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Why Won’t It Cash Flow?

housingrental

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Nick: No

Your forgoing the returns you can get from a different purchase with that money
 

Rickson9

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QUOTE (ThomasBeyer @ May 29 2010, 11:57 AM) First of all: where can you get 5% on your money ?

As an unrelated FYI on a few companies that are currently offering a 5% dividend (or greater):

AT&T
Verizon

Philip Morris
Altria Group

Pfizer
Glaxo Smith Kline
Eli Lilly
Astra Zeneca
Bristol-Myers Squibb

Some of these companies are considered inexpensive on an earnings yield basis.
 

bizaro86

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In Canada you could add:
BCE
Telus

Transalta

There are also many between 4 and 5% dividend yields

Shaw
Husky Energy
Transcanada Pipelines
Great west life
The big banks

A diversified portfolio of conservative stocks yielding ~5% would not be difficult to construct, so 5% is the minimum opportunity cost I would use.

Michael

QUOTE (Rickson9 @ Jun 9 2010, 11:02 AM) As an unrelated FYI on a few companies that are currently offering a 5% dividend (or greater):

AT&T
Verizon

Philip Morris
Altria Group

Pfizer
Glaxo Smith Kline
Eli Lilly
Astra Zeneca
Bristol-Myers Squibb

Some of these companies are considered inexpensive on an earnings yield basis.
 

NickDavis

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QUOTE (housingrental @ Jun 8 2010, 09:21 AM) Nick: No

Your forgoing the returns you can get from a different purchase with that money

Ok, thanks. Just to clarify what your saying is that by using the 5% reutrn method you could reinvest annually rather than waiting the 5 years thus compounding the returns faster.... Am I on the same page now?

Nick
 

Thomas Beyer

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QUOTE (bizaro86 @ Jun 9 2010, 10:36 AM) ..

A diversified portfolio of conservative stocks yielding ~5% would not be difficult to construct, so 5% is the minimum opportunity cost I would use.
Assuming at least flat stock price .. s.th. BP shareholders counted when using their "safe" dividend for retirement .. just to see the stock drop 50% (!!!!) in a few weeks .. a 10 year dividend yield !

Ditto with some shady real estate syndicators offering "up to 18%" .. without mentioning that the money could be gone !

Give me $100,000 and I too can "guarantee" you 20% for 5 years .. but then the money is gone possibly !!

8 mistakes to avoid in real estate syndications: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-13817-Real_Estate_Syndications_-_A_Good_Idea_.html

Thus: 5% "guaranteed" is hard to get.

Where else ?
 

bizaro86

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QUOTE (ThomasBeyer @ Jun 11 2010, 11:33 AM) Assuming at least flat stock price.

Which is very fair, and quite a conservative assumption.

Historically, even conservative dividend paying stocks have appreciated. So while a "black-swan" like BP will probably come up every once in awhile, with even modest diversification the portfolio`s capital value should be at least flat.

Comparing the return you`d get on T-Bills to the return your cash is getting in real estate isn`t fair either, as the T-Bills are guaranteed by the government, while real estate is not. You should compare assets in similar risk classes to each other.

Michael
 

Thomas Beyer

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QUOTE (bizaro86 @ Jun 11 2010, 01:31 PM) ..You should compare assets in similar risk classes to each other.
such as a low risk stock like

Bank of America , or
BP, or
Royal Bank, or
AIG ?

all "blue chip" / low risk stocks that tanked 50-80% .. and compare it to a "high risk" real estate JV with a REIN member where capital loss risk is minimal and upside is virtually guaranteed by an experienced operator using proven REIN research/buy/hold/upgrade/manage/sell principles ?
 

gwasser

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QUOTE (ThomasBeyer @ Jun 11 2010, 05:56 PM) such as a low risk stock like

Bank of America , or
BP, or
Royal Bank, or
AIG ?

all "blue chip" / low risk stocks that tanked 50-80% .. and compare it to a "high risk" real estate JV with a REIN member where capital loss risk is minimal and upside is virtually guaranteed by an experienced operator using proven REIN research/buy/hold/upgrade/manage/sell principles ?


When making a decision to invest in opportunity A or B you look at the potential ROI and next at the risk level involved. Assuming both A and B are equally risky, and the ROI on A = 12% and ROI on B = 5% which investment would you buy? Probably A.

To decide whether an investment is attractive some people in the stockmarket say that Earnings/Stock price represents the `earnings yield` and can be compared with interest earned on a `secure` 5 year Government of Canada Bond whose yield would be interest income per year/purchase price of the bond. So now, taking into account the higher risk of the stock investment, the investor asks is it worth to invest in this stock with an earnings yield of 12% when I can get 5% on a low risk Gov of Canada Bond.

