Real estate cashflow investors will stabilize the housing market

The government doesn't need to subsidize cashflow investors. It simply needs to get out of their way.

Irvine Home Address … 77 ALBERTI AISLE 339 Irvine, CA 92614

Resale Home Price …… $269,000

How can you stand there and deny it

after all we have been through

How can you stand there and deny it

and make a fool out of you

Collapsing like houses of cards

and landing on splinters and glass

Wish I could fake it like you do

wish i could fake it just like you

How can you stand there and deny it

How can you stand there and deny it

Trust me now

Zeromancer — House of Cards

In its obsession with home ownership, the government has been ignoring the one group most needed to stabilize housing prices: cashflow investors. Several weeks ago, I asked the question Should Government Mortgage Subsidies Be Offered to Cashflow Investors? Most readers said no. Personally, I would like to see the government get entirely out of the housing market, but as long as they are determined to support prices, perhaps they should look for policies that will be more effective.

As Shadow Inventory Grows, Time for More Subsidy?

By: Diana Olick — Monday, 22 Nov 2010

As of the end of August, there were 2.1 million properties either in the foreclosure process or headed for foreclosure, according to CoreLogic.

It's come to be known as the "shadow inventory," because it will be coming to market soon, but it's not listed yet.

To put that in perspective, there are about 4.2 million properties (existing homes and new construction) currently, visibly on the market now. So add 50 percent more, and there's your true inventory.

Rather than look at the absolute numbers, we like to look at months supply, which is how many months, at the current sales pace, it would take to sell all these homes. Add the shadow and the visible supply, and figure it into the sales pace in August, and you're looking at a 23-month supply. Nearly two years. Six months worth of supply is generally considered "normal."

"The weak demand for housing is significantly increasing the risk of further price declines in the housing market," notes Mark Fleming, chief economist at CoreLogic.

Inventory is the key to predicting the future of home sales and prices. I've said this over and over. We know that there are investors out there looking to get into the market, and that's a good thing, especially since investors are almost exclusively all-cash these days. But there aren't enough investors to soak it all up, so we have to look to the demand side for regular, organic buyers.

Fannie Mae is doing everything it can to bring in these buyers, introducing a pilot program in Orlando, FL, Detroit, Mi and San Diego, CA that will allow real estate agents to submit offers online for foreclosed properties Fannie now owns and then track them through the sale. Fannie and Freddie are both taking back more and more properties, as their sales of said properties are actually declining slightly.

Other than that, government appears to be largely out of the housing subsidy business.

I've never been a fan of government getting too far into housing, because it inevitably results in doom and gloom when the subsidy expires.

The best solution does not require a subsidy. Merely eliminate the limit on the number of mortgages a cashflow investor may have, and count 75% of the rental income toward the payment. Eliminating the limit on the number of mortgages costs no money, and it allows those investors with expertise in obtaining and managing properties the ability to acquire more. My counting a portion of the rental income toward qualification, wherever the prices are low enough for cashflow investors to make a profit will quickly get bid up to the limit of available financing.

None of this costs the government anything, and the demand it creates is not artificial based on a financial subsidy that inflates prices. The GSEs are merely eliminating an artifical barrier they created. This demand would seek out the most downtrodden markets and put a floor beneath prices in those areas. Very little of that money would flow into inflated markets like Orange County because so few properties meet the criteria.

But here's the conundrum: Even as new loan delinquencies improve, they are improving slowly and are still far too elevated for comfort. On top of that, loan modifications are failing at an alarmingly high rate, which means ever more borrowers will go straight to foreclosure. Foreclosure inventories are still rising, as banks re-file and ramp up the process, which again means more inventory coming to market.

Perhaps it's time to look at a new government incentive, this time for those previously dreaded real estate investors. More to come…

Real Estate Investors Are Not the Enemy

By: Diana Olick — Friday, 3 Dec 2010

They have surpassed lawyers and repo-men as the most vilified professionals on the planet.

