What would you do?

General Real Estate Investing
1

Thought I would throw out a situation.

You find a nice 10 year old home with berber, plantation shutters, and more that is in a prime area in Las Vegas. You can walk in with nothing down. You could rent it out BUT you will lose an estimated $500 per month. The property will go up in value $35-40k over the next 12 months and 80k+ over the next 2 years. You know this will indeed happen with a dry market and more if the market heats up again.

Walk away?

Is owning for appreciation, when you are feeding the alligator monthly, acceptable if you are extremely sure about the numbers?

Thought I would throw that out there to see what people had to say.

EDIT: Wanted to point out that the home in this example would be purchased at 15k under appraised value.

2

Howdy Evergreen:

It is a gamble a lot of investors do everyday. I tried it in Austin at what I thought was the bottom of the market and I was right. It just took too long for the rebound that time. I held om by the skin of my teeth for 5 years and then lost it all. I would not do it again if I could find deals eith better equity and cash flow. The 20% plus appreciation can not go on forever. If it does for a year or more you will do fine. If it slows down a bit you will still be fine. What could happen is the bottom could fall out and your house would not rent at hardly any price. This has happened in several markets including Austin where rent was less than 50% of previous levels and still about 30 % or better vacancy. Some parts of Houston right now are there. It is not pretty.

If you look at the $500 per month as a down payment it is only $6000 a year. You should figure in vacancy loss and fix up and repairs to see what the total negative might be. It probably would not be $80,000 over the two years but the appreciation may not either. To me it is just too big of a gamble.

LOL

3

Legal Notices in towns paper.Subject “Delinquent Taxes” Are the properties considered payed in full when you pay the delinquent taxes?Is this technique popular?How many are using it ?

4

loose 500 per monthand/or 6k per year to make 35k per year!!! Hmmmm you do the math is there a dish included??? That is the only question!!!

So if you pull put the 15k at closing and divide it by $500 lets see that is 30 months covered!!!

Uhhhhhhh Yeah as long as there is a dish there!!!

5

I would definatly have to pass that’s to much for my lifestyle to be paying out. 1 dollar is to much for me tho ;D

6

Yea. The thing is, I know the appreciation is there.

I could pull the 15k cash out at closing I guess–if I knew how :smiley: Anyone want to clue me in?

I would not even think about this in any other city on earth. Mainly because I don’t know any other city so well and because the prices of RE here is not entirely based on some “land rush”.

If you could buy a property that has went up 10% or more annually for almost 10 years, is in the best community in the city, is in high demand, and in a place where land is running out in the city and is gone in the master community, would you buy it?

Would you dare to spend 10-20k to make 80-100k?

This property is not some fix up. It is move-in ready to roll.

Anyway, I am rambling on. Just something I thought I would throw out there for the heck of it.

7

evergreen- I am not a big fan of renting out with a monthly loss. I never figure appreciation into any of my figures on rental property. I look at appreciation as Icing on the cake not the whole cake.

Also renting out with a monthly loss is like running a private welfare office. Are you that nice to give a stranger 500 a month to live in your place? Be nice, but not that nice.

8

how do figure that it will go up 80k over the next 2 years. is it based on the fact that it went up 80k over the last two?

i hope you realize that trees do not growth to the sky.

9

I am not basing what I know on what happened in the past 24 months, which would be completely idiotic. Of course, I see people doing this all day long. At some point, you need good buyers :smiley:

I mean heck, 12 months ago here you had property being sold above value in 1 day. Today, it moves in decent time if the price is right. New home sales are gobbled up instantly though.

I am not going to do this deal of course. I just like shooting out scenarios.

Just found a nervous Nelly who got scared that his home would not sell (after only 1 month on the market). Check this out. He just dropped it from 350k, which was under appraised value, to 300k! I told my mom (a realtor who told me this) that I think I will submit an offer of 280k lol The home is worth about 370ish. So tempting.

She is trying to sell the home next to it for about 340k (little smaller). I tell you, you are only one nutty neighbor away from a lower home value.

I am waiting for the Condo market to implode. There are currently 53 condo high-rise towers permitted out and about 20ish are pre-selling or sold. Nothing like 50-100k condos being added to the market to saturate things. 17,000 conversions coming to market sometime here and many complexes of 100-300 units on the market for sale and possible conversion. Maybe some of these projects will fail.

I expect to walk into Best Buy next year and be offered a Free AOL CD and Condo :smiley:

10

Evergreen,

Have you taken the time to review what you’re typing?

In one sentence alone, you say that this property will “indeed” increase in value $80K in 2 years, even though it’s a “dry” market. And then you say that you KNOW the appreciation is there.

