Thursday, January 29, 2009

Real Estate: Investing and renting after the crisis

Norcal said...
Ferfal, I am wondering if you could comment on real estate prices.

For example, let's say a middle to upper middle class home (not super rich home) was going for say, $400,000 before your crash in 2001.

What would a home in such a neighborhood go for now? Again I'm not talking about the super rich safe suburbs, but a "nice" neighborhood, or at least that was nice before the crash?

You opened the door to a new dimension in real estate.
I know a bit about real estate because I do some operations every now and then.
Remember location, location location?
Well now it’s location, location, location location LOCATION!!!!!! :)

It’s so important to know the place like the palm of your hand, because one block of distance may me may be the difference between a very sweet deal and a rather bad one where you loose money.
"nice" neighborhood, you say?
I ask, HOW nice?

Are the people there new “nice people” or is the place full of well off older guys too, families with their own business going well, the kids of these older guys stay there and carry on the family business, or their profession, the doctor ha his kid that is also a doctor and is taking dad’s place, assured income post SHT?
Because if it’s a year 2000 higher upper class and the guy is an employee that just got fired, he wont be “nice neighborhood” material for too long.
You want people with solid finances, not rich but solid. An older guy that has had a business that survived lots of things for decades.

You don’t want a place full of 20 year old internet wizards that are the first one’s to loose their jobs when things look bad.
Brick and mortar good. Digital bad. :)

OK, how can you tell the kind of people, the target of the place? Do your research.
Old nice neighborhoods that have been nice for 100 years and still have business owners, politicians ( like roaches, they never die, even after the nuke), judges, people with certain money still living there, that’s a good place.
A new development, even if nice, that started just 10 years ago and most people don’t even own their houses, not so SHTF proof.

What happened here, exactly what I’m explaining.

The more exclusive “nice place” that has been “nice” for 100 years still stayed ok, even keeping the pre SHTF prices, while just a block away ( I swear, just 1 block away form the nice place) the price drops like a brick. That house is worth maybe 75%, or 50% of what it used to cost.

Wont drop much more than that, 50% is pretty bad I know, but maybe you can hold on until the price goes up, or you can look hard for the proper person to rent to.
So that’s the key point in real estate after the crisis. The place must be consolidated.

Or you might explore the new market. That’s going to be people that can’t afford a “nice place” anymore and move to duplex or apartment right next to their job opportunities down town. So, it’s got to be easy on the pocket, small place but nice, and it should be right IN downtown or just next to it.
Just a small example, little true story.
Yesterday while waiting for my turn under the claws for that demonic sadist otherwise known as dentist ( ;^) )
I overheard the conversation two young women had while the TV was on in the waiting room. Its was news about another home invasion in a homestead in Pilar.
I heard them comment:
“See? We’re going to be just two women living alone, we cant live in a house, we need to move to an apartment. It’s much safer”
The other one shook the head in agreement right next to her with the eyes glued to the TV.

People just don’t die by the millions after an economical crisis like in the survival novels, in the real world they survive. And that makes things much more complicated. Because, where do they go?

The demand for this kind of real estate will create a new kind of “nice place” demand, in or right next to downtown, simply because there’s were more job opportunities showed up. That’s a niche in the market you’ll be able to exploit.
Before , it didn’t matter. A family lived in the suburbs, had a house in some sub with nice trees, lots of vegetation, and drove a large distance to work.
Now he has no work.
Now he cant afford the big house.
Now he cant afford the gas or maybe even the car.
See where I’m going? Don’t start splitting hairs and go for far fetched suppositions. These things, they happened here in my country, and it’s not something new, we’re nothing special, it’s the typical urban dynamic that has been going on forever.
Having said that, be careful of the places down town that are destined to become a rat hole.
Walk around the place a lot, see what kind of people live there, book stores and cafes? Nice .. xxx stores or industries that just went bankrupt? Maybe a larger investor can buy a few blocks and redesign the city, but not you.
So be smart, and do a lot of research until you know the place well, don’t just go along with whatever the RE agent says.

That’s also a nice way of investing.

In other words, what percent have the house prices fallen since 2001?

