1% rule

[bizaro86]

[quote user=Rickson9]I'm currently negotiating with the owner of a 16 unit multi-unit in Phoenix, AZ that has 3 vacant units and currently brings in $76k in gross rents ("pro forma" with the all units rented is around $96k). Separately metered. The price we're dancing around is $450k. That's a 1.7% rule. He is offering 80% VTB with terrible terms, but we'll see how that turns out over the next few days.





I thought you had a strict "cash-only" policy for your investments?



Regards,



Michael

 

[ThomasLorini]

I posted about a month back a property (detached single-fam bungalow) we purchase for $140,000 and rent for $1600/mth....in Hamilton, ON.



It's not 1.5% but a decent 1.15%



As MarkL already mentioned...they're out there but tough to find....isnt that why we're suppose to be the experts for our JV's?



Thomas

 

[Darr]

To stimulate the conversation, let`s change gears because we are not addressing the issue of deferred maintenance costs in the calculations.


This clip below is well worth your viewing time however, 6 minutes and 29 sec into the video addressed the heart of the income producing asset valuation issues. Junk bonds are priced to yield a nominal 4.95% which in my opinion are far more risky than just about every fixed income product out there.


A muli-family building has very low if any credit risk. As previously mentioned, the only thing separating a sovereign bond from a high quality building is liquidity once inflation is equalized.


Let`s use a brand new building in a good downtown location as a baseline measure from which we can increase the cap rate from there based on age and condition. Consequently, what should be the liquidity yield premium be over government bonds? 1%, 2% ..Any takers?


http://video.cnbc.com/gallery/?video=3000109364


Also worth viewing:


http://business.financialpost.com/2012/08/09/apartment-valuations-soar/

 

[Thomas Beyer]

Yes 1-2% at most and that's why CAP rates for quality, well maintained, in demand locations in big cities command a sub 4% CAP rate.

 

[Rickson9]

I would agree with 1% to 2% at most.

 

[Rickson9]

@Michael I would be looking to use the VTB similar to a medium term bridge loan. Instead of using cash, I want some time to sell some over priced less-than-liquid Toronto RE. I would start with 3%, 30 yr am, 2 yr term with balloon at the end of the term. That would give me enough time. At the end of the term everything would be lien free OR I could try owning the property with 20% down and see how it feels like. I haven't decided...

 

[Philrom]

Hi Warren,

as a mortgage professional in the Hamilton area, I can tell you that has not been the case for some time, the pace at which the property values increased outpaced the increase in monthly rental amounts, and at least in Hamilton, you can not really use the 1 % rule as a benchmark to approximate monthly rental amounts any longer.

regards



Phil Romano, AMP

Mortgage Agent

Verico House of Mortgage Experts

905-516-1150

[email protected]

www.philrom.com

 

[bizaro86]

[quote user=Darr]

To stimulate the conversation, let`s change gears because we are not addressing the issue of deferred maintenance costs in the calculations.


A muli-family building has very low if any credit risk. As previously mentioned, the only thing separating a sovereign bond from a high quality building is liquidity once inflation is equalized.


Personally, I conservatively calculate the required deferred maintenance and factor it into my purchase price. (Essentially capitalizing it). I also typically do the work right away, as I dislike renovations on a continuous basis. Granted, I'm also buying single units, so the practicality is a bit different compared to completely catching up a 30 plex on maintenance in 30 days.



[quote user=Rickson9]@Michael I would be looking to use the VTB similar to a medium term bridge loan. Instead of using cash, I want some time to sell some over priced less-than-liquid Toronto RE. I would start with 3%, 30 yr am, 2 yr term with balloon at the end of the term. That would give me enough time. At the end of the term everything would be lien free OR I could try owning the property with 20% down and see how it feels like. I haven't decided...






That certainly makes sense, 2 years is a long time in a swiftly changing market. I've often felt your investing style would be uniquely suited to leverage, as your downside protection is significant based on your purchase valuations. Out of curiosity, what type of Toronto real estate is illiquid? The view of the Toronto market from the west looks like just about anything should be salable...



Regards,



Michael

 

[Rickson9]

[quote user=bizaro86]That certainly makes sense, 2 years is a long time in a swiftly changing market. I've often felt your investing style would be uniquely suited to leverage, as your downside protection is significant based on your purchase valuations. Out of curiosity, what type of Toronto real estate is illiquid? The view of the Toronto market from the west looks like just about anything should be salable...





In this case I guess I should have clarified my usage of the term "illiquid". I was comparing it to my short-term investments/stocks which I can basically turn into cash next week. I was thinking 1 year initially, but thought 2 years might give me a buffer since I want to try and sell the property myself using comfree. I move very slowly in general.



I got to know an local area well and asked a few realtors what they would sell a specific property for. They all told me around $350k. I then went to an owner of the exact same property/layout in the neighbourhood who used comfree. We went through the property and talked a bit. Basically, he listed it for $390k and eventually sold it after a month at $385k. He had no upgrades, nothing.



It is in the agent's best interest to price low and sell fast. I wasn't sure I could sell as fast (hence the 2 year window), but I will definitely use comfree instead of an agent.



Anyway, it's a moot point as I did some more DD and the 16 unit property is in an area that I really don't want to be in. That kind of sucks.

 

[Rickson9]

[quote user=KevinMatwichuk]Yes. I'm with Rickson. I only buy properties that meet the 1.5 to 2% rule as well. Yes they are in the US (Georgia, Arizona, and Florida). My cash on cash return is between 9% and 15%. The oldest house I own is 1998. Beside the great returns I enjoy almost zero vacancy on my portfolio and best of all no mortgage payments which is a great feeling!
I do own a portfolio in Alberta as well but the performance is lacking in comparison to my US properties.
Buying houses in the US at 1/3 of reconstruction price with high Cashflow is a win-win situation in my books! Congrats Rickson for investing when most others were scared.
The big problem with US housing in going to be the housing shortage which is going to occur in the future. The population there is growing rapidly and there are virtually no new construction.