How will value increase in a flat market, and how do you know that the appreciation is there when it hasn’t happened yet?

Add to that, you say that a year ago a property would sell for over asking price in 1 day. Now, it moves in “decent time” IF the price is right. Sounds like a cooling market to me.

Now you say that this “nervous Nelly” as you say, has dropped the price of his home down to $300K, a home supposedly worth $370ish K. Question, has it sold yet? If not, then why? If the market is as good (or flat, dry, wet, round, etc.) as you say, then either there is a BIG problem with the house, the house is still over-valued, or the market is not nearly as good as it seems to you.

Not trying to be rude on anything. Just pointing out that sometimes you say the market is good, then flat, then bad. I don’t think I’d be buying much of anything in that kind of market. :slight_smile:

BTW, IF you buy based purely on the possible appreciation alone, just be clear that you’re a speculator and not a real estate investor.

If you could buy a property that has went up 10% or more annually for almost 10 years, is in the best community in the city, is in high demand, and in a place where land is running out in the city and is gone in the master community, would you buy it?

Probably not, and especially not if I’m buying at today’s FMV. Historically, RE markets cannot substain a 10% or higher appreciation index for a number of years UNLESS there is a large population growth rate (along with a number of NEW housing) to go with it. Even then, it’s only good IF the area’s capital income maintains the basically the same, or better, index. If you have to have a $500/month negative cashflow just to rent the home, then the market’s wages haven’t kept up well. When it becomes much cheaper to rent than buy, markets will usually be due a price correction.

Raj

11

I probably did not pay too much attention as I was just throwing out a scenario to ponder. Let me clarify that I should have said soft market meaning SALES. The appreciation is there but sales are slow. In other words, you normal market.

How do I know the appreciation is there? Right, that is just a guesstimate by me. I know what the area has done for the last 8 years, that there is no more left, and what are the critical factors are for the area. You would have to know Vegas very well to even understand. Vegas is one of those places that is not like the outside world. Still, nothing is for sure in the world. It was just a play scenario though.

The house that is owned by the 50k dropper is being sold. He had to sell and now. What happened was he started off asking for max price in a buyers market (we are over supplied right now). Time passed, his deadline came closer and soon he was in a corner.

"Probably not, and especially not if I’m buying at today’s FMV. Historically, RE markets cannot substain a 10% or higher appreciation index for a number of years UNLESS there is a large population growth rate (along with a number of NEW housing) to go with it. "

Look who just described one of the factors of Las Vegas. Grats!

I have lived here for 25 years and we still have not stopped growing. 6k plus a month and counting. For decades our growth has been this way. We now lead the nation in educated migration, meaning people with degrees who graduate and then move here. We will see another 10%+ job growth this year.

We sell more than 3,000 homes a month (that are on the MLS). If the supply gets back down to 8,000ish or less, we will experience another big spike.

The $500 figure I quoted was just fictitious really. Again, just see what people think. :smiley:

60% of our new resident comes from California and many are looking to buy. Many rent to feel the area out and then jump in.

Something has to happen here. Our mayor is set on the manhattanization of Vegas. We have a ton of high rise condos coming from $500-millions. Lofts at 600k+, condos in Summerlin from 800k+. In other words, higher priced property is moving in. Can’t wait for the new Bus/Rail system thing that is going to connect SW to downtown.

I could go on about more stuff but no point. What happens in Vegas, stays in Vegas. — so sick of that line.

Nothing to see here. Move along . . .

12

you may have lived in vegas for 25 years but how long were you investing and how many market cycles have you seen?

all of my CA property is in escrow right now. i’m moving to safer places. places where i know for sure i’m going to see 50-60% increase over the next couple of years. Vegas sure isn’t one of them. but maybe you’re right and you’ll make out like a bandit. however i’m definitely not convinced.

13

I can only speak for myself…there is no way I’m going to lose 6K in a year for a CHANCE to make money down the road. There are too many better things I can do with 6K.

14

You know Real Estate is in a bubble when the average wage earner in a particular locality can not afford to buy an average home. Sure Real Estate is expensive, it is suppose to be. The only way these average people can even afford a home is through “creative financing”, thourgh ARMs, Negative Amrotz, pick a payment, or any of these scams. Why would anyone pick an ARM mortgage as their primary mortgage on their primary residence, when 30 year mortgage rates are at all time lows? Those people need their heads examined! Once the Feds give the banks a well deserved spanking and creative financing is no more, you will see Real Estate take a well deserve correction. It will happen, the question is when.

