokey. I guess you really do know it all when it comes to RE investment. Good luck finding that 30% IRR; according to you they're everywhere.

And here's a simple rule: Until your marginal return equals or is less than your interest rate, you borrow as much as you possibly can.

Where are you coming up with this mythical 30% IRR figure?

 

[maxiep]

Where are you coming up with this mythical 30% IRR figure?

You're the RE genius. You tell me.

 

[blazerboy30]

Where are you coming up with this mythical 30% IRR figure?

You made the claim with your "math" earlier of getting $1500 / month on a $60k purchase and an ROI of less than 4 years.

 

[maxiep]

You made the claim with your "math" earlier of getting $1500 / month on a $60k purchase and an ROI of less than 4 years.

It's useless.

 

[Denny Crane]

You're the RE genius. You tell me.

No, you're the genius tossing the number out there.

The IRR from the numbers I presented isn't 30%.

 

[maxiep]

No, you're the genius tossing the number out there.

The IRR from the numbers I presented isn't 30%.

You didn't present your T&I, R&M or any other ancillary costs. You said you paid all cash. I just took $18K and divided by your purchase price of $60K.

 

[blazerboy30]

There is some risk involved.

Yes, I know. Much more than you claim.

The trick for us was to pick out the units in complexes that were in desirable locations, reasonable cost of upkeep, high % ownership or occupancy (we looked at the county records for each property), etc.

Yes, because past performance is indicative of future performance, right?

The thing is, no matter what happens other than the place burning down or the casinos going out of business, the places are going to shed ~$1500/mo in cash each. And the rents will go UP, not down. Even if it's 5% every 5th year.

They did exist on a large scale. But the banks wouldn't lend on them. That's why virtually every one of them was an all cash sale.

If the banks would have lent, I'd have bought a couple myself.

Then you should have bought more. You should have sold your primary residence to get more cash to buy more of these.

It's funny that you think large investors didn't have the cash to do this and needed the banks to lend in order for them to get in on these magical 30% yearly returns.

The CoC argument makes little sense. You'd still have to put down a lot down to make up for the mortgage interest rate. Something like 4.5% for a 20 year loan on investment property. That's just to break even, and then you ARE banking on appreciation or paying off the loan to capture a comparable return.

 

[blazerboy30]

No, you're the genius tossing the number out there.

The IRR from the numbers I presented isn't 30%.

Can you show us the math for IRR given the numbers you previously claimed?

 

[maxiep]

No, you're the genius tossing the number out there.

The IRR from the numbers I presented isn't 30%.

You are correct. I meant annual rate of return. I didn't have enough information to calculate a true IRR.

 

[Denny Crane]

You didn't present your T&I, R&M or any other ancillary costs. You said you paid all cash. I just took $18K and divided by your purchase price of $60K.

I gave you the tax figure of $40/mo. The insurance is a similar amount.

And $18K/$60K isn't the formula for IRR.

(I calculated IRR at 20%-25% range, depending on the property)

 

[Denny Crane]

You are correct. I meant annual rate of return. I didn't have enough information to calculate a true IRR.

Fair enough.

 

[maxiep]

I gave you the tax figure of $40/mo. The insurance is a similar amount.

And $18K/$60K isn't the formula for IRR.

(I calculated IRR at 20%-25% range, depending on the property)

And you do understand that is not a sustainable rate of return for any kind of real estate, right? It's great as a one off, but you can't model with those expectations.

 

[blazerboy30]

I gave you the tax figure of $40/mo. The insurance is a similar amount.

And $18K/$60K isn't the formula for IRR.

(I calculated IRR at 20%-25% range, depending on the property)

Here in Silicon Valley, outside investors are buying up $XXX millions in real estate with negative monthly cashflow, with all cash purchases. But somehow they weren't able to scrape together the money to buy some of these risk-free 25%, guaranteed, yearly returns.

 

[Denny Crane]

I'd point out the market has changed quite a bit. Real estate prices are up about 17% in the Vegas area since the 2009/10 bottom.

And picking out worthwhile properties is beyond doing ROI on a spreadsheet. Having lived 5 years in Henderson, I had a bit of local knowledge. Something that looked good on paper might not be as great in reality. It might be in a bad neighborhood, far commute to the casinos, lack nice amenities, be far from shopping, etc. Every land development deal there required the developer to put in a park or hiking trail and that sort of thing. Distance to those is a factor. Distance and view of the Strip are others. School district is another.

Carry on.

 

[Denny Crane]

And you do understand that is not a sustainable rate of return for any kind of real estate, right? It's great as a one off, but you can't model with those expectations.

It's sustainable as long as you own the property.

At the time we went on the buying spree, we had a couple hundred properties, at least, that we considered. And that was in a fairly small area, a subset of the Vegas area as a whole.

 

[blazerboy30]

I'd point out the market has changed quite a bit. Real estate prices are up about 17% in the Vegas area since the 2009/10 bottom.

And picking out worthwhile properties is beyond doing ROI on a spreadsheet. Having lived 5 years in Henderson, I had a bit of local knowledge. Something that looked good on paper might not be as great in reality. It might be in a bad neighborhood, far commute to the casinos, lack nice amenities, be far from shopping, etc. Every land development deal there required the developer to put in a park or hiking trail and that sort of thing. Distance to those is a factor. Distance and view of the Strip are others. School district is another.

