Selling Residential Rentals, Going Liquid

[cute fuzzy bunny]

We've got a huge disparity between rents and home prices here in norcal, and its going to be made worse. A *ton* of apartment buildings are being built and they just cant rent them. Right now you can get 2+ months of free rent and a $99 security deposit at a lot of the new and older buildings. However, rents between a small 2 bedroom apartment and a small 2 bedroom home are roughly the same, making it tough to rent in a building.

Next step I guess is to convert the buildings from apartments to condos, flooding the market with those. I understand some developers are going this route, building apartments and renting for a year and then converting because the requirements to build a condo are more stringent than building apartments.

 

[Martha]

The condo conversions are going strong in the Phoenix area. Enough property has left the rental market to cause rents to finally increase and vacancies decrease. The LLC in which I am an owner finally closed on the sale of what had been a relatively poorly performing rental property in the Phoenix area. We owned it for three years. Looks like about a 75% return on our cash investment over that three year period. So after being flat for a while, rental property prices seem to be rising in that part of the country.

 

[Texas Proud]

OK, try this on for size...

Sell the house you currently live in and no capital gain...

Move to one of your 'rental' properties and live there for two years...

Sell this as your home and no capital gain...

Repeat (until you reach your limit on doing this)...

 

[greg]

Here's another little scary piece about the housing bubble: http://www.kitco.com/ind/schiff/jul062005.html

Martha didn't mention that the 75% we made was primarily due to the carry trade times two: We borrowed long AND we borrowed short. We were very leveraged. It wasn't so much our skill at slowly flipping excellently chosen properties but, rather, our ability to talk lenders into foolishly loaning us way too much money. Actually, the GP did all the talking. Leverage can be a wonderful thing when it works . . .the way you anticipate.

So . . . let's all keep the party going for a few more months or even years.

 

[BristolBane]

Here's another one for ya. Get yourself a nice doublewide on the beach for a cool $1.4 million (land not included).
_________________________________________________
http://www.usatoday.com/money/perfi/housing/2005-07-05-million-dollar-trailers_x.htm

MALIBU, Calif. — The crazy California real estate market has come to this: a million-dollar trailer.

A two-bedroom, two-bathroom mobile home perched on a lot in Malibu is selling for $1.4 million. This isn't a greedy seller asking a ridiculous amount no one will pay. (Photo gallery: Mobile home boasts of spectacular views)

Two others sold in the area recently for $1.3 million and $1.1 million. Another, at $1.8 million, is in escrow. Nearby, another lists for $2.7 million.

"Those are the hottest (prices) I've ever heard," says Bruce Savage, spokesman for the Manufactured Housing Institute. He says prices in another hot spot, Key West, Fla., top $500,000. As if the price isn't tough enough to swallow, trailer buyers:

 

[justin]

Here's another little scary piece about the housing bubble: http://www.kitco.com/ind/schiff/jul062005.html

Red flags in article: author refers to medium family income and medium home prices. Caveat reader…

 

[REWahoo]

Red flags in article: author refers to medium family income and medium home prices. Caveat reader…

medium def. "... thought to have the power to communicate with the spirits of the dead or with agents of another world or dimension."

So family incomes and home prices are 'out of this world'?

REW

 

[greg]

Thanks, I read "median." But everyone knows extra large (XL) family income is well over $1,000,000 and XL family homes run $2,000,000-$4,000,000.

I go to Kitco because articles over there loosen the oxidation on my tinfoil hat liner. The Magambo (on Thursdays) makes everything shiny again 8).

 

[Mr._johngalt]

Here's another little scary piece about the housing bubble:  http://www.kitco.com/ind/schiff/jul062005.html

Martha didn't mention that the 75% we made was primarily due to the carry trade times two:  We borrowed long AND we borrowed short.  We were very leveraged.  It wasn't so much our skill at slowly flipping excellently chosen properties but, rather, our ability to talk lenders into foolishly loaning us way too much money.  Actually,  the GP did all the talking.  Leverage can be a wonderful thing when it works . . .the way you anticipate. 

