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.
Vulture investors: They're back – and making a bundle
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.
Foreclosure Record
Recording Date: 10/13/2009
Document Type: Notice of Sale (aka Notice of Trustee's Sale)
Click here to get Foreclosure Report.
Foreclosure Record
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 sales@idealhomebrokers.com.
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
Property Details for 19 PERRYVILLE Irvine, CA 92620
——————————————————————————
Beds: 3
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
Community: Northwood
Tract: Cs
——————————————————————————
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,
Irvine Renter
IrvineRenter –
I am curious. What do you think is going to happen to the median Las Vegas rent and vacancy rates as the army of land barons comes rolling into town to partake in the gold rush that is being pumped by the usual suspects?
http://www.crackthecode.us/images/SecretsToLasVegasLandBaron.jpg
Obviously if the town is overrun with wannabe land barons, the pool of potential tenants is going to dry up. These ads make it sounds like a infomercial “YOU CAN’T LOSE!!!!!! CALL NOW!!!” type of proposition.
Have any of these “investors” had a tenant stop paying rent? Or maybe had the property damaged beyond what the security deposit covered? The rental business is no easy picnic. And these “investors” are doing nothing but crowding out families from owning their own houses at affordable prices; acting like a cartel that buys up all of the housing stock so that locals have no choice but to pay usurious rents to their land masters.
Furthermore, what earns these individuals the title of “investor”? Just because they are not doing a quick flip? You can only be a “flipper” or an “investor”? It’s one or the other? There are no other terms? These people are just speculators of a different breed. They are speculating on local rents and dressing it up with some “cashflow investor” lipstick on their little piggy.
The houses are built. They produce not a thing once they are constructed nor create a single job that benefits the economy in any way. So where is the investment? What are these “investors” investing in? Is the economy going to recover if we all just buy up real estate and start renting to each other?
Some hard questions worth discussing.
David,
Can I use your ad?
It’s an investment. There are always risks with an investment. It isn’t putting money into CDs which is why the yield is better. I am sure many investors have had tenant problems; it’s a rental property.
“And these “investors” are doing nothing but crowding out families from owning their own houses at affordable prices; acting like a cartel that buys up all of the housing stock so that locals have no choice but to pay usurious rents to their land masters.”
That is just wrong. The whole reason prices are this low is because the entire housing stock of Las Vegas is going through foreclosure. Investors are buying these properties and renting them to the previous owners who can’t buy because their credit is trashed. Housing is extremely affordable there for average families. Go look at realtor.com and see all the available inventory. There is certainly no shortage of nice single-family homes available for sale to average families with good credit.
You continually conflate the activity of resale flippers in supply-constrained markets with that of wholesale flippers who are returning supply to the market. The first group does crowd out families and drive up prices. The second group does not. The wholesale flippers are the ones solving the supply problem, not the ones creating it.
Cashflow investors are different that speculators because they are not buying for the change in resale price. It is a very different mindset, and the investors behave very differently toward the investment.
By your final definition of investor, only developers and those creating new products are investors. There are plenty of investors who own and maintain existing properties and products; in fact, that is the vast majority.
It’s an investment.
You continually conflate the activity of resale flippers in supply-constrained markets with that of wholesale flippers who are returning supply to the market.
Let’s suppose that AZDavidPhx is tired of putting money into CD’s wants to start up a new company called the AZDavid Food Brokers. Our strategy would be to set up a fund that would be used to buy up all of the food and empty the shelves of every grocery store within 50 miles of Las Vegas. We would then sprinkle some holy water on each package of food and re-sell the upgraded food to anyone feeling hungry. We would then use the profits to buy up the next shipment of food and keep our investment business going. We might then expand our business and form a Gasoline brokerage to help Las Vegas citizens acquire fuel for their vehicles.
Am I understanding correctly that your opinion would be that my businesses are helping the citizens of Las Vegas eat and drive even though they are paying more for their food and fuel?
Would you not take exception with me calling myself an “investor” under those circumstances?
Actually, if you replace “food” with “mortgages” and “bless with holy water” to “repackage into slicing into tranches” and roll the date back a few years – that sounds just like Goldman Sachs would do. But don’t worry – like Goldman, you’d still be “doing God’s work” as an investor.
The behavior you colorfully described is cornering a market and creating a monopoly. The investors buying properties in Las Vegas are not doing this.
In your analogy, investors that I describe would be the ones who found another food supplier and circumvented your monopoly to deliver needed goods to the people.
I can’t believe you don’t see what is going on. These people are going through foreclosure. They can’t buy homes. Someone has to go buy these properties and rent them out to the local residents. This isn’t hurting families; it is helping them.
I can’t believe you don’t see what is going on.
