lookingstill
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Posts posted by lookingstill
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Tommm50, I join other board members in thanking you very much for being so generous with sharing your knowledge and expertise. Would you mind my asking what is your opinion of Lancashire? I know that company has its own thread, but I'm concerned that you may never visit it.
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Depends on the value proposition. If i increased my prices by 10 percent i would make 50 percent more income due to operating leverage. The price increase would go straight to the bottom line. To increase prices there was to be a reason given to the customers so then they can rationalize it so they are getting the same or greater value proposition. Coke and very few other companies can increase prices in shealth mode. Would anyone care or really even notice if coke increased there prices by 10 percent tomorrow? Would the demand suddenly drop? I agree if wages dont increase it would be an issue . I dont think coke or see's is a discretionary item due to what it represents in the mind( happiness/ v-day). It all depends on the value proposition of the product and what it represents in your mind. Price is what you pay and value is what you get. In an scenario of high inflation and wages not keeping up. The customer would still buy discretionary items ( This is the US its what we do) only with the greatest value proposition.
I think this also has a lot to do with the fact that it is a "cheap" product. It is way easier to raise the price 10% on something costing a dollar than on something costing a hundred.
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Thank you Sanjeev. This board is one of the few sites I check on a daily basis. The quality of the content and discussions here is invaluable :)
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Not sure if I agree with your assessment. Investing should be prospective based on your expected returns and discount rate. Just because the price is the same as it was 10 years ago doesn't mean it's a good deal. Ex. Intel traded at $74 per share in late 2000 vs. $21 per share today, doesn't mean it's undervalued.
I understand. But we are not talking about Intel. :) RE prices were, and in some areas are still severely depressed. And in the context of low interest rate environment and a lot of money printing, RE values should come up. Don't know when and by how much, but RE market should recover.
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Lookingstill,
I think what you are doing is a VERY good idea. The future of the stock market is uncertain and you have major players betting that a significant decline could be had. In the 30's the market went down what 89%? Who's to say we couldn't see a 70%+ decline given the monstrous debt loads today. It is smart in this scenario to be diversified.
The one thing is though, have you considered upkeep in your 5.5% return? Property upgrades & maintenance are not cheap unless you have time to DIY.
If you can get 5%+ after all expenses from the rent + match inflation on price appreciation then you are about matching the long-term return of equities. If you can do this plus have a sizable stock portfolio I think you will do just fine. I would just keep in mind that property appreciates roughly at inflation so plan to exit when you see RE prices well ahead of inflation.
Thank you, no_free_lunch. The property is currently in a very good condition. it is a fairly recent construction, being built in 2001. And the previous owner took good care of it, she completely repainted it before selling, the floors are mostly slate and hardwood in good condition. There is a little carpet, but it is about 6 months old and is of a good quality. The seller paid for a year of home warranty for the appliances and such. There will be at least one month rent as a security deposit and of course I'll be creating a cushion for unforeseen expenditures.
Value investing is about buying assets which are currently undervalued. And the way I look at it, if I can buy an income producing asset for what it was selling ten years ago, and in today's dollars, it is not bad. Basically, an undervalued stock with 5% (and likely to be growing over the years) dividend, that should keep up with inflation and help me to preserve my principal. Of course it is much more work than just owning a stock, but being a landlord also could be a good hands-on learning experience.
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People are doing things that are nothing short of insane in the world of investment properties... I hear stories where this is happening elsewhere as well. they are going to get stuck with some really bad collateral- a lot of the people buying these houses have absolutely no idea what they are buying and the eventual expenses that they will get.
Care to elaborate on the above comments?
Sure, I did over the summer:
http://ragnarisapirate.blogspot.com/2012/06/irrationality-in-residential-real.html
People have no idea what the hell they are doing, especially when it comes to the types of repairs that these things need- or, how often they need to be made. There are a ton of problems with the majority of the housing stock out there, and people don't see it- this goes for inspectors that are supposed to verify things for the banks as well... The other shoe has yet to drop (at least here) and there are a lot of people that are not going to make the money that they thought they would.