So . . . let's all keep the party going for a few more months or even years.

Maybe the lenders were not "foolish". After all, "lenders" by definition
need to "lend" to make money. Compound interest is not the wonder
of the financial world, it's leverage.

JG

 

[greg]

Maybe the lenders were not "foolish". After all, "lenders" by definition
need to "lend" to make money. Compound interest is not the wonder
of the financial world, it's leverage.

JG

You're right. Everything the lenders loaned was secured. But . . . I do believe that lenders have become too loose with the housing money--in general. Compound interest should be the wonder of the financial world, not leverage. Virtually every time a country has become seriously overleveraged (whatever that means) something pops. Tulip Mania, South Seas Bubble, American housing bubble, etc. I wouldn't mind if only the guilty were punished for their excesses, but, too often, the innocents get dragged down with them. Mom and Pop hoping to sell their paid for house to fund a secure retirement suddenly find out that the house profits won't support them after the tumble. Arthritic Pop ends up working at Wal-Mart waiting for the market to pop back so he can get his money out.

I like stability, or at least knowing that there's a 50% chance that some of my money will be there if I make it to 90 years old. Darwinism, survival of the fittist, shouldn't have to be the prime directive in a civilized world. Leverage isn't a wonder of the world. It's a dangerous tool when not used carefully. So are loose lending practices. Overwhelming greed on both sides of the loan causes the difficulties. Anyway, that's how I see things.

--Greg

 

[LEX]

One indicator that a market is soon destined to drop is when there is more and more media attention focused on it.  I note with interest that housing has become a staple of the media, both those that praise the upside and those that warn of impending doom.  I have speculated and made great money over the decades, but it was in out of favor mining stocks that I understood as grossly undervalued out of emotion and not recoverable ore. I operate from the premise that housing (at least in Phoenix where I live) will drop down once the last overleveraged wave of flippers finds that there are no buyers banging the door to bail them out.  Higher mortgage costs will factor in, but the real limitation is the wages in the area and the ability for qualified buyers to come into the market and buy the flippers inventory.  Once the short term speculators dump their inventories the chain will pull others equity (and market expectations to value) down with it. If you want fundamental income from real estate open a hotel, apartment complex or casino, but I believe single house residential real estate will implode on its own weight soon. 

 

[Mr._johngalt]

Maybe the lenders were not "foolish".  After all, "lenders" by definition
need to "lend" to make money.  Compound interest is not the wonder
of the financial world, it's leverage.

JG

You're right.  Everything the lenders loaned was secured.  But . . . I do believe that lenders have become too loose with the housing money--in general.  Compound interest should be the wonder of the financial world, not leverage.  Virtually every time a country has become seriously overleveraged (whatever that means) something pops.  Tulip Mania,  South Seas Bubble, American housing bubble, etc.  I wouldn't mind if only the guilty were punished for their excesses, but, too often, the innocents get dragged down with them.  Mom and Pop hoping to sell their paid for house to fund a secure retirement  suddenly find out that the house profits won't support them after the tumble.  Arthritic Pop ends up working at Wal-Mart waiting for the market to pop back so he can get his money out.

I like stability, or at least knowing that there's a 50% chance that some of  my money will be there if I make it to 90 years old.  Darwinism, survival of the fittist, shouldn't have to be the prime directive in a civilized world.    Leverage isn't a  wonder of the world.  It's a dangerous tool when not used carefully.  So are loose lending practices.  Overwhelming greed on both sides of the loan causes the difficulties.  Anyway, that's how I see things.

--Greg   

Well, I see your point, but leverage has built fortunes (many). Would
you prevent somehow people from loaning/borrowing? Besides, people
would get into trouble anyway. They always do. Nope, I say let the money
flow. Some will prosper and some will stumble. That's free enterprise, and the
losers can go on Jerry Springer or Oprah and tell everyone how they were
screwed by the system because they borrowed money and couldn't pay it back.

JG

 

[tryan]

I believe single house residential real estate will implode on its own weight soon.

... and cash will be king.