Thus, the Gov of Canada bond is used as a benchmark to test the attractiveness of another investment opportunity. Some analysists call the 5% income yield of the bond now the `opportunity costs` in order to compare it with ROI of another investment opportunity. As long as the ROI is higher than the `opportunity costs`, and considering the risks incurred, the investment opportunity would be considered attractive.

So `Opportunity costs` are only a measurement to decide whether an investment is attractive compared to a benchmark investment. It is not a real cost and it is certainly not part of the operating costs or the financing costs of a real estate investment.

Hope that this helps.
 

gwasser

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QUOTE (ThomasBeyer @ Jun 11 2010, 05:56 PM) such as a low risk stock like

Bank of America , or
BP, or
Royal Bank, or
AIG ?

all "blue chip" / low risk stocks that tanked 50-80% .. and compare it to a "high risk" real estate JV with a REIN member where capital loss risk is minimal and upside is virtually guaranteed by an experienced operator using proven REIN research/buy/hold/upgrade/manage/sell principles ?

Yes. There are currently a lot of companies that pay good dividends. I recently bought Telefonica SA a Spanish company that builds telecom networks worldwide - especially in S. American countries (where they speak Spanish). The company`s revenues are growing but the stock price has been beaten down because of the European debt crisis (or is it crises?). The dividend is relatively safe and approaches 10% yield.

So when compared with TSX or Dow Jones companies this is very attractive. So the opportunity costs, say 3.5% yield in stallwart BCE, is small when compared to Telefonica, although the latter may be a more risky investment. Considering though that Telefonice traded as high as $80 in the recent past and you can buy it now for around $50, the ROI has the potential to shoot through the roof - this seems to me a very attractive investment.

And yes, BAC and Royal Bank of Scotland were just a few years ago considered `Blue Chips` and see them now. So that tells you that even the `safest` investments can turn out to be dogs and that (in general) you should not put all your ducks in the same basket. Or was it eggs? What about having more than one basket? Sorry, I digress.
 

RedlineBrett

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Thread got hijacked but definitely for the better... lots of insight in the last 10 posts or so!
 

Thomas Beyer

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QUOTE (gwasser @ Jun 12 2010, 10:10 AM) When making a decision to invest in opportunity A or B you look at the potential ROI and next at the risk level involved. Assuming both A and B are equally risky, and the ROI on A = 12% and ROI on B = 5% which investment would you buy? Probably A.
..
indeed, BUT: ROI is easy to measure and risk is HARD .. so is real estate investing more "risky" than buying BP or Royal bank ?

is land development more risky than an office tower ? Is an apartment building more risky than 2 townhouses ?

Where are some insights in risk or assessment of risk ?
 

RedlineBrett

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QUOTE (ThomasBeyer @ Jun 12 2010, 11:53 AM) Where are some insights in risk or assessment of risk ?I get lots of new investors that come to me unsure of where to focus their real estate business. They have read all the books and are excited to take action but stall when deciding between quick turns vs buy-and-hold, townhouses vs. suited bungalows vs. fourplexes and up.My answer is it depends on the investor and their unique set of skills and attributes. Risk assessment centers around how the investor copes with the emotional side of real estate - guts, balls, or the measure of one`s composure when faced with bad news. That is why, as Thomas mentioned, it cannot be evaluated numerically like the return component.
I tell my clients to take the risks where they are comfortable with them on a personal level. No one comes to real estate investing without a background in another field. So use your previous experience to mitigate your risks where appropriate.

Such as..

A tradesperson might not be frightened by the prospect of nastiness revealing iteself once old drywall comes down. They might be comfortable with property risk
. So go ahead and buy that fixer-upper but maybe be cautious with the other variables you are less knowledgable about.

A commerce graduate might be all over economic news and have a good grasp on financial instruments and be comfortable with financial
risk
... so take that variable rate mortgage and apply greater leverage to your investments... but again be cautious with other variables...

A salesperson might be confident in marketing and people skills and may find themselves more comfortable with managerial risk
...
so buy that diamond in the rough and manage it yourself... but mind the othe risks...

And so forth.

Building a real estate portfolio is like eating at a buffet... you fill your own plate and have to eat what you put on it. No one knows what you want better than you so eat (and take risks) the best way YOU see fit!
 

housingrental

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Sure Thomas the first insight any rational investor should have when examining real estate investments is that Student housing, when done right (high quality product, accross from a school, with pro-active management), often provides the lowest risk level.