In town, one of my lenders was telling me about a veteranarian who was buying a house that he might make 10 grand on... If I was a vet, and a cash buyer, why the hell would I worry about RE? I would rather make bank as a bet and throw off my cash/time into other more lucrative ventures that I or others I know, already know about.
I don't necessarily disagree with some things you said, but just to provide another angle.
If anyone remembers, probably not, but a while ago I started a thread here on RE market conditions. I was on the market for an investment property in Southern California. Started looking last May, got serious about it in the summer. For a personal reason was limited to a small area, so had to agonizingly wait for the right property while prices were rising around me.
Several weeks ago closed on the property that satisfies my "personal reason" criteria. The HOA there is in construction litigation, so cash buyers only, which worked for me since I was cash and allowed me to get "summer price" versus what things are going for now.
Basically, I paid for it about 15% higher than the absolute bottom that was here about a year ago. But what I paid was exactly the amount the seller paid when she purchased it in November 2002. She didn't make anything on it, in over 10 years.
The way I look at it. I paid what she paid at the end of 2002. But what a dollar is worth now is not what it was worth then. So, basically, it is cheaper. I'm planning to rent it out with cash on cash return of about 5.5%. With the prices where they are, I could probably sell it now wtih about 8% return, probably more after the lawsuit settles. (Not that I'm planning to.) It should be an ok inflation hedge. It diversifies me away from the stock market, in which I also have substantial part of my net worth. Even if the prices fall somewhat near to mid-term, I don't have a mortgage on it. And it should bring some income being a rental. It is a condo, so HOA takes care of the "outside" maintenance, newer construction, being built in 2001. I agree that the prices, especially here in So. Cal. went up too much, too fast. But I don't see anything particularly wrong with what I just did. Maybe I'm missing something critical?
I'm planning to hold it for a long time (20-30 years), being happy with income from renting it and the idea that this money is somewhat protected from potential inflation in this cheap/abundant money environment. If I get appreciation in addition to rental income - great, if not for a good long while, that's fine with me as well. Even if at some point the prices go lower, it is easier being under water when you have no mortgage. That's the way I look at it. Maybe I'm totally off base and you, guys, could point it out. I'd appreciate it.
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giofranchi,
I think earlier you posted that you are worried the savings rate had gone down again.
I notice in Fisher's document he is concerned that the big banks aren't lending enough.
Are you guys worried about different things?
The road to prosperity might be paved with more debt after all, if you follow Fisher's line of reasoning.
Eric,
I don’t understand your point here. Savings = Investments, provided, of course, that you actually invest them! If people deposit money in the banks and the banks don’t lend, that money is not put to work… Isn’t that a problem? Another story is “how much” money people deposit in the banks, and therefore how much they save.
I would like to see people saving 10% of their income, and banks putting those savings prudently to work.
Sorry, surely I missed your point…
giofranchi
Your desire to boost savings would be working against Fisher's desire to stimulate aggregate demand from credit growth.
Begin with income, add to it new credit, and take away savings. That gives you aggregate demand.
Eric,
I am not so sure I understood what you mean.
Let me explain what I mean: whenever a client pays my firm for a service it has provided him/her, I immediately take 20% of the money coming in and I invest it in other productive businesses, which I believe have good future prospects. I don’t use that 20% to give parties, or to buy a fancier office space. Now, I don’t see any difference with an individual or a family. Ok, 20% maybe is too much, so let’s say I would like to see each family save 10% of its income. Then, because not everybody is able to spend much time evaluating the best way to put to work their savings, there are banks. Which collect savings and should in theory be smart enough to use them properly. And, of course, to use them properly means to facilitate credit to those businesses which really deserve it.
There is a whole world of difference between lending to good businesses on their way to be highly profitable, and letting homeowners borrow because they want a new, bigger “palace” they cannot afford, or letting the government borrow and squander people’s money on its largesse or on silly projects.
