Cashflow investors sat on the sidelines for the better part of the 00s. Now they are finding opportunities in many markets to buy cashflow properties at attractive valuations.
Irvine Home Address … 19 PERRYVILLE Irvine, CA 92620
Resale Home Price …… $668,000
I can open your eyes
Take you wonder by wonder
Over, sideways and under
On a magic carpet ride
A whole new world
A new fantastic point of view
No one to tell us no
Or where to go
Or say we're only dreaming
Aladdin — A Whole New World
The crash in housing prices has created a whole new world for cashflow investors. Investors have been waiting for years for the speculators to flame out. Now that the crash has occurred, many markets are inexpensive enough to present fantastic cashflow investment opportunities.
By Les Christie, staff writer — August 5, 2010
NEW YORK (CNNMoney.com) — These are the glory days of the residential real estate investor. Low prices, rock-bottom interest rates and stable rental markets have created huge buying opportunities.
"It's awesome right now. I don't think we'll ever see another time like this," said Tanya Marchiol of Team Investments, which has operations in about 10 states but focuses mostly on the Phoenix market.
These investors are known to many as vultures because they swoop in and buy "distressed properties" — foreclosures and short sales — cheap. Places like Las Vegas, Phoenix and Miami are popular because home prices there have dropped as much as 70%.
But how they're investing has changed. In the boom years, they would buy a property and flip it for a quick cash out. Today, they are holding and renting for hefty, steady incomes.
Once they analyzed their decisions based on home-price appreciation, which is very speculative. Now they consider potential rental profits, which is far more stable.
Back then, they flipped often and helped to bid up home prices into a froth. Now, the investors say, they can be a part of stabilizing neighborhoods.
This writer is conflating speculators and investors as if they are the same individuals, but they are not. Speculators were the idiots buying up properties because they were rising in price in hopes of capturing appreciation. Cashflow investors don't do that.
Speculators are currently groping for a safe haven for their money trying to find properties that are going to fall in value less than others. Speculators by nature have no concept of value other than recent changes in price. They are herd followers who may profit for a time, but eventually, they get stampeded when the herd bails on the speculative bubble of the moment. In contrast, investors are the ones buying for cashflow that don't care about resale value. They are the investors who create a bottom with their buying activity.
Condos for less than the cost of a Corolla
"People are not in it to flip like back in the old economy," said Matt Martinez, an investor and author whose new book, "How to Make Money in Real Estate in the New Economy" comes out next February. "The new economy dictates that you have to have a long time horizon."
Marchiol, for example, does not even factor in home price appreciation for at least a year. After that, she calculates only a 3% annual increase — a return that won't turn heads of investors who only want to buy low and sell high.
Marchiol just purchased four separate four-plexes in North Phoenix. Three years ago, each four-unit building sold for $310,000; she paid just $70,000 per building. She intends to spend about $64,000 rehabbing the properties, making her total investment $344,000.
In total, she currently owns about 17 rental units. Usually she buys the properties to keep herself, but she also works with a group of investors who are intent on holding them and renting them out. She can spot the deals and then sell to them.
For example, with her North Phoenix buildings, the investors will buy the buildings for $95,000 each. They'll put 20% down and finance the rest, about $76,000 per building.
At today's low interest rates, they'll get a near 5% loan. That yields a payment of about $400 a month. Figure another 10% of the price for property management, 10% for maintenance, an 8% vacancy rate, taxes, insurance and other home ownership expenses, and you're talking about a monthly nut of roughly $1,300.
Marchiol projects the apartments will rent for $600 a month each, for a total rent roll of $2,400. That gives the owners a profit of $1,100 per month and $13,200 per year — a nearly 70% annual return on investment.
I question those numbers, but the basics of what this woman does is brilliant cashflow investment. She is buying low and not selling. She is not buying high in hopes it goes higher.
After I wrote a recent post about Las Vegas, some investors there contacted me and said they were buying condos south of the strip for $50,000 cash and renting them for $750 a month. I can't verify those numbers, but they sound realistic, and the represent a GRM of 67. Locally, you would be lucky to find a GRM less than 200.
Although conditions are very favorable, investors have to be adaptable because the market is evolving rapidly. In Phoenix it's changed in just the past six months. Foreclosure auctions are no longer a fertile hunting ground for Marchiol.
"Amateurs have come in and run up the prices," she said. "In 2009 I bought 76 properties at foreclosure auctions, at an average of about 60 cents on the market dollar. This year, I've bought four."
That part of her story sounds like bullshit. All the great deals are already taken, right? Give me a break. She wants to brag about her home runs, but she doesn't want any competitors to come in and drive down her margins. I have had some similar discussions with trustee sale flippers. Just ask one, and they will tell you all the good deals were some time in the past and that margins are tight now.
Glenn Plantone faces a similar situation in Las Vegas. A veteran real estate broker and investor, he has switched from buying mostly foreclosures and repossessions to short sales almost exclusively. That's because the inventory of distressed properties available in Vegas is way down, to about a two-week supply.
There are no distressed properties in Las Vegas? I imagine the banks will be relieved to hear that. Forget about the 25% delinquency rate and the fact that 88% of mortgage holders are underwater. If there is any shortage of currently available properties, the shadow inventory is the entire city.
"The banks make better profits with short sales, so they're not foreclosing," Plantone said. "They've switched staff to processing short sales and they've gotten faster at processing them."
I don't know if that is true or not in Las Vegas, but lenders certainly have not gotten any faster at processing short sales in Orange County.
He tries to purchase properties for at least 10% less than what he considers to be true market value, then he does some light rehabilitation and sells them to some of the 3,000 buyers he works with.
Since prices have fallen about 70% in some Vegas communities and rents have only declined by about 20%, it's possible for his investors, who are cash buyers, to make money from the first month the homes are rented.
