How to play a multi-year real estate bull market

Discussion in 'Economics' started by Cutten, Jan 18, 2006.

  1. Cutten


    I am starting a thread to discuss how to maximise profits in a long-term real estate bull market. What are your preferred methods, what have you seen work best either yourself or via other people? In any bull market you get big differences in the total profits made by one person relative to another, even though both were bullish - so what makes the big difference? Post your ideas here
  2. isnt it a little late? if anything the real estate bull market seems to be ending.
  3. Craig Hall has a book out that deals with "Timing the real estate market" which I liked which touches on some of these subjects. At least he is a legit commercial real estate owner. The other thing is I am assuming you are looking at real estate in other countries for a bull market in real estate. One thing you have to watch is that different countries evaluate real estate in totally different ways. That is one of the reasons why japanese investors did not do well in the US real estate market several years ago because the way they measure value on properties in Japan did not work in the US, which is also different then the way they measure value in europe.
  4. jim c

    jim c

    Buy a piece of sh*t house in an average area. Move into it and spend the next two years fixing it up like a model home. After two years sell this beast and keep 100% of the profits. Pay no taxes up to 500k for a married couple or 250k for a single person. Rinse and repeat. I think in Chicago you could make 30% on whatever you paid for the house after two years. Even if you only make 100k after two years that still works out to be good living considering you pay NO taxes on that 100k. Jim
  5. The three "L's". Leverage. Location. Luck.
  6. you can also do it with new houses. i have done it several times. act as your own general. sub out the heavy work of getting the house framed up and enclosed and finish it yourself. you can make 30-40% doing it this way. build and live in and flip it every two years. tax free profit plus its good exercise.
  7. Hi Cutten,

    Here's some random musing on RE from the countryside:

    Interest rate changes are doing little to most residential RE I see. The Fed is not jacking them meaningfully or is unable to e.g. - we are perhaps 130 or so basis points above the summer 03 mortgage lows. Instead the Fed is going after the lenders through the OCC to tighten standards. This may not work due to the emergence of asset backed/alternative capital lending and huge supply of money to lend generally.

    I see some trouble in RE to homeowners from rising municipal taxes, insurances, laborer/repair/materials cost and state taxation on non-resident sales.

    The market in trouble is the stock markets. US markets return less than cd's, I bonds, and collecting interest on brokerage accounts w/o trading them. I don't think real estate money is ever going back into US markets. It will go ANYWHERE but there.

    Title insurers and sureties are not falling. Do not short them now. Realtors are somehow still commanding big commissions and many will sell out their sellers on a whim in a falling market. Buyers using sadistic buyer brokers have the advantage. Don't buy foreclosed property unless you have a real RE pro or lawyer helping you.

    In homebuilding, I would think it's the speculative mom and pop borrow, build and sell that are at most risk. The dime a dozen solo builders that can't afford to have help due to worker's comp, etc. favor aggregation toward bigger builders.

    Possible trend in paper companies monetizing some beautiful waterfront lots all over. Homebuilder realty holdings are grain of sand compared to what these guys are sitting on. Markets hate paper companies. This is a great opportunity for city guys to get themselves a cheap camp.

    Underestimated in its effect on RE is the tremendous transfer of boomer wealth underway to younger generation through gifts of equity to those children that need to borrow, or outright buying at the market for those children, and buying at the market because they never intend to sell - ever - and because life is short. Simply put, there's a bunch of relatively wealthy parents that see time grows short.

    I would think the mid west may well have an advantage and other parts of rural America. And few Americans are looking in Latin America. The trend there is toward relaxation of foreign ownership restriction too.

    This revenue neutral tax change talk to ward off AMT threat by cutting mortgage interest deductions is BIG trouble for RE if not done gingerly. It may not go anywhere though.

    Water quality/quantity and air quality are going to be emergent issues in more areas.

    Relying on tenant rent to finance a mortgage on second property is potentially dangerous. Flipping a rural property probably is too. I'd make sure I really liked the place where the 2nd was to be bought and had a decent ownership time frame in mind.

    Never ever get involved with wood and woodstoves other than on a romantic weekend getaway. :) Avoid chainsaws also.
  8. When interest rates are in a downward trend, the payments on housing gets cheaper and cheaper, so more people demand houses to buy. In this scenario, buy and hold all the property you can, preferably by having tenants making the payment. Variable notes are great when this happen, as long as you know that rates can, and will, eventually reverse. Note also, that during times like that, apartment owners do terrible, and landlords don't do too well because buying is an attractive alternative to renting and typically the interest rates are being lowered because the economy is sick.

    In interest rates are on a rising trend, the payments on housing gets more expensive. More and more people turn to renting, boosting the demand for renting. In this scenario, it would pay to have properties that cash flow, and are locked into a fixed note. I believe that this is where we are now. Today I spoke with the owner of 1000 rental units here in my town (he has multiple apartment complexes) and when we were discussing a particularly nice one, he told me that he raised the rents there not too long ago, and he's still at 100% capacity, so he'll be raising it again.