Great foresight on buying in those distressed areas Kev. Do you mind me asking which city in Florida that you decided to buy? I was in Miami last week looking at condos, but they didn't make sense. Thanks!

 

[housingrental]

Funny post Michael



[quote user=bizaro86][quote user=Rickson9]I'm currently negotiating with the owner of a 16 unit multi-unit in Phoenix, AZ that has 3 vacant units and currently brings in $76k in gross rents ("pro forma" with the all units rented is around $96k). Separately metered. The price we're dancing around is $450k. That's a 1.7% rule. He is offering 80% VTB with terrible terms, but we'll see how that turns out over the next few days.





I thought you had a strict "cash-only" policy for your investments?



Regards,



Michael

 

[bizaro86]

[quote user=Rickson9]In this case I guess I should have clarified my usage of the term "illiquid". I was comparing it to my short-term investments/stocks which I can basically turn into cash next week. I was thinking 1 year initially, but thought 2 years might give me a buffer since I want to try and sell the property myself using comfree. I move very slowly in general.


Makes sense in that context. I thought you meant "illiquid as compared to a multiplex in Phoenix" which seemed pretty unlikely for just about anything in Toronto to me. I actually think a condo in Toronto is the most liquid form of real estate in Canada. Although the fact it's worth nearly as much as a 16 plex in Arizona gives a bit of pause.



Regards,



Michael

 

[Rickson9]

[quote user=bizaro86]Makes sense in that context. I thought you meant "illiquid as compared to a multiplex in Phoenix" which seemed pretty unlikely for just about anything in Toronto to me. I actually think a condo in Toronto is the most liquid form of real estate in Canada. Although the fact it's worth nearly as much as a 16 plex in Arizona gives a bit of pause.





Still blows my mind...

 

[Darr]

Hi Rick,

I'm totally set back by the CAN-US differences also even considering to huge shadow inventory on the banks balance sheets that are not counted in the MLS inventory.

 

[Darr]

For those who may be interested in RE deals along the Mediterranean coast, the prices are down again in August: -14.7 YOY. Here`s more info and charts:

http://www.tinsa.es/en/4860/press-area/press-releases/press-release-year-2012/imie-august-2012.html

 

[Rickson9]

[quote user=Darr]Hi Rick,

I'm totally set back by the CAN-US differences also even considering to huge shadow inventory on the banks balance sheets that are not counted in the MLS inventory.




Not sure what differences you are speaking of? USD vs CAD? CRA vs IRS? Something else?



You can get caught up at the end of this thread:

http://myreinspace.com/public_forums/Real_Estate_Discussion/62-17378-Canadians_Snap_Up_US_Properties.html



Since prices and rents in Phoenix, AZ have spiked up dramatically, I have been praying for this so-called "shadow inventory" to quench demand and relax supply; so far, nothing. Apparently most of the earlier bears in the aforementioned thread have disappeared. Would like to hear their analysis at this point. Might be informative.



"As prices increase, returns on investment for landlords diminish and at some point in the future we expect to see investor demand diminish...there is still no sign of any significant new supply of homes coming on
to the market and those who anticipate a flood of bank owned `shadow
inventory` are likely to be very disappointed."

 

[KevinMatwichuk]

I'm with you! Wishing for the shadow inventory. Bring it on so I can get some more deals!!

 

[Darr]

Releasing the shadow inventory (which should have never been allowed to exist) should be liquidated in a normal economy. However, housing deflation will never never be permitted to happen. Banks are holding houses and MBS's on their Balance Sheet at near book value instead of market value. This is the result of fraudulent accounting practices by FASB to save the corrupt banking sector from failing because If they release a house from inventory, it get`s recorded as a write-down. A large scale write down will collapse most large US banks and taking some European and Canadian banks along with them.


There is no practical and political solution out of this mess. The FED will monetize bad assets as long as the American public tolerates it. The USD will lose purchasing power rapidly in 2013~14 as a direct result of monetization of debt and the US will most likely enter hyperinflation thereafter.

 

[Rickson9]

[quote user=Darr]I'm totally set back by the CAN-US differences...


Again, I'm not sure what differences you are thinking of? CAD vs USD? CRA vs IRS? Something else?

[quote user=Darr]Releasing the shadow inventory (which should have never been allowed to exist) should be liquidated in a normal economy. However, housing deflation will never never be permitted to happen. Banks are holding houses and MBS's on their Balance Sheet at near book value instead of market value. This is the result of fraudulent accounting practices by FASB to save the corrupt banking sector from failing because If they release a house from inventory, it get`s recorded as a write-down. A large scale write down will collapse most large US banks and taking some European and Canadian banks along with them.



There is no practical and political solution out of this mess. The FED will monetize bad assets as long as the American public tolerates it. The USD will lose purchasing power rapidly in 2013~14 as a direct result of monetization of debt and the US will most likely enter hyperinflation thereafter.





Fantastic commentary! For better or worse, these opinions have been making the financial media rounds for a few years now.



re: My purchasing of US real estate at 1.5%-2.1% "rule". Do you have any commentary on how you are making money with this information?

 

[Darr]

I was acknowledging comparative Real Estate valuations in the US relative to Canada. This leads me to your next question about making money with this info: In all honesty, to be or not to be in Real Estate is not the issue. Throughout history RE has always been a store of value in inflationary periods which I believe all G10 countries will be facing. They will all print to avoid being at a competitive disadvantage of trading with an appreciating currency. For me, it`s all about finding the right Geo-Political portfolio diversification starting with identifying relative value.