I do see what is going on. There is blood in the water over in Las Vegas and the sharks are circling, trying to “help out” mother nature and get a piece for themselves in the process.
These people are going through foreclosure. They can’t buy homes.
This is the case for every person currently living in Las Vegas? What about the new family that just arrived and put a bid in on a house only to get outbid by 20 “investors” who have come to Las Vegas to “help” everybody out. The family now has to pay more for their house because of all the help being mustered by Californians to help the citizens of Nevada.
IrvineRenter, let’s suppose that you are correct and that every Las Vegas local has been foreclosed and needs a land baron to help them out. 7 years pass by and now everyone can buy again so they don’t need your help anymore. Are the land barons going to hand back the property for what they paid and leave town? Or is the plan to have all the land barons continue to hold all the properties keep the locals in servitude and maybe drive up prices?
It is interesting to see IRs flip flop here. A few years ago he railed against the Irvine speculators who tied up all the housing stock, forcing smart would be homebuyers to rent on the sidelines and seeth about overpriced houses they couldn’t afford while losers were just sitting on rented or vacant houses to make a buck. Now he has flip flopped to the opposite point of view that speculators who own homes they don’t live in are the good guys. Funny how becoming a realtor and then a vulture investment company have changed his moral priorities.
IR has always been consistent.
He’s always been about cashflow from day 1.
If his consistency is “Does that put money in my pocket?” then yes, he has been consistent. But saying he is helping other people by doing so is just over the top like the “doing God’s work” statement by Goldman Sachs. At least be honest about it.
I don’t necessarily have a problem with rental housing. It has its place. Apartment complexes create jobs and a portion of the rent money is recycled back into the local economy. Not so with citizens of California going next door to Nevada and buying up the housing stock and telling them “Yea, just mail the check back the California”.
In that circumstance, no jobs are created for any Las Vegas locals and 100% of the rent money leaves the local economy.
The behavior David descibes IS monopoly and it IS in effect…it’s called the financial sector and banking. It is a monopoly and one that extracts the lifeblood from citizens while saying they are “helping”.
God’s work indeed. Jesus was not a capitalist much to the chagrin of the conservative republicans.
The nation as a whole turns my stomache. I’m drawing back over the years. Cancelled my cable TV, cancelled the phone line, not spending on much anymore as I hate contributing to the decay and waste while the rich get even more rich. I’d rather live humbly and meagerly and get off the teat of banksters.
P.S. I saw Donald Bren graced the front page or the OC Register!
“Funny how becoming a realtor and then a vulture investment company have changed his moral priorities.”
I’m not quite sure where my priorities have changed. I have been wrong about things and changed my mind. I have been writing for four years, and after watching this unfold, my perspective and attitudes have evolved. Hopefully, matured by observation. Consistency is only a virtue to the degree you have been correct. I have missed many things about the way the crash has unfolded. I am flawed. Perhaps I will achieve perfection in my next life. Its something to strive for.
Yes, the choices I have made have been driven by what I believe. I wanted to help people buy and sell homes with the truth about the market and prices. Shevy does this well. Both of us feel good about that.
Further, I do genuinely believe buying properties in places like Las Vegas does help people. Every person who can own a home does. There is no shortage of homes available for families. Prices are a tiny fraction of rent. Someone has to purchase and own these properties until the previous owners are eligible to repurchase with loans again. These interim owners can be individuals or faceless corporations. Does it matter? Is it better to hold these properties as REO and allow the banks to totally control the price that is paid? Or should everyone that signed a loan document be allowed to squat for as long as it takes for house prices to go back up? That’s basically what is happening now in Orange County. What is the best solution?
Perhaps my moral priorities have changed, but I believe in what I am doing, so I am okay with that. I will let the chips fall where they may. I may be in the wrong. I may look back with regret and wonder where I lost my way. I hope not.
I am not here to pass judgement. I’m using your circumstances as an example for discussion of the broader topic is all.
I do genuinely believe buying properties in places like Las Vegas does help people
How many times have you posted on this blog that the road to hell is paved with good intentions?
Every person who can own a home does.
This is not an acceptable answer. I could call up my bank today and they would love to give me a loan for 500K. I could move out of my apartment and buy a nice McMansion for myself. I choose not to do it because I will not be a slave to a bank for a 30 year term. However, if the price were to drop to a reasonable level that I might pay off in 10 years or less then I would consider it. Sure, I “can” own, but I do not. So it is disingenuous for you to go speaking on behalf of others like that.
Someone has to purchase and own these properties until the previous owners are eligible to repurchase with loans again.
You could say the exact same thing for Detroit. Why don’t you include some Detroit houses in your portfolio? Somebody HAS to buy them right?
Perhaps my moral priorities have changed
Disappointing.