One stategy to consider is hedgeing. I've been selling a property very year or 2 since 2000. Want to ensure I am not left holding the proverbial "bag" if/when the bottom falls out. But also hope to minimize what's been left on the table. Sold one this year, will probably sell another next year. Depends on having a vacancy or if the tenants want to buy ... we'll see.

Dumping all 3 today is a hit or miss. Spaceing the sales by a year or two will get most profits off the table (minimizing down side). But continue to hit the up side if that's what's in the cards.

Just more food for thought.

 

[haha]

You're right.  Everything the lenders loaned was secured. 

In a manner of speaking, Greg, but not secured in the sense that you or I would define security if we were going to originate and hold a home loan. We would do better appraisals, we wouldn't do no- docs or zero amortization loans, we would only make floaters and we would look not only to today's borrower income, but to other assets that could be attached.

In other words, we would make no loans. 

Today's institutional lenders engage in a game of Old Maid. Except everyone knows in advance who the Old Maid is. It is the unfortunate taxpayer! (Via Fannie and Freddie)

Ha

 

[greg]

Well, I see your point, but leverage has built fortunes (many). Would
you prevent somehow people from loaning/borrowing? Besides, people
would get into trouble anyway.

JG

I'm an incrementalist at heart. If you're not fairly sure what you're doing will work, then don't drag others down with you. If I were in charge :, I think 5% down, minimum, on a home mortgage would be appropriate. This zero down stuff is getting crazy. Commercial property requires 25% down, for the most part. When people don't have money in the game, the craziness really starts. Home prices, like stock prices, are set on the margin. Cooling the margins a bit wouldn't hurt. Protecting people from themselves a bit isn't neccesarily a bad thing. Protecting innocent people is a good thing.

Unbridled free enterprise isn't a good thing. I'd like to see the brakes put on somehow befor the bubble pops, mildly. Greenspan is an idiot: Fixing the problem after the damage is done is pure craziness. That's my story, and I'm sticking to it.

--Greg

 

[greg]

In other words, we would make no loans.

Ha

Ha,

I concur--ha ha ha ha.

If I ever make a RE loan to anyone, I certainly invite you to steal away the DW, run off to Argentina with her, and put her to work in the Salsa trade. I would loan you the money to do that . . . maybe. She can't dance though; it's one of the primary reasons for marrying her. She mostly thinks it's goofy wiggling around. I have caught her dancing with the dog once or twice though. But she swore she was just looking at the poodle's front feet to see if something was wrong. Now that I think about it, I'm worried. Never mind.

 

[Mr._johngalt]

Well, I see your point, but leverage has built fortunes (many).  Would
you prevent somehow people from loaning/borrowing?  Besides, people
would get into trouble anyway.

JG

I'm an incrementalist at heart.  If you're not fairly sure what you're doing will work, then don't drag others down with you.  If I were in charge :, I think 5% down, minimum, on a home mortgage would be appropriate.  This zero down stuff is getting crazy.  Commercial property requires 25% down, for the most part.  When people don't have money in the game, the craziness really starts.  Home prices, like stock prices, are set on the margin.  Cooling the margins a bit wouldn't hurt.  Protecting people from themselves a bit isn't neccesarily a bad thing.  Protecting innocent people is a good thing. 

Unbridled free enterprise isn't a good thing.  I'd like to see the brakes put on somehow befor the bubble pops, mildly.  Greenspan is an idiot:  Fixing the problem after the damage is done is pure craziness.  That's my story, and I'm sticking to it.

--Greg

NO NO NO! Let the "market" control this stuff. Some will prosper. Some will
go bust. That is how it should work. Don't protect the unlucky, dumb
and/or those without creativitry and/or foresight. Keep government out of it.
Dog eat dog.............live or die..............every man/woman for him/her self.
This PC/protect- everyone- from- their- own- ignorance has gone way too far.
Not what this country was founded on and I doubt the founders ever
even considered such thoughts.

