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Jeff

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From my email today...

"Here's the really surprising thing, home prices are still cheap based on an after inflation per square foot basis.  If you look at the median existing home price per square foot today compared to the last 45 years, we are currently under the long term median value trend line.  Sure homes are bigger today than they were in the 70s and 80s, and sure we have had inflation, but accounting for those two factors, median home prices are actually cheap compared to history."

 

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taddyangle

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I do not believe this to be the case, in fact I think many are over priced, At least in the markets we are in, CA, UT, AZ, TX, USVI. 

We plan to sell a CA duplex and use the proceeds to pay down/pay off other real estate.  Our focus is to pay off/pay down properties.  

2008 our LTV was 99%.  This sucked.  Like many, bought 10% down and Overbought.  Sold some re in 2007, which was a good move for us, but also took a second loan on one property to bridge the gap (and to remodel our primary) as we transitioned from our RE job to a regular JOB. From a financial perspective, selling those properties in 2007 made a HUGE difference for us 10 year later.  

In fact, I would rather own 4 properties at 35% LTV vs 8 properties that are 70% LTV.   












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larrywww

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I don't really comprehend the idea here---houses seem like anything but cheap right now.

According to the Kiplinger report (published in March of 2018)----the median price in San Diego is $530,000.  The % change since the bottom of the market is 74.2%.  And San Diego is only 1.3% from hitting previous peak price----and its affordability index is 10 out of 10---no bargain there.  

As Bruce is fond of repeating, it's all about timing---the worst house at the right time is still probably a way better deal than the cheapest house in an unbelievably inflated market.

https://www.kiplinger.com/tool/real-estate/T010-S003-home-prices-in-100-top-u-s-metro-areas/index.php

Contrast that with the kind of rental houses Bruce is building in Florida----they might range from $150,000 to $200,000 in terms of median price.  But that is 2.65 times cheaper than what exists in San Diego---and the rent is higher relative to purchase price, so the return is much better as rentals.

And if you factor in the fact that Bruce bought the lots below market and did the construction himself, the actual price difference might be more like threefold.  And in Florida Bruce is ahead of the demographic curve----in California by contrast we are losing homeowners to migration elsewhere.  And the fact that Bruce bought relatively cheaply in a very volatile market that is also growing is a triple bonanza.

Or maybe you find a market that is still close to the bottom---rare---but according to the survey above Albany New York is only 7.5% up from its bottom.  (How could that be?)  But Albany's a weird market---it's only 4.7% more to reach its previous peak.

The other way to look at the market is the lower end of the market---which has disappeared from California (including San Diego)---in an ultra low inventory market.  You can't find houses below $200,000 in most cities---except in the desert----and the bottom price keeps retreating---even in otherwise undesireable areas.

I don't see cheap in California---especially not in San Diego (except maybe in the desert type areas---which have always been much less desirable and are also overpriced (like everything else).

The other column in this survey is what happened in 2017---and the prices were down 1.3%.   That means subzero appreciation---you have been managing since 2017 for free (or at a small loss).  Your time has to count for something.

And under the new tax plan---if you considering the deductibility of mortgage payments---not to mention state and local taxes, etc---California is in a seriously disadvantaged situation.

I suppose everything is relative---but I don't see "cheap" reflected in the current market.  Now, it is true that given the rising prices for housing materials you might see some kind of relative savings since these continue to rise if you can buy houses at prices cheaper than current construction.  (Though you can't do that in San Diego).  Also, the fact that impact fees are rising doesn't mean anything if you aren't building hoses---which, mostly, we aren't).   Also, mortgage prices are still relatively cheap----though that might.  But, basically I don't see how these factors alone are going to change the basic dynamics. 

In any case, I'm starting to work on a new thread---with the point of view that at this point in time everything has so inflated---that maybe almost nothing is cheap in the current market---and that would include commercial as well as residential.

niravmd

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Quote:
Originally Posted by larrywww

I don't really comprehend the idea here---houses seem like anything but cheap right now.

According to the Kiplinger report (published in March of 2018)----the median price in San Diego is $530,000.  The % change since the bottom of the market is 74.2%.  And San Diego is only 1.3% from hitting previous peak price----and its affordability index is 10 out of 10---no bargain there.  