I'm asking as I read on that they think our prices will go down 80 to 90%
Wow! What do you think? That is so scary as my husband and I worked so hard to buy and improve this house, then to think it will go down 80 to 90%?

Just to let you know in my area so far in the crash, the houses have gone down probably 20% so far. Many neighborhoods/cities much worse off than ours.

Thanks for your ideas and your blog.

80% and 90% is a bit extreme, unless you paid MUCH more than the already inflated market values dictated.

About 50 % is the norm, 70% for a very crappy deal to begin with prior to the crisis, and after a total market collapse.
Some are closer to going back to their pre-crisis value after a year when talking about a consolidated nice place like I mentioned before, some falling a bit lower than 50% when the buyer already paid too much for it before the crisis and the place was not even nice to begin with.

When property get down to 50%-60% tops, investors (bigger investors than the average folk) start buying because they see the opportunity. That alone prevents prices from going down further.

Old time real estate investors in Argentina estimate that 50% average is about as low as property gets until it reaches it’s floor. I’ve seen exceptions a bit above and below that number, depending on the variables mentioned, but it’s still accurate, as an average.

Perparing for the most likely senario seems like the best way to go and I've done that and more. I started over a year ago and done the best possible for a large family, however there are loose ends. I was unable to sell a multi-family apartment 'complex', referred to as a '4-plex' here. It currently pays for itself and the mortgage. During the initial shock and surge in consumer prices, renters may not be able to pay the rent and I can afford to pay part of the mortgage waiting for wage increases to catch up, or cut rents by up to 50%. The mortgage payment will not increase. If I'm able to hang on and avoid defaulting, is there a chance that wages will increase quickly enough? This assumes of course that there are still jobs in the area.

What do you believe was the experience of rental property owners. I'm counting on wages to increase and the possibility of actually being able to raise rents to offset other expenses expected to rise. Somewhere in your blog I remember reading that rents increase 60%. Is this correct?

If I can hang on to this property there might be a chance that it could be a way to help keep up with some of the price increases and possibly pay off the mortgage with inflated dollars. This sounds good, but the reality of the stituatation might be different.

Thank you,

That’s very smart of you Sticks. And a pretty accurate estimation.

Not quickly, but yes wages will increase. Here they don’t increase as much as inflation. That’s why things are slowly getting a bit worse and middle class is slowly turning into poor.
Again, I have experience renting and I could give you a couple pointers.

1) It’s business, ok?

If you let them cry you a river, you wont even have to water the lawn anymore.
At first I went a bit soft on a guy, until one they he let it slip that he was glad because that way he could pay for all other things that didn’t cut him any slack.
“Dude, I’m getting screwed just so you can keep paying for your credit card buying God knows what else”
I told him that I was sorry, he had a month to get updated with his rent or he could start looking for something within his means .
Those are the words you must use:
“ I’m sorry Mr/Ms xxxx, you’ll have to find something you can actually pay for, something more within your means. I can’t rent this to you for 10 bucks when I have people readily to pay the real market value, which is 12.”
That is it. Don’t be best buds, it’s business.

2) Careful what you sign.

Get a lawyer to read every thing you intent to sing.
I was looking for someone for an office down town. The real estate company wanted me to sign something before they started looking for a tenant.
They had like 6 months exclusivity, I had to pay them like 5000 USD if I found a person to rent to on my own, etc, etc.
Man, that was great. I started laughing at the guy in his face. I called my wife that is a lawyer so we could both laugh at the same time.
I’m not kidding or exaggerating, I laughed at the guy in his face and after wiping away a couple small tears I handed him back the paper and told him of course, I wouldn’t sing that.

He looked at me with a face made of stone “Sir, everyone we work with signs this. The owner of the real estate agency requires it to begin working and finding a tenant for you”

I told him “ That’s fine, I’m glad you find idiots to sign that for you. Only proves how much stupid people there’s around.
Tell you what. I’m not singing you that piece of paper, its ridiculous, but I offer you this:
I’ll give you half the commission you are asking for, I don’t pay anyone more than that. I’ll give you, say, 2 months. This is down town capital district and you should find someone fast enough, I’m not asking for more than the market value.
You have no exclusivity over anything. I’m going to contact at least a couple other brokers. If you find a tenant, they you get the commission, if not then that’s too bad.
If you’re not interested lets just stop wasting each other’s time.”