Carry on.

Like Maxiep said, it isn't unlikely that you made the investment you're talking about.

What is ridiculous are your claims that:
- Rents will never go down, even during a terrible economy
- These types of risk-free investments were available in large quantities and the only reason they weren't purchased was because banks wouldn't lend on them.

 

[Denny Crane]

Here in Silicon Valley, outside investors are buying up $XXX millions in real estate with negative monthly cashflow, with all cash purchases. But somehow they weren't able to scrape together the money to buy some of these risk-free 25%, guaranteed, yearly returns.

Neat. The exchange rate is favorable to foreigners to buy things here. They aren't making any more land on the peninsula. Well, maybe a little with landfills.

Yet they have scraped together money to buy up property in Vegas.

http://www.reviewjournal.com/real-estate/low-housing-inventory-frustrates-homebuyers

Low housing inventory frustrates homebuyers

"The old saying “cash is king” has never been more true than in today’s housing market. Statistics from the Greater Las Vegas Association of Realtors show that cash buyers have accounted for more than half of all local existing home sales since the beginning of 2011. This percentage has actually been climbing in recent months, peaking at nearly 60 percent in February."

 

[blazerboy30]

Neat. The exchange rate is favorable to foreigners to buy things here. They aren't making any more land on the peninsula. Well, maybe a little with landfills.

Yet they have scraped together money to buy up property in Vegas.

But they just couldn't manage to do so in 2009. You were the only person looking at real estate with $60k in cash in 2009. That's why the 25%, risk-free annual returns didn't get priced out of the market quickly.

 

[maxiep]

It's sustainable as long as you own the property.

At the time we went on the buying spree, we had a couple hundred properties, at least, that we considered. And that was in a fairly small area, a subset of the Vegas area as a whole.

Terrific. Now go find a few thousand more like it. Then you can tell me that market exists.

 

[Denny Crane]

But they just couldn't manage to do so in 2009. You were the only person looking at real estate with $60k in cash in 2009. That's why the 25%, risk-free annual returns didn't get priced out of the market quickly.

2009?

It was late 2010.

But whatever.

I wasn't the only one looking at real estate with the ability to pay cash. Hardly.

The market there was saturated with speculators before the crash. For a couple years leading up to the bailouts, there were gradually more and more for sale signs in front of homes in our neighborhood.

We saw our home price nearly double from 2005 to 2008, and we never had an LTV over 50%. Yet we were over $100K underwater for a couple of years and only recently have we made it back to even.

With all the losses and foreclosures and people walking from their properties and speculators simply bailing, there was simply a massive inventory of properties. It took years for that inventory to be bought up again.

I never claimed the investments are risk free. The risk/reward value is good enough to consider, if not too good to pass up.

There are still good deals on paper there.

Lake Las Vegas is a development about 30 minutes east of the Strip. It was a very upscale development with its own casino, lakefront mansions and condos, lakefront shopping, etc. The lake was man made, too.

A property I just looked at on Zillow for yucks costs about $67,000 with about $900 (average) to $1400 (max) rent potential. Everything all told, it returns about 9% at the $900 rent figure, 80% occupancy rate, and before depreciation.

Like I said, "on paper." Lake Las Vegas development went into bankruptcy in 2010. The lake has a leak in it, and who knows who is going to fix it. There are significant foreclosures throughout the development. It's far enough from the Strip that it's a decent commute. It's a bit of a drive to get to any shopping outside the lakefront stores.

So my assessment is that it'd be hard to rent now. It's not going to appreciate until the rest of the inventory tightens up. The properties closer to the Strip in Henderson and Vegas proper are going to get the main focus of buyers for a while to come.

Someone like Trump is going to come along and pick up Lake Las Vegas and there will be a feeding frenzy for the properties. When, I can't say. Maybe not for a few years.

The people who currently own there are fairly rich. Celine Dion had a show on the Strip and lived in Lake Las Vegas ($1.2M home).

Back in 2010, everything in Vegas looked like Lake Las Vegas.

http://www.lasvegassun.com/news/2010/mar/01/shining-lakeside-oasis-loses-its-luster/#axzz2UtzMKaio

Lake Las Vegas: A shining lakeside oasis loses its luster

The area quickly won notice. Golf Magazine named it one of the top communities to semi-retire to, and the development was named one of the 10 most important projects in the world during an international architecture and design exhibition.

Its cachet rose when Celine Dion purchased a $1.2 million home there in 2002.

But then Lake Las Vegas sprung a leak.

The property went into foreclosure after Transcontinental defaulted on $540 million in loans in fall 2007. The development was acquired by the Atalon Group in January 2008, only for it to file for Chapter 11 bankruptcy protection six months later.

The problem: Because Lake Las Vegas was heavily dependent on secondary home buyers, it was crippled when discretionary spending dried up and the booming Las Vegas real estate market crashed.

The community’s three golf courses also went into foreclosure, only one of which has since reopened. Wells Fargo took over Loews Lake Las Vegas — one of three hotels alongside the lake — in June, and in the latest in a string of bad news for Lake Las Vegas, the Ritz-Carlton announced Feb. 8 it would be closing its doors in May, and Casino MonteLago, the community’s only casino, said it would be shutting down in March.

Indeed, Lake Las Vegas, a well-heeled community striving for seclusion, has found itself completely exposed to the Great Recession.

(more at the link)