As Bruce is fond of repeating, it's all about timing---the worst house at the right time is still probably a way better deal than the cheapest house in an unbelievably inflated market.

https://www.kiplinger.com/tool/real-estate/T010-S003-home-prices-in-100-top-u-s-metro-areas/index.php

Contrast that with the kind of rental houses Bruce is building in Florida----they might range from $150,000 to $200,000 in terms of median price.  But that is 2.65 times cheaper than what exists in San Diego---and the rent is higher relative to purchase price, so the return is much better as rentals.

And if you factor in the fact that Bruce bought the lots below market and did the construction himself, the actual price difference might be more like threefold.  And in Florida Bruce is ahead of the demographic curve----in California by contrast we are losing homeowners to migration elsewhere.  And the fact that Bruce bought relatively cheaply in a very volatile market that is also growing is a triple bonanza.

Or maybe you find a market that is still close to the bottom---rare---but according to the survey above Albany New York is only 7.5% up from its bottom.  (How could that be?)  But Albany's a weird market---it's only 4.7% more to reach its previous peak.

The other way to look at the market is the lower end of the market---which has disappeared from California (including San Diego)---in an ultra low inventory market.  You can't find houses below $200,000 in most cities---except in the desert----and the bottom price keeps retreating---even in otherwise undesireable areas.

I don't see cheap in California---especially not in San Diego (except maybe in the desert type areas---which have always been much less desirable and are also overpriced (like everything else).

The other column in this survey is what happened in 2017---and the prices were down 1.3%.   That means subzero appreciation---you have been managing since 2017 for free (or at a small loss).  Your time has to count for something.

And under the new tax plan---if you considering the deductibility of mortgage payments---not to mention state and local taxes, etc---California is in a seriously disadvantaged situation.

I suppose everything is relative---but I don't see "cheap" reflected in the current market.  Now, it is true that given the rising prices for housing materials you might see some kind of relative savings since these continue to rise.  (However, this may  Also, mortgage prices are still relatively cheap----though that might.  But, basically I don't see how these factors alone are going to change the basic dynamics.   The fact that impact fees are rising doesn't mean anything if you aren't building houses---and mostly we arent.

In any case, I'm starting to work on a new thread---with the point of view that at this point in time everything has so inflated---that maybe almost nothing is cheap in the current market---and that would include commercial as well as residential.



Larry, thanks for sharing the kiplinger link!

Looking at the list for investing ideas might be a good starting point, but it isn't directly actionable. Detroit is a 3 on affordability but I'm not touching - and probably never will. It's had negative population growth and a declining median income for 25+ years. Any place with an affordability under 5 is probably in the same boat.

Are there any cities you do like right now? 

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larrywww

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Reply with quote  #5 
All investors make mistakes----and the trickiest is exiting the market.

Even Bruce Norris made mistakes.  His first approach was to segue to a cash flow state----He went to Texas in 2005/2006.  But he now admits that was a mistake.

But it's one possible approach.  But the problem is how much extra are you going to pay when you transfer out of state and must pay for out of state management, repairs, etc?
When Bruce did it in 2005 I'm not sure he had his own management---as he does in Florida now.  Even though he exited with a profit something more than a decade later, he acknowledges that the pain of managing these properties from long distance simply wasn't worth the hassle.

But  the point is that if you 1031 into San Diego you are buying at at 75% loss----and many areas in California will show similar losses.

But alot of investors will simply say that going out of state is a mistake because you are out of control---just pay the taxes and wait for the next market crash to invest.  I respect that point of view more and more these days, actually---there is no magic calculus that will tell you which is 100% the best approach.

Everyone says that Bruce Norris is a genius----and I greatly respect him.  But there are 2 things to keep in mind:

1) He spends 80% of his time trying to figure out when the next crash comes.   But I don't think he spends nearly as much time in terms of exit strategies.  I think that is true for myself too, and for most investors--we don't give enough thought to the ultimate goal.  45 days isn't nearly long enough (with 180 days to close) to arrive at a sensible purchase.  Which is why paying the taxes is looking better and better.
2) When he exited into this Florida project it was almost an afterthought---and he did it at the last possible minute.  A few more months and those cheap lots wouldn't have been available for sale.  Keeping the properties he owns as rentals would have been a much worse solution----not only would he be forced to withstand the crash but the rent received in California vs purchase price is much less advantageous than Florida.
3) If you look at the appreciation in commercial properties then this is (again!) almost like buying at a 75% loss because of the monster appreciation we have already seen.