"We're getting cash flow (net return on investment) of 12% to 14%," he said.
That is why I want to invest in properties in Las Vegas.
He doesn't completely ignore potential profits from home price appreciation because he believes the town is bouncing around the bottom. (Homes already sell for below what it would cost to build new homes.) He does not, however, emphasize that aspect of the investment.
It's the income from rentals that's paramount right now.
The beauty of cash flow, of course, is that even if the prices decline another 10% or 20%, the investors should be able to live with that.
"I tell them to plan on holding for five years," he said. "With cash flow, there's no need to worry about price drops."
Doesn't that read like stuff I have written in the past?
Buying rental properties in Las Vegas
Over the last few weeks, I have had many discussions with people who want to invest in my fund to flip properties locally. Many of these investors also want to own rental properties as long-term investments. in reaction to my post Buy Las Vegas Real Estate, many have done independent research on prices there and reached the same conclusion I have: the next three to five years represent a great time to invest in Las Vegas real estate. There is no huge urgency to buy today. It will take quite some time to grind through the inventory, but the combination of very low interest rates and very low prices make that market particularly attractive.
I have stated, "I personally plan to acquire all the Las Vegas real estate I can buy. And no, neither Ideal Home Brokers nor the mystery fund I might know something about is going to invest in cashflow properties there. I am not selling you on Las Vegas because I will profit from convincing you. I am bullish on Las Vegas real estate because I perceive it as the best buy-and-hold value we will see in our lifetimes."
That was then. This is now. I have been asked, "If you are doing this for yourself, can you get some properties for us?" Yes, I can. After discussing this at length with several investors, I am going to buy properties and offer them for sale to investors who read this blog. I have several interested parties already. I will try to supply however much is demanded.
I will be the trailblazer. I will find the lender who will consider the rental income from the unit in qualifying for the loan. I will find a competent management company locally to handle landlord-tenant issues. And I will find the properties, usually at trustee sale, and acquire them on speculation. I won't recommend any deal I would not take myself. In fact, if the property does not sell on the blog, I probably will take it myself. And yes, I probably will cherry pick some too.
Realistically, it will take a few months to get everything together and go through the process a time or two myself. If you are interested in this kind of investment, keep reading the blog, and you will see them as they become available. If you are not interested, feel free to ignore them.
Peak Buyer loses 10% down
Many of the properties I profiled in 2007 and 2008 were 100% financing deals. They are the weakest hands, and it isn't surprising they were the first to walk away. Over the last 18 months, many of the properties I have profiled put 10% down. They are also underwater, but since they sunk money into the property, they generally hold on a little tighter and try a little harder to stay put.
Today's featured property was purchased for $796,000 on 9/21/2005. The owner used a $632,800 first mortgage, a $79,100 second mortgage, and a $84,100 down payment. He gave up in early 2009 and got to stay for about a year.
Recording Date: 10/13/2009
Document Type: Notice of Sale (aka Notice of Trustee's Sale)
Click here to get Foreclosure Report.
Recording Date: 07/06/2009
Document Type: Notice of Default
Have you ever stopped to think that there would have been no real estate bust if prices have never risen above rental parity? Properties get distressed because they cannot be rented for enough to cover the payments, particularly investment properties. Even a primary residence could be rented out to someone with a job if the owner becomes unemployed and needs to move to less expensive accommodations. Paying above rental parity is the path to destruction.
The flipper purchased it at auction on 6/10/2010 for $620,000. It appears they are having a little buyer's remorse as they have priced this property to get out near breakeven.
If you would like to learn how you can get involved with trustee sales, please contact me at firstname.lastname@example.org.
Irvine Home Address … 19 PERRYVILLE Irvine, CA 92620
Resale Home Price … $668,000
Home Purchase Price … $620,100
Home Purchase Date …. 6/10/2010
Net Gain (Loss) ………. $7,820
Percent Change ………. 1.3%
Annual Appreciation … 30.1%
Cost of Ownership
$668,000 ………. Asking Price
$133,600 ………. 20% Down Conventional
4.51% …………… Mortgage Interest Rate
$534,400 ………. 30-Year Mortgage
$130,704 ………. Income Requirement
$2,711 ………. Monthly Mortgage Payment
$579 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$56 ………. Homeowners Insurance
$75 ………. Homeowners Association Fees
$3,421 ………. Monthly Cash Outlays
-$453 ………. Tax Savings (% of Interest and Property Tax)
-$702 ………. Equity Hidden in Payment
$223 ………. Lost Income to Down Payment (net of taxes)
$84 ………. Maintenance and Replacement Reserves
$2,572 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$6,680 ………. Furnishing and Move In @1%
$6,680 ………. Closing Costs @1%
$5,344 ………… Interest Points @1% of Loan
$133,600 ………. Down Payment
$152,304 ………. Total Cash Costs
$39,400 ………… Emergency Cash Reserves
$191,704 ………. Total Savings Needed
Baths: 2 full 1 part baths
Home size: 2,000 sq ft
($334 / sq ft)
Lot Size: 4,465 sq ft
Year Built: 1985
Days on Market: 1
Listing Updated: 40400
MLS Number: S628520
Property Type: Single Family, Residential
Gorgeous upgraded single family house in NORTHWOOD. It has been renewly remodeled & upgraded with kitchen cabinets, granite countertops and wood flooring on first floor. Master bedroom with Retreat can be easily converted to 4th bedroom. Fire place w/granite tile & mantel, wide hardwood floor, plantation shutters, vaulted ceiling, Spacious backyard w/patio cover, No mello roos, Walk to Top Rated schools. Convenient to shopping and transportation. Awarded schools!!!
I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.
Have a great weekend,