You know you're in a bubble when....

[wabmester]

I just saw the surest sign yet that we're near the top of a real estate bubble.   A  blurb in our local paper announced that a group of little old ladies is forming a new real-estate investment club.   It's deja vu all over again, I tell ya.

 

[Cut-Throat]

I just saw the surest sign yet that we're near the top of a real estate bubble.   A  blurb in our local paper announced that a group of little old ladies is forming a new real-estate investment club.   It's deja vu all over again, I tell ya.

It's a least a small comfort that almost no one is very interested in the stock market right now.

 

[John Galt]

Re. "No one is very interested in the stock market right now",
I know I'm not.

John Galt

 

[Cut-Throat]

Re. "No one is very interested in the stock market right now",
I know I'm not.

John Galt

If you ever get interested in stocks after we've had a run-up, I'll immediately drop my stock allocation to 0%

 

[unclemick]

A bunch of new for sale signs up along our strip of highway - fish camps/vacation cabins here have had some big boom/bust cyles over thirty years - looks like a lot of old timers are trying to cash out at the top.

P.S. - got off the phone with the oldest Nephew - didn't buy in San Diego - will rent and wait. If you get held up on I-5 next week by a demasted Creola 32 on a low boy - it's their's - ? Hmmm - put in the water and live aboard - you gotta pay rent at the marina anyway.

 

[Whakamole]

I've seen a lot of for-sale signs in the sticks around Seattle too.

Is it rude to say "I told you so" when the bubble bursts?

 

[unclemick]

Rude? Yes. I left in Dec. 1969, someone up a sign - "Will the last person leaving Seattle, please turn out the lights." When I left my 90 unit apartment building in Kent, 45 units were empty and 13 more were not renewing their lease.

 

[John Galt]

First for Cut-Throat...............I won't get interested in stocks at any time, so you can relax. As to the real
estate "bubble", with so much of my assets in real estate, any trouble there would give me a lot to chew on and would certainly gum up my plans.

John Galt

 

[haha]

Rude? Yes. I left in Dec. 1969, someone up a sign - "Will the last person leaving Seattle, please turn out the lights." When I left my 90 unit apartment building in Kent, 45 units were empty and 13 more were not renewing their lease.

I came to Seattle about that time. It is very hard to remember what it was like, since we have had 30 years of essentially uninterrupted boom since then.

Enough that the downsizing of Boeing operations locally hasn't yet made a lot of difference. Only thing I can say is thank God for Lord Gates and his many minions on the eastside.

I sometiems wonder what would have happened if I had plunged into one of those empty apartment buildings. It would have taken a lot of nerve, since it's hard to cash-flow on a half empty apartment building even if you get it almost for free. Lots of rent concessions were being made to those who did hang on. Probably a strategy to try would have been trying to market limited partnership interests.

I was so out of it though- I think my main concern at the time was the decision made by federal judge Boldt allowing much greater Indian netting of salmon and steelhead on our rivers.

Mikey

 

[unclemick]

Mikey

There was a woman who did exactly that- the limited partnership thing(can't remember her name) and made millionaires out of her partners over the subsequent twenty years or so - I think mainly on rental housing and/or resale of the houses.

 

[Nords]

The Hawaiian word for "bubble" is "Open House".

This weekend we made our usual round of Central Oahu home sales. Spouse only looks at open houses of at least $500K (formerly $350K, soon to be $700K), preferably with comparable 4BR/2.5BA layouts for home improvement & decorating ideas. We've visited a half-dozen homes a month for decades; it's how we discovered our current humble abode and how we'll cherry-pick our next foreclosure.

The first thing that a bubble brings out is all the hopeless homes & marginal real-estate agents. This particular pair included a 10-year-old second-story addition (with a separate staircase entrance) that had installed interior doors at the exterior entrances. The carpenter was replacing them during the open house so that you couldn't help note the rotten frames & carpenter ants running all over. The REA (on her very first open of her very first listing) even had the gall to point out the second-story fridge hole & plumbed sink, claiming that all we had to do was add an electric cooktop and a microwave to have a renter-ready (yet illegally zoned) apartment. She had no idea whether the addition even had a permit ("Good question!"). The side yard was unlandscaped, the walls had been well-dented by four teenagers, and it was built right to the back of the lot (maybe too far, we'd have to check with the surveyor). Original kitchen downstairs, filthy neglected dirt everywhere, everything needed new carpet, sheet vinyl, & paint. $650K, "Please don't waste our time with offers below that".

The second thing the bubble brings out is the speculators, and this other house had a whopper. It's in an upscale newer neighborhood having a reputation for overpriced country-club homes on small lots with unfinished landscaping (red dirt everywhere) and expensive upgrades (like $20K for a dining room). The 4BR/2.5BA 2400 sq ft house was built in '93 on an odd-size lot of 14,000 sq ft (we don't have enough space on Oahu to do acres). Two-story with cathedral ceilings, luxury master bedroom & bath, backing up on the ravine of a municipal park and an ocean view peeking over the horizon. Later I learned that it had last sold in '98 for $500K. It was listed yesterday for $845K, "Please add your offers to the pile by the door on your way out".