Thanks to the unprecedented real estate crash, "investors" are now the bad guys. During the housing boom, they canoodled with lenders to lever themselves to the hilt, and consequently fueled home prices to levels so unsustainable that the market came crashing down.

There is a major distinction that must be made here. The people who were buying real estate during the bubble were not investors, they were speculators betting on appreciation. Buy-and-hold investors are buying for the cashflow offered by the property. Appreciation does not figure in to their thinking, other than perhaps to acknowledge that appreciation will keep pace with inflation so their original capital is protected.

People who speculate in real estate to capture appreciation are fools. Occasionally this group gets lucky if they manage to time their purchase and subsequent sale well, but few accomplish this task. Many profited greatly from the housing bubble by appreciation, but that was only because banks allowed them to convert artificial appreciation to cash through mortgage equity withdrawal. That won't be happening again any time soon.

Never does the President, the Treasury secretary, or the HUD secretary announce a new element to the Administration's multi-billion dollar housing bailout, without making clear that investors need not apply.

Get over it. That's all I, and plenty of qualified real estate investors, have to say. That was then; this is now, and real estate investors may be our only ticket out of the housing crisis.

"If you want to stabilize the housing market, you have to encourage investors," says hedge fund manager Aaron Edelheit. "The quicker you can end the foreclosures and the short sales, the quicker you're going to have a turnaround in the economy and the housing market."

That isn't really true. The quicker we push through the foreclosure and short sales, the quicker we will have an improved economy, but "ending" foreclosures and short sales requires faster processing. Most loan owners interpret "ending" as terminating the process prior to foreclosure. That isn't helpful because the onerous debt remains.

Edelheit has invested over $10 million in foreclosed homes. He's not looking to flip them for a profit; he's in this for the long-term gain. He doesn't buy up bulk condos, as many institutional investors are now doing, and which he admits is much easier. He buys single family homes with the sole intention of renting them out to families. No, he's not a do-gooder. He's making around an 8 percent profit after expenses.

Eight percent capitialization rates on properties in Las Vegas are quite common. Eight percent can also be readily found in beaten down markets like California's central valley, Riverside county, and suburban Phoenix, Arizona.

Think of it this way. At the height of the housing boom, the home ownership rate was at 69 percent. It's now down to 66.9 percent and dropping. Historically it's around 62-64 percent.

"You have five to seven percent of the nation who needs a place to live, and they would prefer single family homes," notes Edelheit.

Today's jobs report proves that this is going to be a slow economic recovery, which means the pool of potential home buyers will remain small for quite some time. We have already seen apartment rents rise on higher demand. This in the face of a serious oversupply of homes for sale and a shadow inventory of, by some estimates, up to 7 million foreclosed properties.

"There aren't the natural buyers to buy these excess homes, but there are the families to live in them, so if you had long term capital to incentivize investors like me, we would go in, buy homes, fix them up and rent them to families," says Edelheit.

I totally agree.

But there's the problem.

Gun-shy banks and government-owned Fannie Mae and Freddie Mac are being very stingy with credit to investors, capping them at very few loans. Fannie Mae allows ten loans to each individual investor, but investors tell me it's more like four when you talk to the banks. A Fannie Mae spokesperson adds, "Lenders may have their own overlays or added fees."

They've thrown the baby out with the bathwater. I'm not suggesting we return to the heady days of lending to any Joe with a pen to sign on the dotted line. I am suggesting we stop demonizing investors and instead offer low-cost credit to those with worthy balance sheets who are willing to put significant down payments on the properties. And yes, underwrite them conscientiously. It may be our best exit from a too-slow recovery.

Investors like Edelheit are waiting in the wings. "I think that if the government were to encourage investors, they would swoop in and buy homes, and you'd very quickly not have an excess amount of housing."

I find it interesting that the few good ideas for stabilizing the housing market are universally reviled, and the many bad ideas are lionized and implemented only to fail dismally.