I'm not sure I have a one size fits all type solution for all investors since alot depends on your resources and skills.  But I would warn investors that paying taxes doesn't get the respect it should have.  And the problem with most 1031s is that your buying window is just insane----so you end up with really bad choice----and fritter away the gains you have made.

I know that Bruce Norris has spent some time with exit strategies, but I certainly wish he would spend more.

I don't really have an opinion as to out of state markets---my impression is that the secondary markets have been inflated---now we are working on the tertiary and 4th level.  Will there be a 5th level?  Only if the crash comes first.  The really good inventory has already been cherry picked---the ones especially that have jobs, economic growth, where prices are likely to rise quickly.   The hedge funds actually came up with a halfway decent list of cities when they hoovered up all the great inventory---and they are still renting it out.  Also, I think out of state purchases work if you have family and/or close friends there---or maybe if you buy a large enough property that includes management and handymen as part of the deal----otherwise, I would be skeptical.  The really good investment properties---the ones that have sufficient cash flow to pay management, repair, etc---they don't trade hands very often and usually it's some kind of catastrophic situation---or they are already in the hands of hedge funds or other major market movers.

The fact that the bond market has been decimated to such low rates I think has distorted the investment market to the point where investors think that single digit returns----even low single digit returns----are somehow acceptable.  That is a total distortion of what the real risk is.

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Reply with quote  #6 
I totally agree that you shouldn't let taxes wag the investment dog's tail.

I've owned rentals out of state. It's painful initially, since property managers will rob you blind. But eventually, you'll find an honest one and things will smoothen out.

I could've just bought in the places one bought before, but I'm not seeing any value in this places right. Maybe a 4.5% return on cash invested, 7% if I'm really lucky. This includes the 2% appreciation.

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taddyangle

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Reply with quote  #7 
I fell into managing properties out of state, but it was due to having fired so many property managers, that I really had no choice but to do it myself.  No complaints on my end, it has worked out for 15+ years, and I have a ton of stories to share (mostly nightmares, that would truly scare a want to be real estate investor).

Larry, you bring up some really valid points.  What resonated most for me is your comments was the exit strategy.  We are just starting to focus on that, not so much exiting real estate, but trying determine what to sell, what to pay off, what to keep long term, etc.  Basically want to make real estate as trouble free as possible with as little headache and worry.  We also want to make sure our money is working best for us, and we strongly feel it is best in real estate, assuming we make the needed adjustments.

1. We plan to sell properties we would not live in.  The older I get, the more of a headache it is to manage these property types.  And I also think when the next dip hits, these lower end seems to take a harder hit, and I don't need those headaches any longer.
2. Play off/Pay down property.  We have been doing this, and plan to continue this.  In fact we plan to sell a property this year, and we thought about buying a replacement, but we think best to pay off another property.

So while this is not really an exit strategy, it is our strategy until we can best figure out an exit strategy out of real estate.  However, at this point, I am not seeing alternative options out of real estate that make more sense. 






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rickencin

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Reply with quote  #8 
Jeff, Taddyangle, Larrywww and Niravmd,  Thanks for sharing your stories, they are very educational. 
I do my own property management because no one will every love my equity like I do.  When you pay a flat rate, you tend to get the least work.  I once got an estimate from a contractor who went on and on about his 25 years of experience.  The guy he sent to do the job didn't speak English and couldn't figure out a garden hose sprayer.  I'm not saying he was stupid, but where was the decades of experience I was "promised"?  I think there is the same tendency with property management.  If they just phone it in, I can just phone it in a lot cheaper. If they actually included a "building super" with a tool belt who could do plumbing and electrical it would almost be worth it.  A cleaning lady would be cool.  Maybe I should start an Uber for property management.  We'll see how that social network trust/rating thing works. 
I agree that having an exit strategy is good.  If you can live in your rentals for 5 years before you sell them, you can get the limited homeowners capital gains exclusion.  Keeping my money tied up in real estate keeps me from buying sports cars, RVs, boats and airplanes.  That "burning a hole in your pocket" thing.
Thanks again for sharing your experiences!