I think Mr. Fisher is deploring the fact that big banks, to misleadingly strengthen their balance sheets, have ceased to lend to trustworthy businesses, the only ones truly capable of creating employment and wealth.
giofranchi
That's assuming little or no debt. Usually when people with average/substantial debt start "saving", they don't invest. Like ERICOPOLY said they start paying down debt. When they bring the debt down to the level they are comfortable with, they'll start spending/raising debt level again. What you are talking about requires broad and substantial change in western/american mindset. And it is tough in the culture of immediate gratification and "you deserve better/the best".
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racemize, thank you very much. This was quite interesting.
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Re: Lookingstill : "Have any of you, guys, observed similar picture last summer or is it different this year? I wasn't on the market last summer, so no clue there."
About this time last year, when we were looking to buy in walnut, diamond bar, chino hills area; we had plenty of choices. No bidding what so ever.
Thanks for useful information, Investmentacct. And many thanks to everyone for an interesting and useful discussion.
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I was going to post about this on here, but decided to write it up.
http://ragnarisapirate.blogspot.com/2012/06/irrationality-in-residential-real.html
......Let's say that you turn it into a rental. I would think that it would take about $2K to do (mainly, wall repairs, paint, and minor things). The carpet and cabinets for example, still have a lot of life left in them, but it just isn't stuff that would help you in a sale situation. Say you bought it for $80K. You are looking at having $82K in a house that would probably generate $12K in revenue per year. If you are unlevered and have no expenses, that comes up to ~15% a year. Add in vacancy and repair allowances, plus, taxes, insurance and other items, and you are in the high single digits/low teens (but, do get the help of depreciation)... Granted, you could probably refinance out of it and pocket some money since appraisers generally don't know much when it comes to getting a good value on these things (I would generally trust Zillow over an appraiser, though, there are exceptions). But still, that reduces your margin of safety, and you will still have an asset that probably isn't worth what you owe against it. Inflation had better hit in a big way for you to do overly well. Even then, you may be left with no one that can afford to buy the house off of you since interest rates will likely be forced to rise to combat the very inflation that you are trying to protect against!
That said, the house still needs a fair bit of work at some point in the not so distant future... The new owners may not do it, but eventually, something will have to happen. Does anyone really want to move into a house that was recently a rental and still looks like it?
NO.
As such, it didn't do too much for me even at $80K. When I was going through it on the first day that it was listed, there were 2 other investors going through it... I decided that it really wasn't worth my while to even make an offer, as I probably would have come in at $70K for it, but still wasn't thrilled about it even at that price. I figured that it would end up going for something like $90K. As such, I didn't even bother making an offer.
So. What was the sale price of the house? $110K... That's right, it sold for more than 137% of it's list price.
Ok, Ragnar. But if we change the situation a bit. Let's say one buys with cash, no mortgage. And one is not looking for a flip, but a long term income producing asset, basically, a cash cow. Let's say something built in 2000s, so fairly new construction therefore less maintenance and something that is part of condo/townhome association (so exterior maintenance & repairs are covered). So, let's say this something is in the neighbourhood of $250K + let's say $10K in closing costs, inspections etc. So since it is a newer construction in a fairly decent condition, it'll need minimal work to prepare for a rental, but let's say another $10K to spruce it up. So, we have about $270K "out the door". And let's say this something could be rented easily for $2100 per month. So, further let's say monthly expenses will be $350 in homeowners association dues (which already includes insurance), plus let's say $400 in property taxes ($4,800 per year including melloroos (since it is a newer area with nice amenities), plus let's say $250 per month for things like home warranty and to fund unexpected expenses. So, we have $1,100 per month in cash. But if we want to be even more conservative, let's say $1,000. If rents rise over time, which they usually do, will be more than that. For the next 10, 20 years. I don't think it is that bad at all. A little supplement to salary or retirement income. A little bit of diversification away from the stock market, to which let's say you are already substantially exposed. Definitely much better than cash in an inflationary environment. And not to forget that these property prices which are at 2003 levels are paid in 2012 dollars, not in 2003 dollars, which is a different thing. $270K now is not the same as $270K then, which to me is a substantial plus. So, basically, a not such a bad alternative to keeping substantial amount of cash sitting in the bank waiting to be eaten up by inflation or increasing already a substantial exposure to stock/bond markets. Residential real estate today is still a distressed asset, maybe not as cheap as it was yesterday, but still cheap. And if it provides steady monthly income - great, plus if it makes the principal more or less to keep up with inflation - even better, and if the angels sing and some day it appreciates above the "keeping up with inflation" level - icing on the cake.