The consistency of rental demand from - the physical structure of the university is fixed and historically in most area`s cities there`s been consistent enrolement amount or growth - and rarely materially enrolement decilnes in most markets - makes it tough to find a comparable stability of income stream from other rental types.

Generally the risky investment in real estate is through private LP`s as a second component of risk added beyond market conditions of a standard REI - that of the quality and ethics of the GP. Of course an investor can minimize the risk by looking to credible and established operators like yourself (Thomas Beyer) but as a general it`s still an issue in this space.

The next riskiest area is non purpose built multi-units that offer low rental rates. Unexpereienced purchasers offer encounter:
Units and locations that make it hard to attract quality tenants
High vacancy and uncollected rent
Structures with illegal units, not up to ESA / Fire code, with materially deferred maintenance
Higher per unit repair and maintenance expense
Difficulty in finding quality property management - and in some area`s no willing desireable management
Reduced saleability and financing ability
So expected returns rarely materialize and owner often burns through cash on operations, gets stressed out, and is unable to or delayed in selling money losing investment.


I`m not including mortgage / land in above as these are really a different class.

Industrial generally third riskiest.

Office / commercial risk levels vary depending on particular property / location

Sixth riskiest is single family house investing - why? - in many markets it can be difficult and take a long period times to fill vacancies with desireable tenants - there are only so few renters available who can afford the $1200+ rent levels..also when property damage happens from a tenant who leaves country or is down and out for awhile the cost of repairs can be higher as a percent of rent than units... Also when selling in future highest and best use is often to residential owner occupier and cost of quality of finishes needed after rental to help salability can be high...Also can be hard to sell when tenanted and you can`t pro-actively get tenant who wants to continue on out of rental prior to listing...

Second least risky next to student housing is purpose built multi-family rental stock. There`s generally consistent demand from renters and barrier to entry of new supply (in most markets apartments sell below replacement cost / potential cap rate for new construction too low to allow for feasabability of build) - however the rental demand can vary with employment / demographic / income changes in area far more than student housing in most area`s so an additional level of risk.

Your thoughts / criticism of above is appreciated...

QUOTE (ThomasBeyer @ Jun 12 2010, 01:53 PM) indeed, BUT: ROI is easy to measure and risk is HARD .. so is real estate investing more "risky" than buying BP or Royal bank ?

is land development more risky than an office tower ? Is an apartment building more risky than 2 townhouses ?

Where are some insights in risk or assessment of risk ?
 

NickDavis

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Ok, first off I fully admit I am WAY over my head here... But for simple small town folk like me I think this pretty much sums it up:

I would much rather prefer to use my $50,000 to invest the "banks" $200,000 and have the opportunity to earn a return on a total of $250,000. Honestly, I know I am naive but I don`t understand how there could even be an argument or discussion here. If you invest in the stock market you have to have 5 times the annual return to equal that of real estate. Plus, if done properly you have clients who pay the monthly payments to the bank on the $200,000 so you don`t have to. Plus if you do it absolutely right your client also pays you a small amount per month on top of paying the bank back for you. Now, if for some reason everything went right for 25, 30 or 35 years you never have to pay the bank back because your client`s did for you so you get to keep the original $200,000 from the bank too!
If done right,
how could you go wrong with real estate?

On a side note; fantastic job to the entire REIN team this weekend at the Vancouver ACRE! Now the ball is in my court to make it happen 


Nick
 

RedlineBrett

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QUOTE (housingrental @ Jun 12 2010, 04:04 PM) Your thoughts / criticism of above is appreciated...

Adam I think it is hard to rank the risk level of certain types of real estate because there are so many moving parts to these deals that it would be very easy for a property of one type to cross over in riskiness to another.

Like the return component each property has to be evaluated on its own merits.. Some single family homes would be much safer than some student housing properties... no way to know until you roll up your sleeves and do some digging.

I`d also add that there are a few catagories that would need to be added to your list - storage, undeveloped land, redevelopment property etc.
 

RedlineBrett

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QUOTE (NickDavis @ Jun 13 2010, 10:50 PM) Ok, first off I fully admit I am WAY over my head here... But for simple small town folk like me I think this pretty much sums it up:

I would much rather prefer to use my $50,000 to invest the "banks" $200,000 and have the opportunity to earn a return on a total of $250,000. Honestly, I know I am naive but I don`t understand how there could even be an argument or discussion here. If you invest in the stock market you have to have 5 times the annual return to equal that of real estate. Plus, if done properly you have clients who pay the monthly payments to the bank on the $200,000 so you don`t have to. Plus if you do it absolutely right your client also pays you a small amount per month on top of paying the bank back for you. Now, if for some reason everything went right for 25, 30 or 35 years you never have to pay the bank back because your client`s did for you so you get to keep the original $200,000 from the bank too! If done right, how could you go wrong with real estate?