JG

 

[greg]

NO NO NO! Let the "market" control this stuff. Some will prosper. Some will
go bust. That is how it should work. Don't protect the unlucky, dumb
and/or those without creativitry and/or foresight. Keep government out of it.
Dog eat dog.............live or die..............every man/woman for him/her self.
This PC/protect- everyone- from- their- own- ignorance has gone way too far.
Not what this country was founded on and I doubt the founders ever
even considered such thoughts.

JG

You're right! Now that I think about it, we should eat our young too.

I believe the Preamble to the Constitution says "to ensure domestic tranquility." So one of the guiding principles that our forefathers used in shaping the Constitution was . . . ? So what part of the Constitution or Preamble don't I understand? What part of the Constitution says we need to institutionalize and perpetuate a dog eat dog world. That we should continuously be vigilant in our quest for animalhood?

I'm not interested in a snake fight though.

--Greg

 

[Mr._johngalt]

[
NO NO NO!  Let the "market" control this stuff.  Some will prosper.  Some will
go bust.  That is how it should work.  Don't protect the unlucky, dumb
and/or those without creativitry and/or foresight.  Keep government out of it.
Dog eat dog.............live or die..............every man/woman for him/her self.
This PC/protect- everyone- from-  their- own- ignorance has gone way too far.
Not what this country was founded on and I doubt the founders ever
even considered such thoughts.

JG

You're right!  Now that I think about it, we should eat our young too.

I believe the Preamble to the Constitution says "to ensure domestic tranquility."  So one of the guiding principles that our forefathers used in shaping the Constitution was . . . ?  So what part of the Constitution or Preamble don't I understand?  What part of the Constitution says we need to institutionalize and perpetuate a dog eat dog world.  That we should continuously be vigilant in our quest for animalhood?

I'm not interested in a snake fight though.

--Greg

Me neither, I happen to believe strongly that everyone is better off if
each of us pursues our own happiness. Happiness is not guaranteed,
only the pursuit of it. I say, get government out of the way and let
people work out their own way. Some will fall through the cracks and
at some point must be protected. Otherwise, some will prosper, some will
not. Some will be rich. Some will be poor. That is nature at work.
Survival of the fittest and all that. It worked for thousands of years until
PC/bleeding heart liberalism took root. End of rant!

JG

 

[Martha]

John, I just logged in as my DH and fixed his quotes. You and Greg are having troubles lately quoting. Do you want me to fix your's too? I'll need your password, which might be fun.

 

[Mr._johngalt]

John, I just logged in as my DH and fixed his quotes.  You and Greg are having troubles lately quoting.  Do you want me to fix your's too?    I'll need your password, which might be fun. 

Martha, there is hardly anyone that I would prefer messin' with my quotes.
I am quite serious. OTOH, I think it might be safer if we all got into a hot tub and bared our feelings. When is good for you?

JG

 

[Martha]

Ha,

She can't dance though; it's one of the primary reasons for marrying her.

It's you who can't dance, silly boy. And I thought you married me because I ate my vegetables.

 

[Martha]

Martha, there is hardly anyone that I would prefer messin' with my quotes.
I am quite serious. OTOH, I think it might be safer if we all got into a hot tub and bared our feelings. When is good for you?

JG

Greg and I have the laptop in the hot tub right now. Come on in.

 

[Mr._johngalt]

You're right!  Now that I think about it, we should eat our young too.

I believe the Preamble to the Constitution says "to ensure domestic tranquility."  So one of the guiding principles that our forefathers used in shaping the Constitution was . . . ?  So what part of the Constitution or Preamble don't I understand?  What part of the Constitution says we need to institutionalize and perpetuate a dog eat dog world.  That we should continuously be vigilant in our quest for animalhood?

I'm not interested in a snake fight though.

--Greg

Hey, this reminds me of a quote I like.............

"The (fill in the blank) would rather eat their children than part with money,
and they love their children."

JGF

 

[greg]

"The (fill in the blank) would rather eat their children than part with money,
and they love their children." Smiley

JGF

You're baiting me, right? I've rarely seen a better set up.

Martha--The laptop isn't working. Do you think it's wet? .

--Greg