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Quote:
Originally Posted by rickencin
Jeff, Taddyangle, Larrywww and Niravmd,  Thanks for sharing your stories, they are very educational. 
I do my own property management because no one will every love my equity like I do.  When you pay a flat rate, you tend to get the least work.  I once got an estimate from a contractor who went on and on about his 25 years of experience.  The guy he sent to do the job didn't speak English and couldn't figure out a garden hose sprayer.  I'm not saying he was stupid, but where was the decades of experience I was "promised"?  I think there is the same tendency with property management.  If they just phone it in, I can just phone it in a lot cheaper. If they actually included a "building super" with a tool belt who could do plumbing and electrical it would almost be worth it.  A cleaning lady would be cool.  Maybe I should start an Uber for property management.  We'll see how that social network trust/rating thing works. 
I agree that having an exit strategy is good.  If you can live in your rentals for 5 years before you sell them, you can get the limited homeowners capital gains exclusion.  Keeping my money tied up in real estate keeps me from buying sports cars, RVs, boats and airplanes.  That "burning a hole in your pocket" thing.
Thanks again for sharing your experiences!


Dealing with contractors is the worst! Having recently completely rebuilt a house I can attest to poor work ethic today. I can't even get people to give me a quote. I call 5 people and only 2 show up to talk about the job. Then I get one quote and the second guy takes 3-6 weeks to get back on the quote.

I find moving money into my brokerage account and buying tax-free muni bonds solves the "money burning a hole" problem for me.

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Jeff

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Reply with quote  #10 

Quote:
Originally Posted by niravmd


I find moving money into my brokerage account and buying tax-free muni bonds solves the "money burning a hole" problem for me.

 

Quote:
Originally Posted by rickencin
  Keeping my money tied up in real estate keeps me from buying sports cars, RVs, boats and airplanes.  That "burning a hole in your pocket" thing.
Thanks again for sharing your experiences!

 

...AND...

 

...I don't have the "burden" of figuring out what to do with my "extra" money. 


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taddyangle

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Quote:
Originally Posted by Jeff

 

 

 

 

...AND...

 

...I don't have the "burden" of figuring out what to do with my "extra" money. 



That is pretty funny.

I got into wrist watches 5+ years ago.  Over the last three years it has been like the 2004-07 real estate market.  Over the last 3 years values of some watches have almost tripled.  Crazy.  

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larrywww

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I don't get it.

I really don't think that being a landlord is a great deal going forward.  When appreciation stopped (which it, basically, has) then what is left?  Small single digit returns?  Are we looking for rents to rise more?  How is that even possible, given they are at historic highs?  And apartments and housing depend on the incomes of borrowers, even though our economy has very few areas of stable long term employment.  And there are movements to institute rent control throughout California because tenants are being squeezed by the economy and higher rents.  

Practically all active investments (even commercial investments) are written these days on a 5% or lower basis (even lower in some hot cities).  That leaves no margin for property management, and not even for foreseeable repairs.   Whatever you buy you are going to be managing it for free (your time is worth nothing) and at the very best you will end up cash flow neutral, though more likely cash flow negative.  There is the possibility of a crash, but even if this doesn't occur what is the attraction in remaining in the market?  Out of your single digit returns you must pay taxes, insurance, leasing fees (unless you lease it yourself), property management (unless you manage it yourself), not to mention repairs.  And this is even before you consider debt service.

By contrast, if you seller financed the property then you would get a 4.5 to 6% return----but this would be a real (as opposed to an illusory) return----and you would NOT have to do anything.  This is more money than you can make by actively managing it, even if that made sense, which it does NOT.

I suppose if you are working on a section 121 gain property that has been owner occupied and are just waiting for it to be tax free returns, then that might make sense.  I also suppose that if you have a portfolio of properties that seriously cash flows (which probably means you did NOT get this in the current market), then the matter becomes more complicated.   But I see very little that makes sense in a such a low return purchase in such an inflated market.  And then what happens if natural disasters hit?   Or if regulatory changes like rent control are imposed?  The whole deal could be at risk.

Let's face it----landlording is NO joyride---you need to be seriously compensated for this much work---and your time must be worth SOMETHING.

The other thing is that you need to take the long view on all classes of investment properties---the same way that Bruce Norris tries to time residential markets.  I look at commercial and not just residential properties and I see considerable asset inflation that doesn't truly reflects the risks.  I cited a chart for cap rates on commercial properties above.  But this is true for what is supposed to be among the more solid class of commercial investments: Apartments.  If you look at how returns have changed for apartments over the long haul, I think that around 1992 they were getting a 9% return.  Now, the return is closer to 4.5%.  See the following charts.

http://ashworthpartners.com/multifamily-economy-cap-mkts-and-investment-trends-q3-update-reply-now-posted-from-marcus-millichap/

I don't know if they will ever rebound to 9% since what appears to be happening is that with each market since 2006-2007 you see higher and higher prices---and diminishing returns each cycle----you don't return to 1992 levels since those are only in the past.  Basically, this appears to make the long term cycles progressively riskier---and less appealing.   And I don't even want to vouch for apartments, really---but they are the cleanest dirty shirt in the laundry.  I can't say retail because Amazon has decimated that, and office is also a very weak sector right now---not to mention so many workers now just operate from their home offices, etc.