David makes some good points. I don’t think anyone feels what you’re doing is immoral or anything IR, but it’s a bit of a stretch to say that you’re ‘helping’ Las Vegas by bidding up the foreclosures there. One thing we know about markets is that they will eventually find an equilibrium price. Investors buying these properties definately add positive price pressure. It’s not as if there’s nowhere to rent in Las Vegas today, and it can be postulated that even the excess properties would have to fall in price to a level which makes them affordable to those recently forclosed folks, which by providing an ‘artificial’ bottom, you’re helping prevent.
I have no problem with you moving in to make a profit, so long as you’re honest about your motives, which I think you’ve been.
“In that circumstance, no jobs are created for any Las Vegas locals and 100% of the rent money leaves the local economy.”
So IR will hire plumbers, painters, etc. here and have them drive to LV to make sure all the money leaves LV? I doubt it. 20%+ will stay in LV for maintenance and management. Much of the money left over will go to debt service. That money goes to the bank, just like if a local had bought the property. Maybe 10%-20% will leave LV.
Have you ever owned income property?
Should I feel shame for wanting to pursue a profitable endeavor? Am I doing anything harmful? Am I exploiting people (or banks) on hard times? Perhaps I am blind to the evil that I do.
@IR:
I don’t think anyone says you shouldn’t try to make money.
The issue here is don’t paint it as a philanthropic endeavor.
IrvineRenter –
The point is not to shame anybody. You are just blogging about your personal circumstances. I am just looking at the big picture when everybody does it and making astute observations to stir some discussion.
You are free to be as evil as you want to be.
It is not a plan. It is a free market.
By participating in the marketplace of willing buyers and sellers IR is being evil???
IMO, there is far too much discussion about morality on this site. People enter into financial decisions in the marketplace at their free will and for their intended personal benefit. These aren’t moral issues, they are financial decisions. Otherwise, whenever I make a purchase at the store because I think it is a good price, is that being immoral?? Geez.
Buying property does not come with an obligation to create jobs. Owning rental property does not obligate the landlord to spend money in the local economy.
The moral isssue is not whether buying properties helps someone else. The moral issue is whether people have the liberty to choose to buy or sell real property without interference from those who think they know better for everyone else and think that their morality entitles them to tell others what they can and can not do with their money and property.
No, you are not evil for pursuing a possibly profitable endeavor. But neither are you “helping” Las Vegas or anybody else, nor do you have to justify your actions as such. Making money does not have to be justified as doing some greater good. It is what it is.
By participating in the marketplace of willing buyers and sellers IR is being evil???
Someone switch this guy to decaf. It was a JOKE.
IrvineRenter jokingly said:
“Perhaps I am blind to the evil that I do.”
I replied (jokingly which I thought was glaringly obvious):
“You are free to be as evil as you want to be.”
Next time I will be more explicit:
“You are free to be as evil as you want to be. The previous statement was not meant to be taken literally by any reader of said statement. The opinions and views expressed by the said party are tongue-in-cheek as defined in the Oxford English Dictionary and no other such definition may be applied to said statement. You agree to all terms and conditions of this caveat by reading this sentence.”
Buying property does not come with an obligation to create jobs. Owning rental property does not obligate the landlord to spend money in the local economy.
That’s right. The landlord is more than welcome to buy all his groceries on the internet or have a pizza delivered from Bangor, Maine.
No, you are not evil for pursuing a possibly profitable endeavor. But neither are you “helping” Las Vegas or anybody else
I would agree with this.
Irvine Renter needs to say this more often, rather than spew the BS. Finally an accurate statement from IR in how he was so very wrong in regards to market predictions:
” I have been writing for four years, and after watching this unfold, my perspective and attitudes have evolved. “
AzDavid, I’m surprised by this chain of responses. It sounds as though you are, basically, anti-capitalist.
Someone has to step in and stop the rot. If a house in in foreclosure, and an investor doesn’t pick it up, it will be resold – at lower price – and if the next investor doesn’t buy – lower price again – and if the market collapses enough the properties will be abandoned and shortly become worthless.
If an investor is willing to commit their equity in order to provide housing for the public, that is a service, for which they deserve a routine.
IR, what are the chances that market forces in Las Vegas will lower rents? It would seem that to some extent housing bubble prices would have increased rents, and that extremely depressed housing prices compared to rental parity would eventually lower rents.
Currently the government is handing out money in every conceivable way to keep home prices above what the market would suggest and keep mortgage owners in homes they can’t afford. Seems like it would make more sense for the government to somehow facilitate the foreclosure process. The current strategy is wasting money to delay the inevitable. The proposed idea would at least move the ball down the field and deal with reality.
Rents in Las Vegas have already declined 20% due to the large influx of rental supply and the large number of unemployed. Rents tend to track unemployment very well, so when the local economy picks up, rents will also.