If there were no limit to the number of loans the GSE would insure for each investor, and if they counted 75% of the rental income toward qualification for the loan, I would buy hundreds of properties in Las Vegas, and so would many other investors. The foreclosures would be readily mopped up at prices dictated by stable loan terms. The crisis would be resolved as quickly as the foreclosures could be processed. As it stands, prices in Las Vegas are well below cashflow levels, and investors can't buy them quickly enough to absorb the supply. Anyone in government who believes owner-occupants are going to clean up this mess is delusional.

The apartment that pays you rent

Before I studied what was really going on in the housing bubble, I never understood why people would pay ridiculous prices to own a near model match for the apartment I was renting. Now I see that the people in these glorified apartments weren't making payments, they were being paid by the banks to live there. The owners of todays featured property took out more in mortgage equity withdrawal than I paid in rent during the housing bubble. In fact, they took out enough to make their payments plus have enough spending money left over to exceed my rent. If I had only known….

  • This property was purchased on 7/22/1992 for $133,000. The owners original mortgage information is not known, but it was likely a $106,400 first mortgage and a $26,600 down payment.
  • On 8/24/2001 they refinanced with a $143,250 first mortgage and extracted their down payment plus $10,250.
  • On 11/13/2003 the refinanced with a $195,000 first mortgage.
  • On 3/16/2006 they refinanced with a $311,000 first mortgage. After 14 years of ownership, they nearly tripled their mortgage.
  • The defaulted in mid 2009 and squatted for about a year.

Foreclosure Record

Recording Date: 01/26/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 10/07/2009

Document Type: Notice of Default

In the five-year period from 2001-2006, this couple took out an average of $33,550 per year out of their one-bedroom apartment home. That averages to $2,795 per month. What were you paying in rent then?

Irvine Home Address … 77 ALBERTI AISLE 339 Irvine, CA 92614

Resale Home Price … $269,000

Home Purchase Price … $133,000

Home Purchase Date …. 7/22/1992

Net Gain (Loss) ………. $119,860

Percent Change ………. 90.1%

Annual Appreciation … 3.8%

Cost of Ownership


$269,000 ………. Asking Price

$9,415 ………. 3.5% Down FHA Financing

4.71% …………… Mortgage Interest Rate

$259,585 ………. 30-Year Mortgage

$53,875 ………. Income Requirement

$1,348 ………. Monthly Mortgage Payment

$233 ………. Property Tax

$50 ………. Special Taxes and Levies (Mello Roos)

$45 ………. Homeowners Insurance

$235 ………. Homeowners Association Fees


$1,911 ………. Monthly Cash Outlays

-$125 ………. Tax Savings (% of Interest and Property Tax)

-$329 ………. Equity Hidden in Payment

$17 ………. Lost Income to Down Payment (net of taxes)

$34 ………. Maintenance and Replacement Reserves


$1,657 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$2,690 ………. Furnishing and Move In @1%

$2,690 ………. Closing Costs @1%

$2,596 ………… Interest Points @1% of Loan

$9,415 ………. Down Payment


$17,391 ………. Total Cash Costs

$25,400 ………… Emergency Cash Reserves


$42,791 ………. Total Savings Needed

Property Details for 77 ALBERTI AISLE 339 Irvine, CA 92614


Beds: 1

Baths: 1 bath

Home size: n/a


Year Built: 1989

Days on Market: 0032

Listing Updated: 40514

MLS Number: S637599

Property Type: Condominium, Townhouse, Residential

Community: Westpark

Tract: Othr

According to the listing agent, this listing is a bank owned (foreclosed) property.


Property is ready for move in , This is a great 1 Bedroom 1 Bath plus loft upstairs that can be used as a 2nd bedroom. Unit is on the 2nd floor with washer and dryer area. Property is close to freeways and shopping center and schools and parks. This unit is minutes away from downtown Irvine. Property just rehabbed with new paint, flooring, and recessed lighting and all new appliances in the kitchen.

This unit is minutes away from downtown Irvine? Where is downtown Irvine? Main and Jamboree? The Spectrum? Michelson and Von Karman?

