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Author Topic: Location vs cashflow  (Read 21346 times)

Offline Rich_in_CT

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Re: Location vs cashflow
« Reply #30 on: September 09, 2007, 08:32:09 am »
Well put Mike. 

Offline Frank Chin

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Re: Location vs cashflow
« Reply #31 on: September 09, 2007, 08:54:32 am »

If you live in one of the bubble areas and prices have not yet come back to reality, then I would not get into the rental business.  If the deals aren't there, do something else.  Real estate is NOT the be and end all of the world.  It is simply one of a million ways to make money.  If it doesn't work in your area, then the choices are to 1) invest elsewhere (difficult), 2) move, or 3) do something else. 

Mike



There are bubble areas, and there are those that are not. How could that be??

Watching this discussion here, a better understanding can be made if the issue is looked at on a macro economic vs micro economic view. The "New York Times" did an excellent article on it a few years ago, with the thesis "there's TWO real estate markets" in the US. According to this, from the late 70's in one market, properties started in values form below 100K for a SFH, and after a few bubbles, reached at that time $500,000 in places like NYC and San Francisco. In other places, in the USA midwest, prices moved up slowly, if not at all.

Why is that??

On a macro economic basis, true throughout the world, true in China as well as the USA, coastal economies grew as inland economies stagnated. Worldwide, populations live along the coasts. The USA has a bi-coastal economy.

This means 50% of the population lives within 10 miles of the coast leaving the other half to occupy the other 2980 miles of a 3,000 mile wide continent.

We see bubble economies in NYC and San Francisco. In inland areas where Mike is, economies stagnate. Of course, you make money in RE in either one, though the strategies can be diametrically opposite.

With bubble prices in NYC, I'm placing a property on the market with a FMV of $715K, indicating I'm happy at $650K, cashing out over $500K, compared to netting $15K/year in rent. Agents laughed and said "Frank, if you want $650K, I'll write you a check today for it, as I can sell it for $700K in three weeks".

If I'm a tired landlod in NYC, do I have to sell at 50% FMV and go to a RE club to look for Mike??

I looked into the contrasts of coastal vs inland RE economy. Examples are Springfied MA, vs Boston Ma, 90 minutes by car. The other was 20 years ago, NYC vs Philadelphia, 2 hours by car.

Coastal economies of Boston, stretching halfway across the state of MA as far as  Worcester, including the "128 corridor" consists of job creating industries, high skilled workers, and opportunities created by the global economy, import export, banking, finance etc. Industry and people want to move there, demand created, and the highly paid and educated labor force pushes  up land, housing prices, and rents.

Inland economies of Springfield Ma are also called "Walmart" economies. I had investments there. and looked into "cash flow" investing. They are called "Walmart" economies because there is no NET contributin to the nations's "goods and services". This means, I go to a service job, clerk at Walmarts, earn a few dollars, get my haircut, and the barber takes the money, go to Walmarts and spend it back there. The net cash inflows are "government spending", government subsidies, such as social security, schools, section 8 subsidies.

I go up there every so often to check my investments, and once skipped a year, drove around and around, couldn't find Burger King. Apparently they closed for the lack of business. The shopping mall on Main Street was half torn down, also for the lack of business.

Opposite of what was happening in NYC and Boston at the time.

I could pick up vacant six-plexes for $60K. There was a 200 unit apartment building for sale at $600K, and I beleive overpriced, and only 35% occupied.

Why then does industry not invest and locate in inland economies??

I worked once at a large US industrial firm, Ingersoll Rand. They produce industrial goods, and tried locating plants into the inland areas where the cost of land and labor is cheap. Overall, it was a bad decision.

First, the complaint was the labor pool. The workers turned out more to be Mike's tenants. Workers from NYC, and Boston would not relocate there. And goods produced there had to be trucked to the coasts, increasing the cost.

Recently, I read of a midwest city, I don't reccall if it was Detroit, that depopulated to the extent that the city decided to downsize. If a home is vacant, tear it down, deed the land to the neighbor. Stop fixing streets leading to vacated neighhoods. Poeple and industry is not coming back.

Then a few years ago, the Census Bureau announced the "frontier" has returned, the first time since the late 1800's. The frontier was defined as an area with less than "one person" per square mile, and areas of Montana, due to depopulation, has reached that number.

So while places like NYC, San Franciso are bubbling along, others stagnates, and depopulates.

It is true that without immigration, NYC, San Francsio, and Miami may depopulate, but historically, first generation immigrants also settle in coastal cities. Creation of ethnic enclaves is another factor affecing prices on the coasts.

So "bubble" investing and "cash flow" investing will be interesting topics of discussion. At least, we should understand the differences and know where it comes from.