The government is intent of dragging out this process to keep our banks solvent. They are wasting money to delay the inevitable in hopes that when the inevitable happens, the banks can absorb the losses.
Rents in Las Vegas have already declined 20% due to the large influx of rental supply
So how does adding more rental supply help land barons who are speculating on local rents? Seems to me that adding more rental supply will just pressure rents even more.
so when the local economy picks up
This is stated as some kind of a forgone conclusion. If we are looking at a Japan style lost decade then this may be quite a wait.
“This is stated as some kind of a forgone conclusion. If we are looking at a Japan style lost decade then this may be quite a wait.”
Yes, that is a business risk of this investment. There is also the risk that Las Vegas will go out of style and people stop going there. That would be an absolute catastrophe. If I have failed to warn anyone of that possibility, I humbly apologize.
Why “deal with reality” when you can print as much money as you like to “redefine reality” to be whatever you want it to be?
Interesting radio interview on Lasner
recently that discusses today’s topic by IR
Hear why homes good as shelter not investments
http://lansner.ocregister.com/2010/08/18/hear-why-homes-good-as-shelter-not-investments/76245/
Clyde Kendzierski is right about our local market. The changing mix has made the median tick up and generated a lot of excitement, but prices remain too high, and as a speculative investment, local real estate isn’t a very good idea.
His point about interest rates being too low, however, is valid in both OC and Las Vegas.
The houses IR is talking about can be good investments. Buying a home that will be cash-flow positive through renting it out is an investment. Really, we all need to go back and read some articles from 2005-6/7, about how great an investment real estate was. IR is correct in pointing out the investor looking for cash-flow and the speculator looking for capital gains (it’s ironic that the cash-flow investor will probably also see better cap-gains).
Anything useful can be either a good investment or a bad investment based upon what you pay for it.
My concern in LV & other bubble markets is sheer oversupply of housing. I think you’ll have to factor in more unoccupied months than you might in a market that is in any way tight.
I actually liked the play of contacting people about to be foreclosed on (auction sold), so that you would have an instant tenant.
I am still waiting to hear what the investment is. Buying a factory to make create jobs and make things which can then be sold is an investment.
A house produces nothing. It is a 100% consumptive expense.
Where is the investment? I am not seeing it.
What I am seeing is speculation on rents. The speculation is that the land baron can sell a month’s tenancy for more than his mortgage payment. That’s speculation – not investing.
The definition is in the dictionairy:
•investing: the act of investing; laying out money or capital in an enterprise with the expectation of profit
Speculating? Only in that rents won’t decrease substantially. By your definition, only a risk free investment is an investment, an actually a risk free investment does not exist. Even a treasury security does have some default risk (granted, minimal) but also infation risk that can provide a negative return.
> Buying a factory to make create jobs and make things which can then be sold is an investment.
But aren’t these factory-buying “investors” crowding out families who might want to own their own factories at affordable prices? Acting like a cartel that buys up all of the factory stock so that locals have no choice but to remain laborers under their capitalist masters?
I am no huge fan of large landowners, and the writings of Adam Smith and David Ricardo are full of chin-scratching over the low social benefit of squires, but our society is all about wealthier people owning everything. I see no easy means of discriminating between land ownership by investors versus land ownership by occupants, either morally or in law; nor between ownership of lots of housing and ownership of a big factory. If you’re going to disapprove of land investment, then you pretty much have to disapprove of land ownership by “families” – whatever that means – and go to a Georgist approach to land ownership, which is basically to ban it.
BTW, is there something special about “families”? Do they have wet furry noses and big eyes which exempt them from judgment for some reason? Some of the dumbest, most destructive players in this whole game have been “families”, who destroyed mountains for their new countertops, sucked oilfields dry with their HELOC-financed Suburbans, and gobbled up cheap eyesore housing in every poorly-conceived Rancho Del Stucco.
BTW, there’s nothing wrong with a little Marxism here and there – I’m a fan! – but at least admit that that’s where you’re going.
But aren’t these factory-buying “investors” crowding out families who might want to own their own factories at affordable prices?
Nice straw dog you have made here. My argument was meant to differentiate an investment from a consumptive expenditure and made no reference to families. You just wove that part in from some other posts to set up your little straw man with a wet furry nose and big eyes.
BTW, there’s nothing wrong with a little Marxism here and there – I’m a fan! – but at least admit that that’s where you’re going.
Yup, you caught me. I was pushing Marxism until you called me on it. Crap, looks like I’ve been made!
“Nice straw dog you have made here.”
Thanks. Now I can’t get the image of Susan George being raped on a couch in a crummy country cottage, and Dustin Hoffman braining a yokel with a nine-iron!