The other thing that seems to be happening is that the cycles keep getting longer---and if you buy now you will need to hold onto a property and manage it for an entire cycle---and we don't even know how long that is going to be since the end of this cycle is nowhere in sight.

The other factor I would keep in mind about---is the Trump factor.  What he is doing now seems very unpredictable to the rest of the world----I'm not getting into politics since I have no great interest in that subject---but what I am talking about is economic stability that may crash the market at some point.  More than one of the things he is doing right now seem to have the possible prospect of landing the US in a trade war and/or a recession and/or a war somewhere.  That is just another reason to get out---but I think that helps the argument.

To me, the whole thing seems like a supercharged Ponzi scheme.  When the market is flaming out in an all out bidding war, at some point you have lower the lifeboats and get out of the market---and don't look back.  If you can figure out a way to seller finance below 60% or lower loan to value, then that is probably good enough.

Just saying.

My advice is, if you have overinflated properties: Seller finance and get out of the market.  Being a lender has always been a much more intelligent play in an inflated market---maybe after a few years, the market will crash and you can get back into buying.  But right now even Bruce Norris isn't hazarding a guess as to when that will be.

Also, everyone on the board knows that I follow Bruce Norris very closely.  But I think he should be giving this advice right now.  I think that is especially true of commercial properties---which I know Bruce doesn't primarily focus upon.  Mainly his advice is to give us a range of criterion that will signal the end to the market.  But these criterion are probably not going to be why the market tanks----the economy in general may tank----and/or a world crisis may somehow trigger an economic downturn---and/or any of the innumerable black swan events may come home to roost.  But since the market isn't appreciating significantly any more, I think that anyone who stays in the market bears the burden of proof that this makes any sense.  To me, it doesn't.  Before 2018, I haven't really sounded this advice in an urgent manner---but I really feel it's warranted now.
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Reply with quote  #13 
Quote:
Originally Posted by larrywww
I don't get it.

I really don't think that being a landlord is a great deal going forward.
 

It is widely accepted that most assets, including real estate, are priced at the high end of historical valuations.  This is due in large part to the (still) extraordinarily low interest rate environment and lots of money sloshing around.

In the recent clip below, Sam Zell says that real estate is "priced to perfection", points out that real estate in particular is a highly priced asset, and mentions that a REIT he (or one of his organizations) took over about five years ago has been converting real estate assets into cash ever since they took that REIT over.  They're now sitting on billions in cash, waiting patiently for a much better opportunity to deploy it.  



Zell further points out that there is a great deal of new construction coming on line within the next few years, and that the market clearing price after all that inventory has come on line may be quite different from today's prices.  He notes that when a market clearing starts, "it will likely happen relatively quickly".  

Few people have been successful "market timers".  An exception, however, is Sam Zell.  Note however that even Zell has taken his time in this slow liquidation, and still has a lot of assets which he is not liquidating.

There is much wisdom here.  If you are young and just starting out and have minimal assets, you can sell them all at once and relatively easily buy back a similar position later, all without too much hassle or too expensive tax consequences.  And if you screw up completely, you can work and save your money for a couple of years and be back where you started.  

If you have been successful for a while and have a lot of assets, it rarely makes sense to either sell or repurchase everything at once.  Your timing is very unlikely to be perfect, tax consequences will be a much more important consideration, and if you screw up you may never be able to get back to where you were.    

You shouldn't try to drive a supertanker like a jet ski.  


Quote:
My advice is, if you have overinflated properties: Seller finance and get out of the market.


Under many circumstances, the above makes a lot of sense.  

However: What if you bought your properties for a small fraction of their current values, are receiving a great return on your original investment, are grandfathered into a low property tax, and have long-term financing at very favorable fixed interest rate?  Under these circumstances, it could make a lot more sense to hang on, even if the properties seem overinflated now.

It is also important to consider that real values can be adjusted downward in two ways - either through reduced prices, or through higher inflation.  The right course of action under the first scenario can be the wrong one under the second.  


