Investment in Phoenix property

[Martha]

We have invested in various rental properties and condo developments over the past few years with the same developer/promoter. Most of them are done. All made good money but one. The promoter has made an offering for investors in a property just outside the Phoenix city limits. I'll tell you a bit about the property, but not enough. It is rental property. Built in 2000, looks in good shape. The neighborhood is decidedly middle to lower middle class. Three hundred plus rental units. Replacement cost 45 million, purchase price 30 million. If property continues to perform as it has over the last couple of years, there would be a 20% return in the first five years. On the other hand, the mortgage is interest only for those five years and that is part of the reason the return is so high.

It would be a mid five figure investment.

So [-]Arizonites, Arizonians,[/-] those from Arizona, how are things going down there? What is the water situation? I understand that the recession has hit you hard, how diversified is the economy? What is employment like? I know it is impossible to time the bottom, but the price really looks good.

 

[LOL!]

phoenix real estate for investors was written up in the ny times in the last week. did you see the article?

 

[Martha]

No I didn't. I'll look for it.

 

[Westernskies]

Martha,

We've been looking at investment properties here in AZ- PM me with specifics and and I'll tell you a bit about the EV market; just not enough


No water issues at present. Reservoirs are all at 95%+ of capacity; we had a great spring runoff. Should be OK for the next couple of years anyway. FWIW, I've been here 8 years and have never had any issues with water rationing or shortages.

Come on in, the water's fine...

 

[calmloki]

I'd be kinda iffy at $100k/unit. MLS has 2145 condo/townhouse units listed and 6586 houses listed right now:
Phoenix, AZ, Real Estate Listings and Phoenix Homes for Sale - REALTOR.com® Lots of newish freestanding homes for under $100k. Air quality seems to be an issue down there - i was drooling over the cheap newish homes in the Buckeye & Queens Creek areas, thinking winter getaway house, but may think further south...

 

[crazy connie]

location, location, LOCATION! Also, the dynamics of the market are changing a lot. The illegal immigrants have been heading south by the droves as they can not get work. Some of the elementary schools have dropped student populations by about 20%. One of the mainstays of the economy continues to be tourism which is understandably on its lips. Rental rates are full of incentives and there has been a large rate reduction across the Valley. Several large complexes have gone tits up and the AG is busy because mtc is not being done. Before investing that kind of money, come on down and I will give you an unbiased nickel tour. I am not intrested in investing in this type of venture!

 

[NW-Bound]

Being an Arizonan, I felt compelled to throw in my 2 red cents.

Hi, Westernskies newcomer! I have been here 34 years, and we have not ran out of water (knock on wood). Just came back from Nevada, and boy oh boy, I appreciate how "green" Arizona is, particularly the northern part and the Mogollon Rim It's nothing like the eastern states of course, but we do get rain once in a while.

Anyway, the article LOL referred to might be this one.

http://www.nytimes.com/2009/05/24/business/24phoenix.html?pagewanted=1&_r=1

Until I read it, I did not realize there have been investors scooping up these houses. You see, I am not an RE investor at all, having bought only 3 houses in my life, 2 of which I still live in. So, I can't tell you a thing about RE as an investment, particularly rental units. I do know as anyone else that it is a good time to buy one to live in.

About unemployment, I might be biased here but the local economy is broader-based than some hard-hit areas in neighbor Western states. There are manufacturing industries, so we are not all service-based or agriculture-based. Not being an economist, I can only provide one factual number: April unemployment in Phoenix was 7.8% (7.9% in March), compared to the national number of 8.9% in April.

 

[Martha]

I'd be kinda iffy at $100k/unit. MLS has 2145 condo/townhouse units listed and 6586 houses listed right now:
Phoenix, AZ, Real Estate Listings and Phoenix Homes for Sale - REALTOR.com® Lots of newish freestanding homes for under $100k. Air quality seems to be an issue down there - i was drooling over the cheap newish homes in the Buckeye & Queens Creek areas, thinking winter getaway house, but may think further south...

$78 a square foot. It is actually more than 400 units, I had a typo.

 

[Ronstar]

I'm a part time Arizonan, and spend a lot of my time in Az looking for real estate - mainly sf houses, not rental. IMO, water supply doesnt appear to be a problem yet. The economy is somewhat diversified, but most of the people I talk to are in real estate or tourism , and these have taken a huge hit.

Your investment idea seems ok, but I think prices can still come down. Good ROI for the first 5 years, but how liquid / profitable will it be after that? I'm also concerned about a saturated rental market - a lot of condos are going rental because they cant sell them.

 

[FUEGO]

Is running out of water a good thing or bad thing for property owners/speculators? If water runs low, won't they stop (or severely restrict) issuing development permits, effectively creating artificial restriction in housing supply and therefore increases in the market price (with a shortage/scarcity)?

 

[NW-Bound]

Argghh... Sponge bath isn't fun.

Arizona not only has its own watershed but also gets its allocation of water from the Colorado River via the CAP (Central Arizona Project) canal. Phoenix so far does not have water shortage problems, compared to the LA area. Tucson, a major AZ city near the US-Mexico border, is another story. It is drier with no easy access to water, and the landscape is arguably closer to that of Nevada.