Oh snap, AZDave let the straw dog out!
While I agree with some of your remarks, your notion of “investment” is too narrow. Investing can take many forms and the benefits gained isn’t always just money.
We all know you don’t believe in home “ownership” nor do you think it is an investment… but it can be.
1. It provides shelter.
2. If you do pay it off in 30 years and you pass away, you can give it to your kids and their lives will be financially easier.
3. If it does rise in value, you can sell it downgrade to a smaller home and use the profits for retirement, college fund, blingy sportscar or whatever.
There are more but none of those are guaranteed except item 1. And in 30 years, after you have been renting well into your 50s, if the rent vs. own cost was the same, in the end, I’ll still have a place to live rent-free… where you won’t.
Your current status may not see it but when (if?) you get married and have kids… maybe you will evolve.
The investment in IR’s case is the hope to generate positive cash flow, just like a factory that makes things you would sell, but in this case, the factory makes shelter for people who wouldn’t be able to buy. And if the market eventually recovers, he can make more money.
The question is… will it work? I’m doubtful like many of the observations here, but that’s part of investing… risk.
AZDave,
I like you a lot and I think you are generally spot on. But at this point you are acting like a troll. IR has an area of expertise and he’s been sharing that for years, for free. However, it’s the area he studied in and works in. If he finds a way to make money, it’s called taking advantage of his education and career. Now, if you want, you can set up a straw man and argue this is the same as Goldman Sachs. But the difference is that IR is offering all of us “little people” a way to get in on the action.
Moreover, those houses WILL BE foreclosed upon and they WILL BE purchased by someone at auction. You understand that “regular families” will not have the option to buy these homes at auction, right? Because you have to pay all cash at auction.
You get that, right? You see how your entire argument just fell to pieces, right?
Who would you rather have buy the foreclosed home at auction – IR and a group of “little people” investors or a huge investment group?
I understand that you are all about redistributing wealth and I think that’s noble. So, isn’t this an opportunity to redistribute wealth to the middle class at the expense of the rich?
Go ahead now, instead of taking my arguments seriously, just cherry pick the one or two lines you think you can use to distract from the fact that you are wrong and flat out unfair in this aggressive attack.
Breathe, AZDave, breathe. You don’t have to be angry at anyone that makes money.
Who is mad? I am simply questioning the Las Vegas gold rush views that have been posted. I don’t believe that taking advantage of Las Vegas locals is at all helpful to them but it is open to debate and that is what we are doing. We congregate here to debate – not circle jerk like some Active Rain bloggers. Sometimes the questions are tough but it doesn’t mean people are frothing at the mouth trolls.
Who said anything about redistributing wealth? You are putting a lot of statements into my typing hands that were never said.
The whole discussion has always been about rents being pressured lower and whether or not these investors are really just speculators. I do not discuss the business interests of this blog nor have I ever made a statement about them. I am using IrvineRenter’s scenario because it is relevant to today’s post. Your insinuation that I am mad at people for “making money” is just stupid huff and puff.
I could understand, for example, that if IR was being dishonest or intentionally deceptive, etc. to his investors in purchasing Las Vegas real estate, that would be immoral to his investors. But suggesting that buying Las Vegas real estate if you live out of state is “taking advantage of Las Vegas locals” is hard to fathom, particularly for someone who is “not here to pass judgement”.
Huh? Lots of people have gotten in on the Goldman action. Some went badly (ex buying those debt tranches) and some bought GS stock or whatever.
Like awgee said, it is just investing (with the usual caveats and risks). Not a morality play one way or another.
But suggesting that buying Las Vegas real estate if you live out of state is “taking advantage of Las Vegas locals” is hard to fathom, particularly for someone who is “not here to pass judgement”
That’s not a judgement, it’s a fact. The gold rush is on to take advantage of Las Vegas renters who have been foreclosed on. This is indisputable – IrvineRenter has said so himself. Maybe you do not like the language “take advantage of”. Well why is that an unfair statement? The “investors” are looking to Vegas because of its “favorable” conditions. Do you like that kind of corporate CEO language better? It means the exact same thing.
Like awgee said, it is just investing (with the usual caveats and risks). Not a morality play one way or another.
I don’t know why so many of you keep crowing about the morality. I have no concern about the screwed Las Vegas debtors. I have no moral concern about Las Vegas whatsoever.
I am simply making the argument that this is not helping Las Vegas citizens as has been claimed by IrvineRenter because they are just ending up paying higher prices and much of the money ends up leaving the state.
Some of you don’t want to discuss the argument and just go off fighting some morality straw man instead.
I have also said that when the town becomes full of land barons, it is going to cause downward pressure on rents.
But keep on crowing about morality.