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Reply with quote  #14 
I did mention that if someone had a portfolio, that would be a different story.  But to me talking about buying at the top of the market (the subject of this thread) is clearly overly frothy.

But even as to those who own good portfolios:

1. You need to weed out the assets that don't make sense in a down market
2. You need to be prepared to hold these assets a very long time---the cycles are increasing in length---and if the asset isn't increasing in value, it better have a very good return even in a down market
3. For assets that don't entirely make sense, there must be some kind of exit strategy.  And 1031 won't make sense if all you receive in exchange are highly overvalued assets---which is what you are (typically) selling to preserve your gains.  (Very tough right now to 1031 into ANYTHING that makes any sense).

Yeah, I'm an admirer of Sam Zell too.

In the video he indicates that industrial and office are probably overbuilt.  So these areas are not good.  (The Reit that he mentions in the video is, oddly, an office building Reit----even though he says the sector is overvalued---he must think highly of their remaining assets----or maybe they have long term leases that will paper over any problems).

In another video he mentions that retail is a serious trap----Malls, shopping centers and other retail used to sell at an 8% cap---but he predicted that market will crash and burn at some point.  (He also mentions in this video that he is one of the largest owners of multifamily in the US.



In this video 4.5 years ago he predicted (correctly) that we were entering a "golden age of multifamily"---he nailed that prediction.



In the video you cited, Zell mentions building over half a million units of multifamily in 2017---another good call.  But I'm not sure at what point he stops building multifamily----he doesn't say what his plans are for 2018.

The other thing I know about Sam Zell---he invests internationally so it's not like he has all his investments in the United States.

In this video, Zell says that buying single family houses as rentals is not a business model that he thinks will work out well.  (Multifamily, which he owns, is another question).



Overall, I haven't reviewed his recent pronouncements but I almost think there is a sense in which he supports my point of view.

The other thing is that NO ONE wants to take away the punch bowl and call an end to this bull market.  But since I believe that what will likely happen may be some kind of crisis that will give little time to react, given that houses are no longer appreciating in Southern California (you in Florida may be on a slightly different cycle), the incentive for staying in the market seems to me to be marginal at this point.  In the post above I mentioned how low cap rates were for apartments and many other classes of commercial investments. 

The apartment market has been aided because of the rising percentage of renters, by the steady increase in rents, by the fact that we are seriously underbuilt in this area, and other factors.  But you can only squeeze renters so much and you reach a breaking point---since renters' incomes haven't kept pace with housing costs for decades.  Do you really believe there is any chicken left on the bone, even in this favored market?  I'm not so sure.

The only classes of commercial that might be on the safer side would include self storage----though I heard a shocking statistic about how much this market has appreciated in the last few years.    Also, the construction of self storage has also increased dramatically over the last few years.  

http://www.globest.com/sites/paulbubny/2018/01/04/self-storage-builds-reach-new-peak/

So, it seems to me like whatever niche markets made sense before are getting an obscene amount of money thrown at them.

I criticized those Chicken Little types who ran for cover in 2009 and thought that investment was overly risky----I strongly disagreed with that point of view at that time.  But this is 9 years later---and the market is very mature (an overly long bull market, not only in real estate, but in stocks too).

The other sign I find that the market is overly frothy----are hyped up products like NNN leases, Delaware Statutory trusts, TICs (less common, but still there) and other overhyped investments that I am extremely skeptical about----where the investor cedes total control of his/her investment nest egg to the tender mercies of Wall Street. (I seem to recall that it moreso TICs in the last cycle--but also not good IMHO). The one area that Wall Street is always bullish on is pure greed---it's the only thing that they do really well.  (Sorry, for the sarcasm, but you would think that after the last financial crisis these are the last money managers on Planet Earth that I would trust my investments with.

Everywhere I look in this market I (basically) see irrational exuberance---the low interest rate environment has put it on steroids.  And when you consider that the current administration has delivered a 1.5 trillion plus tax cut at a time when unemployment is historically low and we didn't really need the stimulus that much.  All of these factors point to a serious crash at some point---the magnitude is exacerbated by these factors, not really helped at all.  They did this in a superannuated Bull market that was way overdue for correction, without the tax cut.  Maybe it will postpone the rally a bit longer, but if you look at the returns I just don't see how they continue to decrease and inflate the values of real estate on their trip to the moon on gossamer wings.   If nothing else, the interest rate hikes that are widely predicted are going to cast a serious pall on the market, if it doesn't crash sooner.