41 thoughts on “Real estate cashflow investors will stabilize the housing market

  1. winstongator

    I don’t think this is going to happen. People are skeptical enough of the GSE’s, that if they start funding massive investor purchases of properties, it would probably be the last nail in their coffin. Your local bank should have no restrictions on how many loans you can take. If the loans are that low-risk, why do the banks have to sell them off to the GSE’s? (The best counter-argument to this is that just because the banks aren’t doing something doesn’t mean it’s bad, which is proved by its false opposite, ‘If banks are doing it, it must be a good idea’.)

    If there were no limit to the number of GSE loans one could get, you’d start buying ‘hundreds’ of properties in Vegas, have you already purchased the groups of 25 that would represent the down payments going towards all-cash purchases?

    You are underestimating the negative effect investors had in the run-up. Yes, they were more appreciation investors than cash-flow investors, and I understand the difference, but investors are different than owner-occupants.

    I’d like to see you get more loans to grow your business, just not GSE loans.

      1. winstongator

        During the run-up, speculators were considered investors. Did we call Lehman a speculation bank, even though their actions were not much different than many budding real-estate barons?

      2. AZDavidPhx

        And now the “investors” are helping prop up prices and preventing them from coming down further.

      3. Misstrial

        Uh, no, they were referred to as specuvestors.

        During the run-up these folks were one and the same.


        1. winstongator

          Did you ever hear the term ‘specuvestor’ in the mainstream media? cnbc? Wall St Journal? I love the term, but it was not really generally used.

    1. OC Renter David

      It’s a long article, here’s IR:

      Orange County has long been a bastion of conservative values; the idea of homeowners not paying and then staying put rankles. Larry Roberts, a local blogger and real estate investor better known as IrvineRenter, calls them “squatters.”

      One hot question is how much of this is “strategic” defaulting — that is, how many people who have stopped paying have simply decided they will no longer pour money into a bad investment? Californians talk about short sellers with BMWs and/or conspicuous surgical enhancements. (A tour of Ladera short-sale listings confirms the first part of the story.)

      But the financial picture of defaulters usually isn’t rosy. “There’s a strategic element in most defaults, and few defaults are purely strategic,” says analyst Goodman. “You have your hours cut back at work or go through a divorce and re-evaluate … You don’t just say, ‘Oh, it’s three o’clock, time to default.’ “

      1. lee in irvine


        Oh I just love this! OC has lots of wealthy people living here, but when you look under the veneer of The OC, you start to see something very disturbing. The media struggles with the idea that a good chunk of the OC defaults are people who have been swimming with no suit for years … fakes … phonies. And now, they’re sinking in a cesspool of debt. We still have thousands of them all over Orange County.

        It’s a race to the bottom as the phony rich add to the growing number of strategic defaulters. It’s a flush cycle.

        Example: The Housewives of Orange County are exposed one-by-one on Lansner’s blog:

        Alexis Bellino
        A Newport Beach home owned by O.C. ‘Housewife’ Alexis Bellino and her husband Jim that the pair managed to rescue from repossession several months ago has been scheduled for another foreclosure auction, and now is also listed for sale at $3,695,000.

        Lynne Curtin
        ‘O.C. Housewife’ Lynne Curtin and husband Frank may file for bankruptcy, the pair told reporters today. “Everyone thinks because of the show we’re gazillionaires,” Lynne Curtin said. “When the economy turned we lost all of our money in real estate investments. We’ve been trying to get back on our feet ever since then,” Frank Curtin said.

        Jeana Keough
        Now that the Coto de Caza home of recently retired “Real Housewives of Orange County” cast member Jeana Keough has escaped foreclosure, it’s up on the market!

        Tamra Barney
        It’s been a long, hard trial, but the short sale finally went through for the home belonging to ‘Real Housewives of Orange County’ personality Tamra Barney.

          1. lee in irvine

            How can I ignore theme, Orange County is full of these latte drinking bimbo’s. They have no understanding of culture, and they don’t know how to value what’s most important.

          2. AZDavidPhx

            It’s entertainment for the masses, Lee. The sheeple love their television programs. I loved the bread and circus analogy from the other day.

            Just go watch some TMZ, pay your taxes, and STFU.