I am skeptical about the Vegas plan, but your argument that it is not ‘investment’ is not a good tack. People buy assets for many reasons, but two of which are because of free cash-flow, and capital appreciation (another is because everyone else is doing it). Buying assets for cash-flow vs. capital-appreciation are fundamentally different endeavors. By your measure, someone buying AMZN in 2000 was a real ‘investor’ because their money was going for buildings, software, etc. But they weren’t interested in the fundamentals of the business, just that it was a hot stock. (If they had held on since 1/1/00 they would have a modest 3.5%/yr return to date).
You really have to acknowledge the Vegas buying IR is proposing vs what was going on during the bubble. Plus consider the options:
1. Bank allows people to stay in homes w/o paying.
2. Bank sits on REO
3. IR buys and rents out
With the available homes in Vegas, IR is not crowding out a potential buyer. I found over 5,000 properties between 100-150k, the first two having been on the market for > 100 days.
Part of the invisible hand is pushing prices where they need to be. If rents should fall a little, having another rental property plays the hand.
My skepticism is based on the estimate that #of qualified households to rent/own < # of homes in the Vegas area. IR is banking on this shifting as the gaming industry rebounds, but I would counter that Vegas's housing industry isn't really coming back (at least anytime soon, and water/electricity issues can make it more expensive in the future).
AzDavid, are you seriously suggesting that housing has no value? If so, why don’t we all walk around naked and sleep outside on rocks?
You are making a false distinction between certain types of manufactured goods that supposedly have ‘value’ and real estate which provides value through the provision of shelter. In your defense this is a common misunderstanding among those who argue that only manufacturing jobs create ‘value’ while services supposedly don’t (even though, of course, housing is manufactured anyway).
Yes, there has been massive overinvestment in real estate that should have been directed elsewhere in the economy. That is not the same thing as to argue that real estate has no value.
Patient renters who finally want to buy but keep losing to cash investors may disagree with you on that point. Interesting that HUD goes out of their way to let those folks have a crack at the properties before the investors can swoop in.
http://www.bankingmyway.com/real-estate/investors-beating-out-homebuyers-cash
Here the investors at least provide some useful service (ex. provide home repairs) before they flip it.
Professional investors move into flipping foreclosed homes
http://www.latimes.com/business/la-fi-homes-investors-20100820,0,7168785.story
IrvineRenter –
This is an older article, but I believe that it is still relevant in today’s context:
http://www.lvrj.com/business/28908134.html
Do you have any comments regarding these quotes from the article from the perspective of how the citizens of Las Vegas are being helped by these “investors”?
What really boils Hill’s blood is that international and out-of-state buyers are snapping up housing deals while the backbone of Las Vegas’ tourism industry — people who earn most of their income from tips — are being squeezed out of the market.
Speculators and investors were partly blamed for the run-up in Las Vegas home prices from 2004 to 2006 and the ensuing foreclosure mess. It seems they’re back in town, circling like vultures.
It is going to materially affect people in this town who truly deserve to have a home, who are well qualified but don’t have that much cash saved up,” Stewart said. “It’s a big issue and one that the shadow Congress has to work with.
If investors don’t buy the depressed real estate, whether they be in or out of state, real estate prices would even plummet further. Much further.
GASP!!!
Good God. You are right. We don’t want people to be buying houses with affordable prices.
If we do not act quickly, someone might actually snag a house and pay it off earlier than 30 years and spend the rest of that money on other things that actually create jobs for people!
We have to “help”! Don’t let prices PLUMMET! The horror!!!! The horror!!!!
Obviously you do want home owners to experience more pain. You can’t only look at one side of the coin.
Whether anybody buys a home in any market for the purpose of owning or renting is irrelevant in terms of morality. Participating in the marketplace is not a moral decision, it is a financial decision. It is also a decision between two willing parties acting in their own self interest and presumably with the intention of benefiting themselves or they wouldn’t be doing it. To say that investors shouldn’t buy Las Vegas real estate because it is keeping prices higher than they would otherwise by is nonsense.
Obviously you do want home owners to experience more pain.
Not at all. Real home owners have no mortgage. Whenever someone tells me that they are a homeowner, I always say “WOW, you have no mortgage? Don’t see that very often”
The only folks feeling the pain are the house debtors who overstretched and have no way of paying off their mortgage in this life. And I say screw those people. I could not care less how much pain a screwed debtor feels.
Whether anybody buys a home in any market for the purpose of owning or renting is irrelevant in terms of morality. Participating in the marketplace is not a moral decision, it is a financial decision.
Blah Blah Blah.
To say that investors shouldn’t buy Las Vegas real estate because it is keeping prices higher than they would otherwise by is nonsense.
LOL!
I am going to hire you to pitch my Food and Gasoline Brokerage. Don’t worry, it will be commission based. Is 6% of each food sale enough?