The FSBO was on his first open. He sure didn't know much about the place and he finally admitted that he'd only owned it for two years and had never personally lived there. ("But I fell in love with it the moment I saw it and I had to have it!") I asked about renters and he said that it had been VACANT for "A COUPLE YEARS". I asked how his neighbors felt about that ('cuz my next step was to ask them if the house had really been vacant!) and he said that he'd paid a retired police officer next door to keep an eye on it. The house was stripped bare with a neglected stale smell about it and only a couple structural problems so I'm inclined to believe him. He claimed he was selling to raise cash for "other projects"; he was liquidating all four (!) of his homes.

I chased this one all over the internet tax records and I couldn't figure the guy out. No sale was recorded since 1998 so I think he'd bought the home in Jan 2003 (when he'd incorporated his LLC) on an installment sale for the deed (which was why the transfer hadn't been recorded yet). He was probably paying the former owner installments on $600K while leaving it vacant! I guess he was going to bundle his four homes into a 1031 exchange (on an apartment block?) so I can only speculate how much he was paying lawyers & title companies.

I can't imagine a $600K installment sale on the assumption that the market would keep rising, especially with Hawaii's previous real estate bubbles. I can't imagine leaving a home VACANT for TWO YEARS. And I can't imagine doing that with one home, let alone four. But most of all, I can't imagine having that much capital wrapped up in that much real estate. Clearly I fail the "Warren Buffett diversification test". For having the chutzpah (or idiocy) to build this real estate empire, I hope the seller clears seven figures on the liquidation.

BTW the house assessed in Oct 2003 at $540K for $1890 annual property taxes. He'll probably get at least $850K for it, and that's with no commission.

 

[haha]

Interesting stories, Nords. Funny thing about a bubble- you can get really rich very fast, or broke very fast. It doesn't appeal to me, I just hate chasing prices. But "flipping" and such bubble maneuvers have made lots of money fast for some.

Mikey

 

[trumpeting_angel]

Does anyone read John Reed?

I bought a couple of his books (how to make money in real estate) and he just lists about every idea on the planet. Some of them sound off-the-wall.

I still hope to become a small-time real estate magnate, I mean, investor. But I walked my REA (buyer's agent) all over 4 towns looking at properties - I only want a bargain. Prices are so high....

Anne

 

[wabmester]

Re: The Hawaiian word for "bubble" is "Open House"

I can't imagine leaving a home VACANT for TWO YEARS.

I'm not surprised.   If the P/R ratio in HI is anything like it is here, it doesn't make a lot of sense to go to the trouble of renting if you plan to flip in a couple years.

I only pay attention to waterfront property.   We're seeing appreciation of about 20%/year, but rents have been flat.   A really dumpy waterfront sells for about $500K and might rent for $1300 (a cap rate of about 3% if you assume 100% occupancy and no expenses).   So, if you expect 20%/year and you might juice that to 23%/year with tenants, it's easy to see why you might skip the hassle of renting.

 

[cute fuzzy bunny]

Just finishing up a $40k remodel to the wifes old house, and we may let it sit for a year or two or three before we sell it. If we sell it. Havent made up our minds yet. My dad might sell his house and move into it, but he likes his little Sun City house. This one is bigger and has a huge hunk of land, but the neighborhood is nowhere near as nice, although its also a lot closer to his impending grandchild.

I probably wouldnt rent it because I'd be worried about renters doing more damage to the brand new stuff we just put in offsetting any rental income. No mortgage on the place and a 13 year old proposition 13 property tax of $470 a year. Try getting that on a 1500 sq foot house on a third of an acre anywhere...

So with out of pocket expenses of about a grand a year for property taxes, insurance, and utilities (and a watchful next door neighbor), we might let it sit a while.

 

[Nords]

Hope you've seen a recessed housing market, Wab.

I'd NEVER foresake cashflow in favor of anticipated cap gains when I might be able to obtain BOTH.

Renters can be a hassle, but the owner would still be ahead even after pessimistic projections for full-service management & passive income. Hawaii renters would have no trouble signing a one-year lease, going month-to-month afterward, and then being asked to leave a month before the place goes on the market. Market rent for this property would have conservatively been $2000/month; I would've gone for $2200/month.

As a long-term owner, I've fantasized about waterfront property... getting up in the morning, checking out the surf from my livingroom window, and grabbing a board. Then I remember the tsunami flood zones (clearly mapped in every Hawaii phone book) and hurricane storm surge (like Iniki in 1992). Even if I was renting, I think I'm happier on my hillside with a short drive to the break.

