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Investing in distressed housing market


shalab

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Many here have large sums of money under management. I wanted to pose this question - how many are looking at buying properties in the U.S for bargain prices? There are many things one can do with such a property - e.g: renting or re-selling after fixing up etc.

 

 

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are there any Canadians here with any experience investing in US residential real estate?

 

I would love to have some feedback with someone who has done this before:

 

1) Were you able to get a $US mortgage in the States?  

2) Did your credit rating in Canada give you any positive standing when it came time to apply for credit in the US? or did you have to pay much higher rates?

3) Did you invest at the bottom end or mid-market in terms of housing quality.

4) What did you pay for property management? (10% of rent?)

5) Did you run into any unforeseen issues?

 

 

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Not an endorsement, but look at the vulture funds buying distressed debt

http://www.tavistock.com/index.aspx?id=13

http://www.thefreelibrary.com/RoundPoint+Financial+Group+Names+Steve+Bashmakov+as+Chief+Financial...-a0239825740

 

Then ask why is the US better than a similar investment in the Europeans. ie: Portugal, Italy, Ireland, Greece, & Spain ?

 

SD

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Guest broxburnboy

In order for a residence to become an income property (i.e. an investment) you would need an available renter, capable of paying all the operating costs and interest on a mortgage.

The purchase price would have to be adjusted down as you require a margin of safety for..increased taxes (or decreasing level of public services), the inevitability of higher interest rates, downward pressure of rents in an overbuilt community, cost push expenses (inflation).

I'm sure there are localities where these conditions are met, but generally it doesn't look like a good proposition..yet. If it were there already would be a recovery in residential housing.

 

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I am also interested in investing in US RE.  My chief concern is what happens when interest rate starts its inevitable ascent (this is the one parameter where I have no control over).  My plan is to finance any investment properties with a 30-yr fixed-rate mortgage.  This way, interest rate hikes won't increase mortgage payments.  In addition, higher mortgage payments would mean more potential buyers will remain as renters, so that's a positive as those renters are usually better renters (vs. those who are "permanent renters" if you will).

 

On the other hand, less purchase demand may result in lower prices, resulting in (unrealized / paper) losses.  Also, investors may start to demand a higher rental yield, which again pushes prices down.

 

Has anyone done any research for the high-interest-rate 80s what happens to RE prices?

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The answer to the exam is that some of these funds have been picking up mortgages, in volume, at 15c on the $ :o with the european mortgages at maybe 20-25c. If you're going to stay with them for 3-5 yrs it will be pretty hard to lose, even with Roundpoint not being the greatest vehicle.

 

Point is that beyond direct ownership, & indirect ownership via the REIT, there is the 'vulture' fund. Obviously not for everybody, but they do have some attractions.

 

SD

 

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The assertion is that rates increase because inflation increases. In the short term house values fall because the cap rate increases. Over the long term, the purchasing power of the house rises, & the mortgage falls, with the inflation rate.

 

Why buy a 2nd house, or buy a REIT/vulture fund AT ALL? Simply increase your mortgage, invest in & roll short-term T-Bills, & short the housing index. Dont care when my house value falls as I dont intent to sell (I need it to live in), my T-Bills are maintaining their value & I have a cash gain when I close out the index short. When I repay the mortgage from my T-Bills I capture the inflation gain on my liability - & I leave my house untouched & worth significantly more than when I started.

 

Elegant, no fuss, no unplugging toilets, no collecting rent, no finding tennants, etc.

 

SD

 

 

 

 

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The assertion is that rates increase because inflation increases. In the short term house values fall because the cap rate increases. Over the long term, the purchasing power of the house rises, & the mortgage falls, with the inflation rate.

 

Why buy a 2nd house, or buy a REIT/vulture fund AT ALL? Simply increase your mortgage, invest in & roll short-term T-Bills, & short the housing index. Dont care when my house value falls as I dont intent to sell (I need it to live in), my T-Bills are maintaining their value & I have a cash gain when I close out the index short. When I repay the mortgage from my T-Bills I capture the inflation gain on my liability - & I leave my house untouched & worth significantly more than when I started.

 

Elegant, no fuss, no unplugging toilets, no collecting rent, no finding tennants, etc.

 

SD

 

 

 

 

 

Shouldn't the house values go up if the the cap rate increases. When you said mortgage falls over the LT, you mean in relative to inflation rate?

I don't see how ur increase mortgage, roll into short term T-bill will work in Canada where Mortgage rate is quite abit above T-bill rate... And I don't think there is CDN housing index to short .. if there is, I will do it.

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Shouldn't the house values go up if the the cap rate increases. When you said mortgage falls over the LT, you mean in relative to inflation rate?

I don't see how ur increase mortgage, roll into short term T-bill will work in Canada where Mortgage rate is quite abit above T-bill rate... And I don't think there is CDN housing index to short .. if there is, I will do it.

 

cap rate = rent / house price, so if cap rate increase with constant rent, house price decreases.

 

I believe there's the National Bank/Teranet housing index futures that trades OTC in Canada.  Didn't dig too much into how it is actually traded as I presume it's more for the big boys (institutions) and I am not one.

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that's catch 22 then... cap rate can increase because of rent increase too.. and as rent increase... house price usually will increase as a result.

 

The way I look at it, cap rate is the investment return demanded by the investor / market.  If cap rate adjusts per market requirement (due to interest rate change for example), then rent and/or house price adjusts.

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"Shouldn't the house values go up if the the cap rate increases. When you said mortgage falls over the LT, you mean in relative to inflation rate?

I don't see how ur increase mortgage, roll into short term T-bill will work in Canada where Mortgage rate is quite abit above T-bill rate... And I don't think there is CDN housing index to short .. if there is, I will do it."

 

 

Higher interest rate = higher capitalization rate. Future equivalent rental income is discounted at the higher interest rate which reduces the PV. Lower PV = lower house value. A house is a hard asset. A mortgage is a hard liability. Inflation increases the price of a hard asset, & reduces the purchasing power cost of hard liability - producing a PV saving on retirement.

 

Yes there is negative cash carry but you miss the point. You will repay the mortgage with inflated $ producing a gain, & the cash is the required margin for the index short. The discussion is also in the US context - Schiller index. If you believe in your premise that there will be inflation, this should not be a problem.

 

To go this route be very sure that you fully understand the application of DCF, what inflation does to hard & soft assets/liabilities, & how to get/maintain an effective hedge. Miss-understanding, could cost you your house.

 

SD       

 

 

 

 

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