        1. Monsignor Generalissimo El HydroCabron

          when you look under the veneer of The OC, you start to see something very disturbing.

          These stories are nothing more than fabrications authored by base and vindictive blackguards blinded by jealousy. Knowing full well that they can never aspire to any place in Irvine society, they fling falsehoods and mud at those with higher SAT scores, better life achievements, and greater inner peace.

          It must be horrible to be these non-Irvinites living out there in Riverside, their filthy pockmarked faces pressed against the translucent force-field of ever-low interest rates and genteel manners which forever insulates Irvine from the sort of price declines which occur among the cities of the dirty and low-born.

        2. Misstrial

          Anyone know if their motel on PCH in LB has gone into Default?

          Address: 690 S. Coast Hwy., Laguna Beach 92652


  2. irvine_home_owner

    Do you want prices to fall where they should be or do you want an in-flux of cash flow investors to prop up prices?

    It seems your opinion changes based on the area we are talking about. If it was Irvine, remove all forces that would cause prices to be stable… in Vegas, remove all forces what would prevent investors from buying more property.

    Am I understanding that correctly>

    1. AZDavidPhx

      Do you want prices to fall where they should be or do you want an in-flux of cash flow investors to prop up prices?

      Exactly right. IrvineRenter, you cannot have it both ways. We should be championing the idea of prices falling to levels that middle class families can actually afford them. Do you think that investors are doing some kind of a service by snapping up properties before the price falls to a level where it will be bought by someone who will actually live in it?

      1. CK

        Somebody told me I should come read the IHB today. They were right.

        It’s like walking into some sort of parallel universe here from what I used to read and comment on so religiously a couple years ago. Apparently in this universe Irvine Renter is the prick house flipper who he used to ridicule so much in that other universe — and AZDavid is the smartest guy in the room that I find myself saying “amen, brother” when reading his comments. WTF happened here?

        1. .

          this is true.

          IR has turned on us renters.

          blinded by money and greed.

          real estate investing is distasteful; although i would do it in a split second if i knew i could make money off of it. it’s still distasteful.

          i see IHB readership dropping.

    2. AZDavidPhx

      “Brent White, the University of Arizona law professor who’s made a name for himself by urging more underwater homeowners to consider walking away from their homes, has published a 168-page book to help borrowers who are wrestling with that decision”

      And for a mere $18.95 ( plus shipping and handling ), you too can get the help that you need! Just go to Call within the next 5 minutes and get a free bag of popcorn! ABSOLUTELY FREE! LIMIT 10 PER CALLER! HURRY!

  3. AZDavidPhx

    There aren’t the natural buyers to buy these excess homes, but there are the families to live in them

    IrvineRenter, I am afraid this is complete spin.

    If there are families available to rent the properties then certainly there are families available to buy them. Of course, the prices may be too high to buy. The solution is for prices to fall so that more people can buy.

    We do not need land barons popping all over the place turning neighborhoods into detached apartment complexes.

    This article makes it out to be that these “investors” are doing some kind of public service. If prices fall then people who actually live in the houses can buy them and fix them up without having to pay rent to a land baron.

    Do you envision a country where the haves own all of the houses and rent to the have nots?

    If the government is pushing for “homeownership” then that is not compatible with land baron kingdoms. Investors such as yourself should not receive one penny in subsidies. I do agree that the government should keep its nose out of the market completely.

    I disagree that land barons are the market saviors. Bottom feeders is more accurate. I would like to see all this “investor” money go to something productive other cornering the market on houses.

    Why don’t these investors build a factory and make something so that all these people can work and pay to fix up their own houses?

  4. lee in irvine

    Smart Investors are not buying homes in Irvine (or any other part of OC) mainly because the deals here don’t produce positive cash-flow.

    As for LV, they’re selling more homes there than ever before.

    1. AZDavidPhx

      My point is this is not investing. Whether people are buying “cashflow” houses in Irvine, Vegas, or the fu{king moon. It’s just gaming and nothing productive results by it that improves the economy in any way. Maybe Home Depot sells a few more sinks and refrigerators made in some other country but that is about it.