That would be determined by willing buyers and sellers in the marketplace. But apparently, which transactions are worthy or moral should be up to you.
Just as my Food Broker service would function. The price of grain would be determined by willing buyers and sellers. What’s the problem? We are both in complete agreement.
“Not at all. Real home owners have no mortgage. Whenever someone tells me that they are a homeowner, I always say “WOW, you have no mortgage? Don’t see that very often”
Nobody is a TRUE owner of a property. You still have property tax that you’re gonna have to deal with as long as your name is on that title. Thus, you OWE property tax EVERY DAMN YEAR.
**Homeowner** is just a nice spinner name to it, that’s all.
“If investors don’t buy the depressed real estate, whether they be in or out of state, real estate prices would even plummet further. Much further.”
I have no problem with this lowering of prices.
However, I do think that outside investment is welcome, but for a different reason: around half of the American public has consistently proven itself too stupid to handle debt and home ownership responsibly. By renting homes to these idiot families, the professional investor classes are doing a service, both by managing debt and property more responsibly and by taking the financial hit on downside market moves.
Around half the public are morons. This half should not be allowed to borrow money or own their homes. This past decade has left no doubt that debt and land ownership should be slightly more difficult to attain than we thought.
There is an alternative. And that is to make govt regulation of banks to actually make only loans people can afford. Seems like a much better solution.
the professional investor classes are doing a service, both by managing debt and property more responsibly and by taking the financial hit on downside market moves.
This is actually a good argument. Just make sure that you hang a red/white/blue flag on each of your houses so your subjects AHEM! Tenants! still believe that they are free. Maybe throw in machine gun too.
This half should not be allowed to borrow money or own their homes.
Very true. Unfortunately this is not in the interest of Big Finance. The new way of life is easy money for all. No banker left behind.
That’s a great emotional argument, and when it is the current state of reality, it has impact. I don’t believe owners are being squeezed out. Right now, prices are so low that it is much cheaper to own than to rent. How much lower should it go? Isn’t it wiser to switch from renting to owning at that point?
The people crowded out by investors are currently renting. Renters can always raise their bids for purchase and still be saving money versus renting. Owner-occupants would be outbidding investors who want a steeper discount.
Why should investors leave the market? They provide a price floor. That is their function. The price floor provides a significant margin for owner-occupants to be enticed out of rentership.
Right now, prices are so low that it is much cheaper to own than to rent.
Isn’t it wiser to switch from renting to owning at that point?
Not if rents are declining right alongside sale prices.
I disagree with both you and IrvineRenter here; with you on the issue of outside investors, and with IR on the future cashflow picture in Vegas.
I think that investors are welcome to purchase Las Vegas real estate, because they will take the hit for the continuing stagnation in values and decline in rents as Las Vegas rots and crumbles into the soil. I would rather the money lost be investor capital, and not blood money.
As you say, rents look to decline, which will give the residents the opportunity to rebuild their finances by insulating them from the ongoing collapse.
My primary reason for selecting Las Vegas over other markets that are similarly beaten down (Bakersfield, Santa Maria, Detroit) is because I believe the Las Vegas economy will recover. Or to be more specific, more money spent in Las Vegas by tourists will flow to wages that will support rents and prices. If I am wrong, if tourists abandon Las Vegas, then cashflow properties there will perform very poorly. In fact, I would not purchase good cashflowing properties in some markets precisely because I don’t believe in rent growth. Significant portions of Detroit will likely be bulldozed as many empty properties lose money on maintenance and taxes. These properties have a negative cash worth. Only speculators will touch those.
For me, energy prices are the dominant concern. I know that our cemeteries are full of prognosticators who died waiting for civilization’s resource base to create a severe crisis – e.g. Club of Rome – but it seems to me that liquid petroleum production has peaked and that no comparably cheap substitute will be found in the next few decades.
Think about tar sands production and deep-Gulf drilling: are these the acts of an industry which is not desperate?
Maybe the bottom for the Vegas economy is in, and tourist revenue will remain at or above current levels for the long term. Maybe revenue will continue to drop, then rebound, due to a combination of energy costs, the economy at large, and consumer tastes.
Also, the casinos can subsidize airplane tickets, provide free bus service from nearby cities, closer than 500 miles, or maybe obtain subsidies through high-speed rail, for which Vegas is a near-must as a junction. Each man who visits Vegas has a wonderful ability to convince himself that it is everyone else’s losses which pay for these things, and that he, in the long term, is ahead.
Or perhaps there is a battery breakthrough in the offing, or even a monster breakthrough such as fusion – then Vegas will grow, with only water as the limiting constraint. Of course, substantial advances in battery technology have been approaching, and still approaching, for 40 years, yet, like the collapse predicted by the doomsayers, these never seem to arrive either.