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This makes me wonder ( as a naive observer who does not have much experience with real estate) about the emotions that are driving housing demand given that unemployment in the US is still high and there hasn't been a strong recovery in the economy . Could it be that the demand in housing is not from people buying homes for their primary residence but others trying to buy multiple properties more as an investment, hoping that the economy improves and they are able to sell them in a few years. If that is the case could there be a glut in the housing market in a few years when everyone tries to sell driving prices lower again and creating much better buying opportunity?
Well, I'm also looking to protect money from future inflation, which I'm sure will come with a vengence at some point after all this easing and money creation, as I'm sure many of these investors also trying to do. And prices are still at about 2003 levels. Have any of you, guys, observed similar picture last summer or is it different this year? I wasn't on the market last summer, so no clue there.
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"Right now I'm on the market to buy a smaller rental property in a certain area of Southern California."
Have you looked in inland empire area; or have you been looking in LA,OC ?
OC, don't really care for the inland empire area.
And I'm trying to figure out whether this is just the normal summer thing or there is some kind of deeper and more permanent change is going on. The agents are saying different things, of course. Some think that the market will cool off in Fall and mention that banks are holding back inventory because of some kind of handshake deal with the government to create an appearance of improving housing market to help current president to get re-elected (I'm not sure I buy that one. I can see banks not being that agressive on short sales, so they don't have to realize losses, but holding back foreclosed homes would cost them real money.) Some agents believe that the market is normalizing, the interest rates are so low, the rental market is so strong, and the prices are so attractive compared to rents that many investors that held back before are stepping in. I even heard talks about some hedge funds buying entire portfolios of distressed residential properties from banks, setting up or using existing property management companies and are renting those out or are flipping them. Sort of makes sense for the funds and for the banks.
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Right now I'm on the market to buy a smaller rental property in a certain area of Southern California. Entered the market fully expecting to pick up a good deal, and found myself in the middle of the lowest inventory in 6-7 years, multiple offers substantially above listing price, bidding wars, listing prices rising by as much as 20%-30% and properties being sold within a few days of being listed. Agents having multiple buyers, including many cash buyers and nothing to offer to them. Refusing to accept back up offers on short sales and forclosures, because they already have 5, 6 sometimes 10 back ups. It is just crazy. Nothing I see in the broader economy justifies this (recovery is weak, unemployment is high, many homeowners are under warter), but nevertheless this is the situation in the local real estate market. And from what I read is true in many parts of the country. What is really going on?
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Ok. This is an old interview, and most of you already saw it. But just for those who didn't, may be worth watching.
- Part 1- Part 2- Part 3 -
I was pleasantly surprised that the audiobook version is available for free on Youtube. Here is the link to the first part, then just follow links on the right. http://www.youtube.com/watch?v=02_kWrNOAQk
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Maybe I'm not understanding the "wash trade" discussion correctly, but here is what I found.
A wash trade (not to be confused with a wash sale) is an illegal form of stock manipulation in which an investor simultaneously sells and buys shares in order to artificially increase trading volume and thus the stock price.
The United States Security and Exchange Commission defines a wash trade as "a securities transaction which involves no change in the beneficial ownership of the security."http://en.wikipedia.org/wiki/Wash_trade
If you guys ment wash sale, then:
Losses Only
The wash sale rule only applies to losses. You can't wipe out a gain from a sale by buying the same stock back within 30 days. http://www.fairmark.com/capgain/wash/ws101.htm
I'd rather be wrong on this though. :)
WITH A LITTLE HELP FROM MY FRIENDS
in General Discussion
Posted
Well, I'm here. Doing a lot of reading. Can't contribute anything meaningful, not even sure ever will be able to. But thank you all very much!