      Let’s just be real here and call it what it is: Real Estate Gaming. We see it dressed up in articles such as today’s that make it out to be some kind of public service which I take exception with.

      It is no more investing than if I started up a company to buy up all the low priced gasoline at $3.00 a gallon so that I could add a few drops of honey to each barrel and sell it back to the poor at $5.00 a gallon claiming that the investor fuel is much sweeter than the old fuel.

      1. IR_Fan

        define investing them.
        If I buy the stock of a company and hope it goes up in value in hopes of selling it, how is that any different from buying a house in hopes that in future the values will increase so I can sell it?

        each represents a stream of cash flows and depending on the discount rate and the growth of those stream of cash flows, it will be valued higher or lower.

        I am taking risk and expecting to earn a return. Isn’t that investing?

        1. AZDavidPhx

          I am taking risk and expecting to earn a return. Isn’t that investing?

          No. That is gambling.

        2. AZDavidPhx

          define investing them.

          Buy a farm. Grow some vegetables. Sell the vegetables to get back the money you spent on the farm.

          1. IR_fan


            its no wonder you clash with so many people. You have own definitions of everything.

            Buy a farm and grow vegetables? That is called entrepreneurship.

            And what if the entrepreneur doesn’t have enough cash? That is when he gets INVESTORS who make and INVESTMENT who take a RISK by betting on the person or on the idea.

            Gambling is a game of chance wherein no skill is required.

          2. .

            actually david is right.

            i trade stocks in and out.

            it’s not in any way productive or beneficial to society. it’s actually detrimental in some ways. but i make money. quite lucrative for the time spent. i could probably live off my trades.

            it is absolutely gambling. from wikipedia:
            “Gambling is the wagering of money on an event with an uncertain outcome with the primary intent of winning additional money”

            i play the odds just like poker or any other game of chance. it’s just that trading has better odds than playing against the house in vegas.

          3. IR_fan

            thats because you trade. You don’t invest. two different things.

            By Wiki’s definition, any risk taking is then gambling.
            The farmer in David’s example is gambling since he doesn’t know what the price of his crops will be in the future too or whether he will actually make money or not.

            So anything with variance is considered gambling by that definition.

    2. tenmagnet

      Yeah, you forgot to mention that the banks are also taking back those Las Vegas homes en masse.
      Maybe they’ll figure out a way to securitize and sell them off to investors.

  5. awgee

    The 10 year is at 3.16%, or .76% higher than when B-52 Ben first mentioned QE2. Wasn’t QE2 intended to lower interest rates or at least keep them low?

      1. wheresthebeef

        AZD, I think I know the person you are talking about. The same guy who said the Fed can keep rates low forever. Not sure how that will work out in a few years.

    1. BD

      The process has begun. That is why I say if you buy now anything over $800K be prepared to stay and pay. In 5 years or a decade. Somebody will have to buy with interest rates dramatically higher.

      For every 1 point rise in 30 year fixed rates buyers loose 10% in purchasing power. If you pay 1M dollars now you may have to sell at $750K b/c that is all people with great incomes can support.

      Just a thought for the group to consider. The feds activities are most surely distorting the economy.


  6. Brad

    Most people will do anything to avoid being kicked out of their own home and ruining their credit. A short sale foreclosure saves a homeowner’s credit and gives them the luxury of time to relax and find a new place to live. No one wants the local sheriff to come knocking on their door to evict them from their own home.
    Start by contacting a bank’s loss mitigation department. They will give you all the information you need to move forward with negotiating a discount on a loan. Believe it or not banks don’t want to take a house back into their REO inventory and they will work with you to avoid this.

    Here are some key points to remember:

    1. 90 days late or more is the best time to contact both homeowners and banks.

    2. Have all paperwork prepared and ready to submit to the loss mitigation department of a bank.

    3. Follow up, follow up and follow up again.

    4. Ask the negotiator questions, they typically will be very helpful.

    5. Do as many foreclosure short sales as you can, you are helping people out of a very bad situation and making money at the same time!

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