 

[Martha]

I'm a part time Arizonan, and spend a lot of my time in Az looking for real estate - mainly sf houses, not rental. IMO, water supply doesnt appear to be a problem yet. The economy is somewhat diversified, but most of the people I talk to are in real estate or tourism , and these have taken a huge hit.

Your investment idea seems ok, but I think prices can still come down. Good ROI for the first 5 years, but how liquid / profitable will it be after that? I'm also concerned about a saturated rental market - a lot of condos are going rental because they cant sell them.

I'll never know the bottom until it is long gone. Whatchagonnado. I understand that a number of condos are going rental, but many of them were condo conversions from rental in the first place. I also believe that many of the conversions to rental have already occurred as the market drop is now a couple of years old. Do you know any more about the issue?

 

[tryan]

They need to fix the interest rate while things are low ... but - of course - nobody is financing these things. Rates will jump then 20% return will become much, much less.

 

[Martha]

Yes, I would not expect long term 20% returns.

 

[Ronstar]

I'll never know the bottom until it is long gone. Whatchagonnado. I understand that a number of condos are going rental, but many of them were condo conversions from rental in the first place. I also believe that many of the conversions to rental have already occurred as the market drop is now a couple of years old. Do you know any more about the issue?

I don't know much more, but it seems like a lot of people with 2nd homes/condos have started renting them out. My HOA board brings it up occasionally at mtgs as an increasing 'problem'. Its probably not a big number in the grand scope of things. And yes - the conversions back to rental were probably rental to begin with.

On the flip side, one would think that rentals would get stronger since its now tougher to get a mortgage. If the vacancy rates at the Phoenix complex are minimal, and the leases of current residents are healthy, and you're comfortable with your developer and this type of investment, it may make sense to throw some $ at this.

 

[Martha]

Building has strong occupancy. Our developer is of the opinion that part of the mortgage backlash will be more renters and less of a push to own. Until people forget and we do more irrational exuberance.

 

[calmloki]

Martha, You've probably already been there, but City-Data has a very active group of forums on the different states and areas and towns within those states. Plug in your complex name or development or area and see what the dish is from the crowd:
Phoenix area Forum - Relocation, Moving, Local City Discussions - City-Data Forum
I used it when looking at Buckeye.

 

[tuixiu]

Water situation has definitely been improving with the natural (yet always forgotten) cyclical nature seeming to be on the wax.

I think one thing Phoenix has and will continue to have going forward is strong growth, as growth can float an economy even with underlying weakness. There was just an article here:

The biggest U.S. metro areas in 2025 - Local business- msnbc.com

3. Detroit will drop out of the top 10, with Phoenix replacing it
Detroit and Phoenix are two of the most economically troubled areas in America today, but their future prospects are considerably different. Detroit is the only metro expected to slip from the top 10 during the next two decades. It’s projected to fall from 10th place in 2005 to 14th place in 2025, losing 59,500 residents during that span.
Phoenix, on the other hand, is likely to bounce back strongly from its current problems. Its projected 2025 population of 6.9 million will elevate it to seventh place, up from 13th in 2005.

 

[Zathras]

I would agree Phoenix will bounce back quicker than Detroit. That isn't saying much though.
Long term, I wouldn't touch real estate in Phoenix. I expect their water situation to get worse over the years. Perhaps better in the short term, but much worse over the next few decades.
They continue to build water parks and golf courses. And as population increases, so will water usage.
A drought now which is just a bad deal, will be critical with more people.

 

[NW-Bound]

They continue to build water parks and golf courses. And as population increases, so will water usage.

68% of water usage in AZ is for agriculture. A large percentage of that is to grow cotton, a subsidized crop that might be cheaper to import. Politics trump economics, as usual.

 

[heyyou]

Martha,
I'm sure that some investors will make money buying Phx RE these days. Consider looking at other deals just to get some comparables to the one you are interested in. There may be a dozen projects for sale, just like that one.

Having lost two years of income in speculative Phx RE in the early 80's, my suggestion is to let the first one pass. If the rental market does hold up, more deals will be available.

For his retirement, my Dad bought 4.5% 30 year bonds in 1967. For his investing life, that was a high bond rate. The next decade was not good for bonds. Be wary of deals on the edge of major changes.

My thoughts are, if the price and the future are both so good, why is the RE up for sale?

 

[tuixiu]

Investors not flipping houses, but renting

Real-estate investors have returned to the Valley in a big way, prompting concerns that the housing market is becoming too speculative to sustain the recent buyer activity.

The lure of once-in-a-lifetime deals on bank-owned homes is driving investor purchases, which experts say account for 50 to 70 percent of recent home-buying transactions. Still, it's the ability to generate revenue by renting the homes to tenants - in some cases, previous owners - that makes the properties such attractive investments.

 

[Martha]

Martha,
I'm sure that some investors will make money buying Phx RE these days. Consider looking at other deals just to get some comparables to the one you are interested in. There may be a dozen projects for sale, just like that one.

Having lost two years of income in speculative Phx RE in the early 80's, my suggestion is to let the first one pass. If the rental market does hold up, more deals will be available.

For his retirement, my Dad bought 4.5% 30 year bonds in 1967. For his investing life, that was a high bond rate. The next decade was not good for bonds. Be wary of deals on the edge of major changes.

My thoughts are, if the price and the future are both so good, why is the RE up for sale?

The ownership group is cash poor and has to divest some properties to raise cash.