 


 

Offline propertymanager

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Re: Location vs cashflowe
« Reply #32 on: September 09, 2007, 09:30:46 am »
Quote
If I'm a tired landlod in NYC, do I have to sell at 50% FMV and go to a RE club to look for Mike??

If you're a tired landlord in Ohio, you don't have to sell your property to me at 50% FMV either.  The vast majority of rentals here in Ohio are sold at FMV.  In my previous example, the previous owner could have spent $5K and several days of her time to fix all the broken stuff and then sold the property at retail (although it might take a year in this terrible market).  She didn't do that because she was in too much pain.  The only thing that was important to her was getting out of pain  -  NOW.

If any of us were in a terrible accident and were in a lot of pain, we would give almost anything to stop the pain.  The same is true of desperate sellers.  They just want to pain to stop.

Mike


www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

Offline aak5454

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Re: Location vs cashflow
« Reply #33 on: September 10, 2007, 11:06:49 am »
Quote
Do tenants have a choice between buying a $100,000 home for $725 PITI, or renting the place for $1000 and choose to rent?  WTF?  WHY????  Are they stupid?  Are they desperate?  Do they want to move?  Do they fear losing their jobs?

If you live in one of the bubble areas and prices have not yet come back to reality, then I would not get into the rental business.  If the deals aren't there, do something else.  Real estate is NOT the be and end all of the world.  It is simply one of a million ways to make money.  If it doesn't work in your area, then the choices are to 1) invest elsewhere (difficult), 2) move, or 3) do something else. 


I agree 100%.  Here's in SoCal, you have a half stupid to buy rental property right now as its soooo cash negative its obscene and the market it pretty unsteady.  I have not bought anything in nearly 4 years.  I fish in other waters for away from the bubbles of Calif., Vegas and other headliners.

Offline Frank Chin

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Re: Location vs cashflowe
« Reply #34 on: September 10, 2007, 01:21:58 pm »

If you're a tired landlord in Ohio, you don't have to sell your property to me at 50% FMV either.  The vast majority of rentals here in Ohio are sold at FMV. 
Mike


I guess the key is how LONG it'll take to get FMV in Ohio. The last rental I sold here took me two showings in 20 days.

Talking about pain, one investor I know specaiized in taking over mixed use properties from tired old owners who can't let go for tax purposes. He would NNN properties for say 20 to 30 years from owners in their sixties, too tired to chase after tenants, but too unwilling to pay large capital gains, and would like to leave the place to their kids.

His method is simply driving around looking for not well maintained properties, figure out from public record how long the owners had the place, and if he sees an owner in possession of a tired looking property for 35 years, he know he found his target.

His solution is is to take over via a master lease, collects the rent. and take care of all the headacjes of management, and with NNN lease can even be a no down deal, though a "non taxable option" payment would ease the pain.

How does he come out ahead collectinng some rent, and then pay the master lease, making a small spread??

- First, in mixed use properties, when the commercial tenants leave, the new ones come in at a much higher rate, increasing his spread.

- Often the old owners die sooner than expected, though the heirs got a deed, but is stuck with a long lease. Many want the money NOW. He offers them a way out at 50% of FMV or or they can buy out his lease. Better than trying to pick up deals at probate as you already got the heirs over the barrel.

Here in NYC, it's so much easier to unload the "pain" that what this guy does appear to be the next best thing to "ease someone's headache", and avoid the other pain of taxes at the same time.

Now that my dad is 85, owned a commercial property since 1963, I can see the difficulties of someone getting around on a walker trying to manage a property. And it's nice that he's hanging on to it for his kids, though he also hates the thought of paying taxes on close to $1MM in capital gains..


The NNN works in other cases too. Some guy who murdered a tenant during a dispute got 15 years to life in prison, and as was reported in the papers, NNN the property to an investor for the next 25 years. While someone can hire a PM, it's hard to hire and fire them from prison.

With the RE maket bubbling along here, this imprisoned landlord would leave prison with a paid up mortgage, and hopefully a nice property to retrun to, easing his PAIN.



« Last Edit: September 10, 2007, 01:29:08 pm by Frank Chin »

Offline Rich_in_CT

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Re: Location vs cashflow
« Reply #35 on: September 10, 2007, 01:30:56 pm »
Frank,
I've considered the same thing myself, I even have a master lease that was written by an attorney to do something similar.  I like the approach of finding older folks that just don't want the hassle.  I've got mine set up a little different though and its got an option to buy built in and a section for rent credits.  I figure I can get myself started with nothing out of pocket, build payment history and build equity all while letting natural appreciation happen.  Best case scenario I buy it at the end of the lease term with equity already built up.  Worst case it has depreciated and I have an OPTION so I am not stuck with it, I just don't purchase.  In the interim while its leased I would get some cashflow.