I will say that I hold little hope for Bakersfield or Riverside, either, but this is not rational: simply put, they both make me sick, unlike Vegas.
This flipper is giving Irvine trustee sale flippers
a bad name.
Pays $620K then lists at $668K
He should’ve at least added the standard $100K-$150K premium typical of the others.
Where’s the honor among thieves?
Speculating and investing in real estate is neither moral nor immoral. Investing in real estate is no more moral than speculating in real estate.
Vultures do not need to justify their investments. Vultures do what they do to make money, and that is neither illegal nor immoral.
Just like those hucksters on the infomercials who sell Get-Rich-Quick books and cures for Cancer. Nothing illegal or immoral about it.
Strawman and ad hominem should be beneath you, but they aren’t, are they?
Regarding the plight of Las Vegas families – it seems like the only difference between the posters is what their own personal definition of what home prices “should be”.
Say thanks to IR & others the LV market for SFH is around 200K. This causes a ton of angst to blogger A who thinks homes “should cost” 100K and to blogger B who thinks homes “should cost” 50K, and especially to blogger C, our resident permadoomer who thinks we are headed to a deflationary collapse and homes “should cost” 1K. These guys rail against all the “specuvestors” who “artifically inflate the market” and “keep prices from being affordable”.
What if IR & the other investors were to vanish such that prices fell to 100K? Blogger A would suddenly declare LV “affordable”. In fact, say prices continued to fall. At some point, Blogger A would say, “this is nuts, I am going to buy more than one home, and rent it for profit”.
This move would enrage Blogger B who will now rail against “vultures” like Blogger A who “refuse to allow prices to fall to where they should be”.
At the same time however, what if for whatever reason prices fell all the way past 50K, down to to 5K? At that point, even the enraged Blogger B would say “this is nuts, I am going to buy another homes and rent it for profit”. This would of course enrage C and perpetuate the cycle.
The price disparities in this example are extreme, but that is only to prove the point. At some point, unless you happen to be the most bearish person on the face of the planet, you too will pick up houses and “keep prices unaffordable” and “squeeze out families” who happen to be more bearish than you.
Excuse me as I go grab my heat shield for the inevitable flame attacks.
No heat shield needed. Well said.
What you say makes sense. I can only counter, more as a devil’s advocate than out of any skepticism of your conclusion, that the blogger-investors have failed to put a floor under prices in Detroit.
Not necessarily. Are homes going for $0 in Detroit or something higher?
Even if homes in Detroit were going for $1,000 a piece, there is some more bearish person who thinks they “should be” $500, and is railing against the “specuvestors” who are “propping up home prices”.
Frankly, bloggers A, B, and C can buy at whatever price they feel that’s right for them.
However, my beef is when blogger A tries to make the govt pay for his **mistakes**. That’s my f***ing money which is paying for his **mistakes**.
Irvinerenter, home purchase for investment for positive cash is smart thing, but another factor is that home that may be positive cash today may turn negative as we dig deeper into housing slump. as home prices fall further, rents fall too. We should keep this in mid. Still, such investmets are good for those who have plenty of cash and treassury pays next to nothing, so you can buy cheap deals for cash and enjoy rental income for years to come without thinking much about the home values. 100% cash properties dont have much to lose as whatever rent it generates would be substantially higher than the treassury rate and it also gives you an asset for future appreciation.
I do not recommend anyone to finance investment property as negative cash could be on the horizon for financed buyers.
Re: North Phoenix apartments mentioned in article
I am skeptical about each unit in the north Phoenix 4-plexes commanding $600/month. North Phoenix has some okay areas and some really, really bad areas with very high meth addiction and convicted child molester rates. I suspect these units are in a crappy area because I don’t recall seeing many 4-plexes in the nicer parts of north Phoenix. Plus, I suspect the units are all one bedrooms.
In contrast, I lived in Phoenix from 2004-2006 and I could find a real nice 2-bedroom apartment for $700 – $900/month in nice areas of Phoenix (e.g., Biltmore area). And I presume the rents have gone down since the boom years.
So I think it is likely a stretch that the new owners of these 4-plexes are going to get $600/month for each unit. Not only will they be lucky if half the tenants aren’t arrested and so can’t pay the rent, but they’d be lucky to not have to spend a fortune to clean up the inevitable disaster left after a tenant leaves.
And unlike Vegas’ economy having the outside chance of recovering some time soon due to gaming, I fail to see any industry in Phoenix that could be strong enough to bring Phoenix back anytime soon.
Section 8 anyone?
To invest based on renting to Section 8 people is insane. I’d like to see some anecdotal evidences of millionaire Section 8 landlords.
great post
but re: vegas
ur not going long and going loud r u ?