His jaw hung pretty low, I don’t know if he was pretending to be shocked or really was, I don’t think everyone fall for what he wanted me to sign, but many sure did.
HE asked me to hold on a second, talked to some guy on the cell, offered me 75% commission of what they asked before. I told him I was willing to round it up to about 60% of the commission he asked, he talked on the phone again and said ok.
Know the market, don’t let anyone push you around into paying more than you should. And just don’t sign anything until you are sure.
Important: Whatever contract you sign, make sure it includes some kind of protection against any jump of inflation and the market in general.
My contracts have the possibility of braking up the deal after 6 months if inflation increased and the parts don’t reach an agreement on rent.
Other’s also include how much rent will approximately go up, again, with the possibility of braking the agreement after 6-12 months.

3)Find the right tenant.
The guy ended up finding a tenant, a gay psychiatrist.
The place had two offices and he’d use one, a woman ( also a psychologist) would work in the other office.
That’s the perfect. Not only one, but two professionals. The guy will never have a divorce of childcare to worry.
That guy will be paying rent for the rest of his life, and one things people need during a crisis, that’s therapy. He’s going to have lots of work for sure.
Don’t rent to any chunk of meat that walks and breathes.

Kids are a reality, but take a good look. A shabby looking guy with 5 brats running around, with an equally shabby looking wife is not someone you want.
Clean looking, verifiable job, preferably not 12 kids and someone that sounds reasonable when you talk to him. Check his background as well as you can. Lots of scams going on and once inside, it’s harder to get rid of them.



Anonymous said...

Thanks for the update Ferfal, you have a lot of fans up in North America right now!

Anonymous said...

Thanks for the response. All good and key points to consider.

The units spoke are exceptional for the area in attempt to provide sophistication at an affordable price, a price only slightly higher than the average rent charged. Each unit is unique and features lots of fine/custom wood work. As I do this work myself, it was mostly an investment of time. Most who view the places are impressed and some do all they can to get into one. Some are small studios, some multi-bedroom/bath. This was done in attempt to attract those with stable incomes and acceptable personalities. The current tenants appreciate the quality and atmosphere.

The interior decorating may help offset any potential objections a prospect might have to the location which is good, yet possibly not the best in their eyes. As current tenants loose their jobs and move to housing that they can afford, those once in higher income brackets and hold better jobs who loose their homes and nicer vehicles may move into town seeking the best the can afford as close to work as possible. My bet is that even a professional would find these places a welcomed retreat from the rather shocking circumstances they now find themselves in. They would seek a bit of class, nicer environs' than is usually available at this price point. I also anticipate that nicer homes will enter the rental market as they cannot find qualified buyers, yet they will require higher rents to remain sustainable, not to mention the higher utility bills. Quality at an affordable price may lure some to rent who would otherwise naturally be inclined to seek this luxury. These units should be competitive.

Thanks again for your response. It helps to know that I might have some success. I'm currently working hard remodeling the last unit, a two story, and now three bedroom/ two bath log 'home' which should be classified as a town house given the setting, yet feels like a home in the woods. This is unique property. It is hard and time consuming work, but it is first class gorgeous. I hope the strategy works and the bank doesn't want this back after all I've done LOL. It is very risky to invest such or any property at this time, but I'm stuck with it and am attempting to do my best.


Anonymous said...

This is interesting because one of the observations I made when working in Venezuela was the local staff did not put money into savings accounts, they bought apartments and cars instead if they at all could.

Apartments they could rent out and raise the rent yearly.

Cars could be resold a couple of years later for alomost as much as they were listed when purchased - losing very little real value.

"Real" property, as in "real estate" reverts back to its real meaning.

Unknown said...

Thanks for this post.I enjoyed reading it.It has really changed the way I think about internships.
Property Investing

Triple net (NNN) lease said...

Good post. In my opinion, it is much easier to finance real estate than any other investment product because it provides best long term returns.