Offline Frank Chin

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Re: Location vs cashflow
« Reply #36 on: September 10, 2007, 01:48:19 pm »
Frank,
I've considered the same thing myself, I even have a master lease that was written by an attorney to do something similar.  I like the approach of finding older folks that just don't want the hassle.  I've got mine set up a little different though and its got an option to buy built in and a section for rent credits.  I figure I can get myself started with nothing out of pocket, build payment history and build equity all while letting natural appreciation happen.  Best case scenario I buy it at the end of the lease term with equity already built up.  Worst case it has depreciated and I have an OPTION so I am not stuck with it, I just don't purchase.  In the interim while its leased I would get some cashflow.

It can get even better.

What he does is if he can talk the lease terms to 29 years, it's considered a long term lease that can be mortgaged.

After holidng it a few years, with increased cash flow, he found he can even sell it to folks needing to do 1031, or 1033 exchanges, as NNN leases qualify as "like kind property".

He concentrated more on mixed use and commercial properties because he found typical homeowners clueless about NNN leases, and there's greater cash flow in commercial deals.

Long term NNN works for residential properties as well, as the imprisoned landlord did one on a Manhattan townhouse he owned.

 



Offline phatman5

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Re: Location vs cashflow
« Reply #37 on: September 11, 2007, 12:41:51 pm »
Rich - I saw you mentioning that you purchase properties based on being able to get 2% in rents of the purchase price.   This method works for you?

Offline COMREINVESTOR

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Re: Location vs cashflow
« Reply #38 on: September 11, 2007, 02:24:46 pm »
Frank,

Newbie here in Commercial but have had a SFH rental in North Jersey for 15 years.

I am trying to understand how this guy who does the NNN master lease gets a mortgage on a property with a 29 year lease.  He doesn't own the property himself, right?  How does it work?

Your macro/micro analysis of the coastal/interior markets is really interesting.  What has always intrigued me is that you always hear the old Northeast losing population.  I haven't looked at the stats lately but people have been moving out of NY and NJ for years.  I think on the whole they gained a smidgen because of external immigration but these states have done a poor job in respect to net migration with other states. Then you look around..darn the whole place is completely built out!

So what do you think is hiding behind all these numbers?  The high coastal prices are often way higher than local income figures.  A bigger trade-up market??  More wealth??  Why do the coasts sustain much higher prices for so long?? OK they don't move to Ohio but they do move to the southeast, Arizona and Nevada in droves!

You picked up good bargains in the last slump back in the early '90s.  What does your crystal ball when we can go bargain hunting again the NYC?

Offline COMREINVESTOR

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Re: Location vs cashflow
« Reply #39 on: September 11, 2007, 02:30:53 pm »
Rich,

How much upfront cash in exchange for the purchase option in your NNN master lease?  Have you made any proposals yet?  Give us some ideas how things are going.

 

Offline Rich_in_CT

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Re: Location vs cashflow
« Reply #40 on: September 11, 2007, 02:33:08 pm »
Rich,

How much upfront cash in exchange for the purchase option in your NNN master lease?  Have you made any proposals yet?  Give us some ideas how things are going.

 
Made one offer for 4 properties using it.  Fell through, seller got really flakey and wanted a ton of cash with it.  Worked out a solution for that but she fell through completely.  Real basket case.

Offline Frank Chin

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Re: Location vs cashflow
« Reply #41 on: September 11, 2007, 02:58:56 pm »


I am trying to understand how this guy who does the NNN master lease gets a mortgage on a property with a 29 year lease.  He doesn't own the property himself, right?  How does it work?

Your macro/micro analysis of the coastal/interior markets is really interesting.  What has always intrigued me is that you always hear the old Northeast losing population.  I haven't looked at the stats lately but people have been moving out of NY and NJ for years.  I think on the whole they gained a smidgen because of external immigration but these states have done a poor job in respect to net migration with other states. Then you look around..darn the whole place is completely built out!


One of the amazing things about long term NNN leases, is that they are considered "real property", and can be mortgaged, bought and sold, just like buildings. See the following URL:

http://www.realwebfunds.com/services/NNN_investment_property_mortgage_loans.asp

Some of the most prestigious properities are controlled via NNN laeses, where one party has fee simple ownership of  the land and buildings, and another control over the property via an NNN lease.

Among the most famous is the World Trade Center, where the Port Authoirty of NY and NJ owns the building and ground, and Larry Silverstein the NNN lease for 99 years. He paid $400 million for the lease plus making annual rent payments. He can go get a mortgage on this NNN lease if he wanted to.

The Empire State Building had a NNN lease held by a group headed by Donald Trump, but a few years ago, they bought the building and grounds itself, and merged the two.

On a micro basis, Queens County where I lived in saw it's population soar from 1.8 million to 2.1 million from the 1990 to year 2000 census. With an average household of 2.1, there were 140,000 family formations in this period. Yet the average permits for new housing is 300/month. or 36,000 for the ten year period for new units. So, housing starts is actually 100,000 units shy of demand. 