Here's another cautionary tale. Spouse & I arrived in Hawaii in early 1989, at (in retrospect) the height of the Japanese real-estate bubble. We looked at over 50 houses and settled on a "quaint fixer-upper" 4BR 2BA 1870 sq ft on a 5400 sq ft lot. Tenant abuse & landlord neglect had beaten the price down to $277K, more than we could comfortably afford, but the only realistic choice.

In May 1990 we found a North Shore "bargain", but that's not the point. Inflamed with consumer lust we put our house on the market. It had fresh paint and a new kitchen floor but not much else. The carpeting and the "landscaping" were crap. The master bathtub had leaked through its adjoining wall so the bathroom had been ripped down to its studs while we looked for a plumber. We had a new Jacuzzi whirlpool tub sitting in the garage but no progress.

We put that puppy on the market for $425K (14 months after its last sale, a 50% gain) and we couldn't answer the phone fast enough. Today I wish I'd shot video of ourselves proudly displaying a demolished bathroom and a garage Jacuzzi, promising a $5K "redecorating allowance" on the sale price.

The following week (14 years ago this week!) Hussein invaded Kuwait and the Japanese discovered that their economy was built on a house of cards. Our "buyers" pulled their contingency ripcords and vaporized. Subsequent open houses were visited only by tumbleweeds. We pulled out of our North Shore purchase and started reading plumbing books (but that's another story too).

By 1993 our home was worth $300K (neighborhood comps). By 1996 it was worth $250K. By 1998 a neighbor a couple doors down sold our model at $235K. We contemplated bottom-fishing a couple properties but we were too busy with work to do the job right, and frankly we were beginning to wonder how low this would go.

Things began to turn around in 2000. Today that home is worth $445K (and it has a very nice bathroom). We joke about putting it on the market but we've had 100%-occupancy rental income for seven years and this is not a good market for a 1031 exchange. And the market rent is $2400/month.

But all those years of rental income have built up a nice stash. When that next recession hits, we're goin' property shopping.

 

[wabmester]

Nords, nobody reads these subject lines

Hope you've seen a recessed housing market, Wab.

Nords, I have no doubt that HI saw a recession, but many other areas saw the same housing bubble collapse in 1990 without a tourism-induced recession. So, chances are that you won't have to wait for a full-on recession to go on your buying binge.

As far as rental income goes, if you can get $2400/mo from a $277K investment, that looks pretty damn good to me. But if you have no mortgage, and your place is now worth $445K, then you're getting something like a 6% yield. Not bad, but at those numbers, I'd start to think about selling and taking the cap gain. If your market starts to really get out of wack (like ours with a 3% yield), then that's about as good an indication that you're going to get that you're in a bubble and should take some money off the table.

When I buy a property, I treat it like any other investment and evaluate the yield vs the risk. In some cases, I will invest purely for appreciation, but only when I think the supply/demand balance is in my favor long-term. Prime waterfront property is the only thing I've found that seems to always have a low supply and high demand, regardless of how well the economy is doing.

Of course, a tsunami would probably put a ding in my returns, but my stock in sump pump companies would skyrocket, so I should be OK

 

[John Galt]

This is for Anne, aspiring real estate magnate.

All of those books and seminars telling you about
seemingly improbable deals/profits in real estate
are basically accurate (at least the ones I've looked into). In real estate, you are only limited by your imagination. It's like the used car dealers say
"No money, no credit, no problem!" Truly you don't
need any of that to get started, just guts and creativity.
It is a LOT of work though. You might have to look a
long time to find a "No-brainer" investment. If I was 15 years
younger I'd be looking right now.

John Galt

 

[Cut-Throat]

All of those books and seminars telling you about
seemingly improbable deals/profits in real estate
are basically accurate

Maybe, but these guys have figured out the real money is the seminars. I have got to say though that most of these guys are crooks and some of them have been convicted already.

 

[John Galt]

Well, obviously the "real money" is in the seminars.
Otherwise they would stick with investing. My point is that your "man on the street" has no idea what is possible with brainpower and willpower. Crooks?
I have no doubt of it. But, there are crooks
everywhere. caveat emptor!

John Galt

 

[cute fuzzy bunny]

This is for Anne, aspiring real estate magnate.

I'm aspiring to become a refrigerator magnate.

 

[Nords]

I agree with you, Wab.  Buy low, sell high.

That'd be an impressive 28% cap gain, though. We've MACRS-depreciated the heck outta that place while its value has been bubbling up in the other direction.

Unfortunately the current tenants are the best we've ever had-- my spouse's parents. And if they leave after the next five years, we'd put our kid (and a few roomates) in there. Compared to the threat of any of them moving back in with us, we'll take the low yield!

 

[John Galt]

I recall in my active investing days a realtor might ask me "What are you looking for? Cash flow, tax advantages or appreciation?" My answer?
"Why, all three of course!"

John Galt

 

[wabmester]

I'm in it for the property taxes, endless maintenance, and nightmare tenants.

 

[John Galt]

Ah, a masochist!

John Galt