    After 9/11, it was an unprecedented opportunity that I, myself, didn't recognize. Slashing the interest rates at the knees sparked the bull run for real estate simply because it cost less, on a monthly basis, to buy houses....and in some cases, buying was cheaper than renting. I wish that I had bought all the real estate I could have bought...raw land, and rental units. As it is, I did leverage up my holdings by borrowing against one unit to buy a second, and later borrowing against them to buy a couple more. After that, the prices were so high on properties I couldn't buy more and get them to cash flow. Because I am conservative (I have kids), I bought everything on fixed rates. By keeping them neat and clean, I maintained at least 98% occupancy, even during 2004, which was supposed to be the worst time on record to be a landlord.

    Right now, however, I recognize that we are in the mix of ANOTHER unprecedented opportunity. Over the last 2 years, the cost of properties were bid up so high that it just didn't make sense to buy. And with prices so high, and rentals doing so badly, many, many landlords sold their holdings or converted their apartments to condos. Percentage-wise, there are very, very few rental units in the hands of landlords...especially small 1 or 2 bedroom places because most of the new construction centered around bigger places. You may, or may not know, that the value of an apartment complex is directly related to its cash flow. I believe, that if interest rates continue to rise due to an expanding economy, there will be lots of families unbundling, or kids going off on their own, looking for apartments and small rental units. Meanwhile, with the uncertainty in the real estate market, some people are anxious to unload so they don't miss the real estate peak. Because rates are still low, and prices have dipped a little, I believe that we are close to the point where it makes sense to acquire rental properties, not for the price appreciation, but for the cash flow. This assumes that an investor has the stomach for being a landlord, which is an art, and can buy cheap enough to get a tiny bit of cash flow.

    One of the posters here talked about flipping houses after rehabing them. Just so you know, I agree with him on that, because the timeline on rehabbing is so fast that the market would change much, provided that you got a good price on the purchase. You can rehab in a backsliding market. However, the advantage or being a buy and hold, landlord, is that your money is highly leveraged, and your return compounds itself. (FWIW, you can make more than 35% annually if you're leveraged) The guy I met with 1000 rental units might have done rehabs early in his career, but if he continued to try to make profits in that linear fashion, where would he be now? If you start with one unit, and double your holdings every 4 years, it would take you 40 years to own 1000 rental units. If you did that, and you increased your rents $25 per month from year to year, you've increased your annual cashflow $300,000, less management fees (probably about $30,000). Four years of that, and your annual income INCREASED by over $1,000,000 a year. Don't underestimate compound interest and economies of scale.

    To recap, interest rates fell, so property prices rose, rents sank, variable notes were king, and landlords made money by appreciation, not cash flow.

    With rates rising, property prices may sink, rents will go up, fixed rate notes are king, and landlords will make money through cash flow, not so much appreciation.

    Most importantly...not everyone is cut out to be a landlord.

  9. Banjo


    Smart money's post is on the money :D. I come from a family of builders and have been investing in R.E. in some form all my life. Some points to sharpen your edge.

    NEVER get involved in a deal structured in a manner that doesn't immediately provide positive cash flow, it is simply uneccesarry to do so.

    Don't limit your investment portfoilio to just one market, i.e. residential rental or commercial.We even have a truck stop.

    Know the area, the demographics are always morphing, ask yourself what is under way in terms of population shifts, there is always something and the change can accelerate faster than you may think. Questions like who wants to live /work here and why., the same questions you would ask yourself if you were the renter/buyer.

    Develope a solid relationship with a banker who understands the biz, they will provide you better financing and even find some opportunities as they are in the flow of information. Twenty years ago my banker ask me if I wanted an almond/ olive orchoard/ vinyard in Napa. I said , what am I a farmer, another 15 million left on the table.

    Don't be afraid to create/ structure unusual deals. Maybe you know a contractor who can put up an industrial park with his banks financing but can't afford the property purchase, you put up the property, lease it back for 25 yrs or form a partnership, think outside the usual box.

    All of this depends on your ability to read the mkt. An example: They passed a law eliminating metal plating without millions in cost to the platers. After talking to platers we built a facility, industrial park, 40 mi away in another county with less egregious laws, they leased , moved their equipt in and kept present locations for store fronts.

    All in, the idea is to be aggressive and keep the ball rolling , think of it as farming , you are continuously planting and harvesting.

    People have been calling tops in the R E mkts since the first owner claimed a piece was his and decided to defend it.
  10. jem


    Good schools great location should be your target when buyers are picky.


    I have two homes for sale. One is 5 years old, priced a little under the competition.

    a bunch of showings but no offers after 3 weeks. My backyard is large for the area but you can see the neighbors homes in the backyard. Also the tile is the smaller tile, not on the diagonal.

    I am builidng a new home on a cul de sac, walking distance from schools. It is not even finished.

    Got lots of interest and an oral full priced offer the second day it was on the market, even though it was 40% higher priced than the home we were living in.

    (i told the agent not to write up because my wife started crying.) My plan to blow out our current house with a 50Gs reduction and return to San Diego as a renter with two and half years of big profits on two houses were completely dashed when my wife realized we might actually get the big home sold.)
    #10     Jan 21, 2006