Housing prices is greatly affected by the scarcity of land. In Queens County, there's no additional land to build on. Broward County FL, with a comparable population, similar population growth, did not experience the same price spikss due to the larger availability of land.

While the population statewide may have stagnated, the growth or stagnation is not uniform, creating shortgages somewhere, and overages elsewhere. Queens County, grew by 15%, not an insignificant amount.

The upstate NY economy had not been well for years, with industrial jobs moving south and west. BUT, Wallstreet, despite the internet, had not migrated south or west. Instead, it has grown. So NYC is a whole different story.

Connecticuut is another example. Property values zoomed in the Stamford CT area 10 years from the mid 90's. Chief reason was the growth in jobs. Yet in the Hartford, the insurance capital, shrunk, housing prices fell, as insurance companies consolidated.



« Last Edit: September 11, 2007, 03:52:24 pm by Frank Chin »

Offline COMREINVESTOR

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Re: Location vs cashflow
« Reply #42 on: September 11, 2007, 05:19:51 pm »
Frank,

Thanks.  I am learning tons of great stuff from you.

How did your friend structure a NNN master lease?  Just a bit of upfront cash or tons like Larry Silverstein $400 million?

A friend of mine told me how he almost went under in the early 90's.  He sold his Queens properties as fast as he could but still wound up with half a dozen or so.  Did the best to survive juggling meager rental incomes with expenses.  Lots of people he knew lost everything.  Prices of homes just went into a free fall for some years.

So the whole NYC has grown to be dependent on Wall Street - spinning off tons of high paying jobs trickling prosperity down to the man peddling pretzels in the street corner.  The question is will this credit fiasco cascade through the NYC economy?  Will we see Wall Street guys jumping out the window again?

What does your crystal ball say?





 

Offline Frank Chin

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Re: Location vs cashflow
« Reply #43 on: September 12, 2007, 08:53:12 am »
Frank,

Thanks.  I am learning tons of great stuff from you.

How did your friend structure a NNN master lease?  Just a bit of upfront cash or tons like Larry Silverstein $400 million?

A friend of mine told me how he almost went under in the early 90's.  He sold his Queens properties as fast as he could but still wound up with half a dozen or so.  Did the best to survive juggling meager rental incomes with expenses.  Lots of people he knew lost everything.  Prices of homes just went into a free fall for some years.

So the whole NYC has grown to be dependent on Wall Street - spinning off tons of high paying jobs trickling prosperity down to the man peddling pretzels in the street corner.  The question is will this credit fiasco cascade through the NYC economy?  Will we see Wall Street guys jumping out the window again?

What does your crystal ball say?

 

The way I understand it, this investor started doing the leasing deals as a way of doing "no money down", and initially structured the leases so he'll be paying 10% less than what the tenant is paying,essentially a management fee. Keep in mind, market rents are often highr, but the trick is to lock in low rents in the master lease, and hopefully, make the money as the sub-tenants renew them.

You can pay up front, pay "option fees" etc, in different combinations depending on the needs of the lessor and lessee.

His favorite tactic is build enough of a spread in to find a "subtenant" to do all the dirry work, collect an upfront fee from the subtenant even whiles he's not paying one to the fee simple owner.

One thing I learned wathcing my dad and some other older owners is they trade "top of the line" rent for less stress. So it wouldn't surprise me even if the owner knew what the market rent was, he's not pushing for it.

I asked my dad why he's not charging $1,000 more on a video store he's renting too. His logic is that he can put the guy out of business struggling to pay the rent. So at a $1,000 less, the tenant can take it nice and easy, and he can take it nice and easy.

I haven't followed Silverstein that closely, but I understand Donald Trump had some difficulties in the last downturn, similar to what you described.

As to NYC, it is dependent somewhat on Wall Street, but is diversified in the sense it's a "transportation hub" (the port of NY & NJ), entertainment (headquaters of CBS, NBC, ABC, Time-Warner), among many others. One of it's growth industries surprisingly is "ethnc foods". I can imagine someone starting a "wonton" factory in Queens, NYC, rather than in the south or west. Can you imagine some "good 'ol boys" making wontons in Alabama??



 

Offline COMREINVESTOR

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Re: Location vs cashflow
« Reply #44 on: September 12, 2007, 10:50:03 am »
Thanks Frank..You're the MAN!

Your friend's master lease approach is giving me an idea.  I am currently evaluating a small office building where the expenses are so hard to pin down, i.e. large discrepancies between tax return and stated - so I am thinking of a master lease to gain an accurate picture of expenses and exercise the buy option in a couple of years.

Wonton factory, ha...I heard there's a fortune cookie maker here in Maryland.


 




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