15

FYI: a 30 year loan is the worst loan out there.

Unless you are going to keep the loan for the full 30 years.

Who does that anymore.

At a 6% rate the first yr you are paying 400% interest and the only year you pay 6% is the 29th year.

I am not a mortgage broker just an investor, but its not hard to figure out if you do research.

16

What market would that be? Want to make sure I stay out of there.

One thing about Vegas, I can’t imagine any place I would stay for 30 years. The town moves fast. A decent area can become ho-hum in 3-5 years.

A halt has to happen here in time. We have room to grow though and that halt is probably years out at least. The home prices are shocking to those of us who lived here when the prices were dirt cheap, but they are not out of the range of buyers yet.

17

I’m not a mortgage broker (by far), but I would like more explanation on why a 30-fixed at these historically low rates is the worst thing out there.

I lock in at a decent rate, I know what the payments are going to be and I have my tenents pay the note via their rent. If I were to put an ARM on my properties, I am taking the risk of an increase in payment – to convert the note to a fixed rate at a future date will cost more money.

I’m just curious as to the logic – if mine is flawed, I’m ready to learn more. I hate to pay for money, especially more than once, but if there is a better way – I’m all ears (or eyes) LOL.

Thank you!

18

The property will go up in value $35-40k over the next 12 months and 80k+ over the next 2 years. You know this will indeed happen with a dry market and more if the market heats up again.

The descerning factor is if you know the property will increase at those levels in the next 1-2 years. Since no one has a crystal ball that can foretell the future, even a HOT market today can be a bust tomorrow.

I found the following on a friend’s blog, which seems to follow this discussion:

[i]Real Estate markets are in one of three phases:

  1. Expansion Phase (3 to 5 years)- This the very beginning of a boom market. Its early in the phase , so most of the investors do not understand the potential opportunities. This is when the money is really made and the savvy investors make their bets. The best way to track this type of market is to be on top of the market data and be able to extrapolate trends.

  2. Absorption Phase (4 to 7 years)- The “cat is out of the bag” This phase is when everybody is jumping in to get a piece of the Real Estate action. The builders are selling like crazy, everybody is talking about the growth opportunities.

  3. Contraction Phase - Market begins to shrink and happens very quickly. This phase will stay the same UNTIL something significant happens to bring it out. i.e., IBM comes to town for employment…[/i]

Right now, one can say places like Arizona are in Phase #2, while Austin is more like Phase #3 (and probably starting to enter Phase #1 again).

19

Tami,

I’m not in Wallace’s brain, but I think that I can explain the reasoning behind the comment.

IF you are going to be a landlord and DO plan on holding the property for 20-30yrs, then locking in a low fixed rate now is probably the best option.

However, historically, homeowners tend to live in a place 5-7 years before selling again. Since you can get ARMs in that range, it is usually a better option than a fixed rate. If you can get a 6% fixed, you’ll likely be able to get around 4% on a 5-7 yr ARM. The interest savings is alot. IF you apply what you would have paid in interest during those years to the principle, then you’ll pay down the loan much faster. At that point, even if you do keep the property and need to refi into a fixed rate loan, you’ll be have a lower LTV to work with.

If you’re an investor who intends to sell the property, either immediately or through L/O’s or similiar, then ARMs are the best way to go. They increase your cashflow, and reduce your interest paid, increasing your net profit.

Raj

20

Some good thoughts.

Right now Vegas is in the gluttony phase. When the the demand side over took the supply side, builders rushed to get permits and started building like crazy. Well building takes time so their efforts were not immediately seen. Enter today, these efforts have come to light and our market has a healthy supply, thus craziness has slowed.

However, we new homes are being gobbled up, condo towers are being sold out, and once the current new development supply starts to thin to regular, we are possibly 2-4 months away from entering a demand side market again. It is very exciting to watch.

Right now we are selling just over 3000 resale homes and 600+ condos per month. This is with the huge supply of new development that came. For Vegas to stay clam, the new development would have to keep coming at the large numbers it has been or resale homes will experience a sales boom. They can’t keep this up for too much longer because of our land issues. I think we could stay a softer market for the next 24 months even and then explode again. New home developments are constantly selling out, having large waiting lists, and raising prices every 2 weeks by thousands of dollars with no problem.

We are also working on building a complex that will make us the furniture distribution capital of the west, among other things. In 2007, we are going to become the first city to host the NBA all-star game who does not have a NBA team. Thanks in large part to the bros who own the Palms and Sac Kings for helping the NBA take a peak at us.

All the big names are in Vegas or coming to Vegas. Exciting times.