On a side note; fantastic job to the entire REIN team this weekend at the Vancouver ACRE! Now the ball is in my court to make it happen 


Nick

Hey Nick you are touching on `leverage`. While it does allow you to have more money working in the market for you it is a double edged sword. Many REIN members experienced this first hand when their $250k property dropped in value by 10% to 225k... which would be a 50% loss in capital when you evaluate it next to the cash you actually brought to the table. That being said I think your post sums up the reason that there are 1000s of REIN members into real estate!
 

bizaro86

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QUOTE (ThomasBeyer @ Jun 11 2010, 05:56 PM) such as a low risk stock like

Bank of America , or
BP, or
Royal Bank, or
AIG ?

all "blue chip" / low risk stocks that tanked 50-80% .. and compare it to a "high risk" real estate JV with a REIN member where capital loss risk is minimal and upside is virtually guaranteed by an experienced operator using proven REIN research/buy/hold/upgrade/manage/sell principles ?

A properly diversified stock portfolio shouldn`t have gone down 50%, even during the worst of the crash. Secondly, the vast majority of companies have recovered. You`re taking an unbalanced approach to the debate by including only negative stories. If we get to pick and choose, can I pick my US REIT preferred shares, up from $2.05 to over $20 in less than a year? Or how about Teck, from 7.00 at the beginning of 2009 to $36 currently?

Finally, anyone with a stock portfolio that was down 50%, only lost that 50% if they sold. It just happens that the stock market gives you a precise "price" every second the market is open. It doesn`t mean its a good, rational, or fair price, but it`s there. Real estate moves in similar ways, especially with leverage, but the trick (As in the stock market) is to have the staying power (financial and emotional) to not sell low.

Many, many real estate investors (including some REIN members!) bought 20% down properties before the peak (say in 2008). Those properties had almost certainly declined in value by 10% during the crash, likely more. Which wiped out 50% of the equity, or a 50% loss. I won`t mention the return for those who bought before the crash with 5% down. Those who have bought sustainable positive cashflow (==sustainable, diversified dividend yields) are fine and can hold on for the long term, short term paper losses notwithstanding. In fact, they should be better off due to the downturn, as there are bargains to be had on the buy-side.

I`m not anti real-estate (In fact, I`ve got more money in RE than the stock market) but I am in favour of being intellectually honest about the decisions I`m making. If I don`t compare all the options, how do I know I`ve selected the optimal choice? Using an opportunity cost is a way of comparing the options available to every given investor.

Michael
 

Rickson9

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QUOTE (ThomasBeyer @ Jun 12 2010, 01:53 PM) Where are some insights in risk or assessment of risk ?

Risk is not associated with a specific asset, but moreso on the knowledge level of the investor investing in that asset or asset class. IMHO.

As an unrelated aside, I have always found it interesting that society considers it more `risky` to invest in an asset class after it has dropped in price by 50%. Those have been the only times that I`ve felt comfortable investing...
 

RedlineBrett

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QUOTE (Rickson9 @ Jun 14 2010, 08:52 AM) Risk is not associated with a specific asset, but moreso on the knowledge level of the investor investing in that asset or asset class. IMHO.

As an unrelated aside, I have always found it interesting that society considers it more `risky` to invest in an asset class after it has dropped in price by 50%. Those have been the only times that I`ve felt comfortable investing...

What does Buffet advise? "Buy when there is blood on the streets" or something to that effect...
 

housingrental

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Thanks Brett
Anyone else`s thoughts?
For sure Brett you`re correct - a single family house in a rural area might have more risk than a chopped up multi-family in a large city, etc.. Each investment is unique but in general terms the above is how I see it...
QUOTE (RedlineBrett @ Jun 14 2010, 10:08 AM) Adam I think it is hard to rank the risk level of certain types of real estate because there are so many moving parts to these deals that it would be very easy for a property of one type to cross over in riskiness to another.

Like the return component each property has to be evaluated on its own merits.. Some single family homes would be much safer than some student housing properties... no way to know until you roll up your sleeves and do some digging.

I`d also add that there are a few catagories that would need to be added to your list - storage, undeveloped land, redevelopment property etc.
 
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