The truth is that it is frequently only by 20/20 hindight that you can definitively call the end of a price rally---but it hehooves you to exit early as a precaution.  What if I am wrong?   Well, only if Southern California takes another serious run at appreciation will there be any seriously negative consequences in terms of this decision---but that doesn't seem to be in the cards.  Even if the actual crash is delayed for 1 to 3 years---it won't bother me because at least I avoided the hassle of managing these properties for another 3 years---I received an early vacation.  I don't claim to have a crystal ball that foretells the crash any better than Bruce Norris or anyone else, but I know when enough is enough---I can't improve upon the equity I have already created---and I need to get out.  At some point, you just hit a brick wall.  This has actually been true for a while.

My feeling is that you need to listen to what the market is telling you.  It's kind of bizarre, but do you know what turned out to be one of the best forerunners of the financial crisis?  Remittances that were being sent back to Mexico and other foreign countries suddenly dried up----there was a bank that claimed that they figured this out before the crash actually came.  (I don't see how they relate directly, maybee employers started firing everyone all at onace, but that is what the bank inferred).

In any case, I respect your opinion, but to the extent you disagree (it sounds like you disagree in part---maybe only in part), that is how I see things.
niravmd

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Reply with quote  #15 
Thanks for your viewpoints, Larry.

No doubt housing has become very expensive in SoCal.

However, unlike the last cycle, people are still putting down 20%. And apparently there are still people with deep pockets who are willing to buy real estate at these inflated prices.

One of my neighbors overpaid for their house 18 months ago and and put in another $100k redoing the backyard and interiors. They suddenly decided to move back to Chicago to be near the wife's family so they listing their house for $1.95MM, and will probably lose $100k on their home. After a week on the market and 1 open house, it's already in escrow.

The buyers are an older couple who already have a bigger house nearby and needed a place to stay while they remodel it. Who buys a $2MM house instead of a getting a rental????

Given this level of insanity, I think we still have some room to run. Lending standards need to get looser, and FOMO needs to step in. If these don't happen, I think home prices might flatten out and not necessarily decline.

I'm also hiring babysitters, maids and handymen for work around the house. I can't find anyone under $20-25/hr, and this is basically semi-skilled labor. While people on fixed incomes are facing problems with the rent increases, people who are still working are seeing wage growth to offset some of that increase.

Just my opinion based on my limited data-points.



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larrywww

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Northern California and Southern California are very different markets this cycle.  My conclusions were about Southern California---and more specifically the Inland Empire where I operate.  I'm not necessarily even talking about the coastal market in Southern California---that's not my market.   I express no opinions about where the market is going up North.

In my market, I think the appreciation has stalled.   Even if there has been no crash, every investor needs to determine at this point their own personal exit strategy.   And I am primarily invested in the multifamily market, not single family homes, so that may be different as well.

Bruce Norris doesn't exactly have a timing model for commercial properties, so, in that sense, I need to invent my own strategic plan.  I am not going to wait for the crash because I believe that non real estate events may intervene and abruptly tank the market---so called black swan events, which no one can really predict with any certainty.   Maybe it's just me, but I see alot of potential events that could happen during the current administration----I just have the feeling that no one is really steering the ship of state, right now.  And for an investor that's really bad news.  (This isn't the only factor---but it's one of many mentioned in my previous posts.  And No, I am not debating politics---this is about dollars and cents).  So far, to my knowledge, no one has gone on the record saying that now is the time to get out (except maybe those who are always predicting imminent disasters).

For what it's worth, I do believe that Bruce Norris believes that what is happening in the Bay Area has reached speculative price levels----but it's not like I have attended any of his talks there, so I can't speak with authority about his message there.  If you want  to stick around, that is your own decision.   But I would at least have some idea about your exit strategy----or a decision that you want to keep your portfolio intact and weather the downturn.   

Look at it this way---even if I wanted to 1031 into something else---there is nothing on the market significantly better.  By exiting the market, I am seeking to avoid further futility.  

Also, it's kind of bizarre---but if you set up seller financing, given the relatively low cap rates, you arguably may end up making almost the same money as a lender than what you were earning as a property owner----and you don't need to do any work.  (Which, BTW, is another sign that the market has reached speculative price levels).

Nyou

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Reply with quote  #17 
Totally understand Larry!
i am looking for exiting the market too. as you said there is nothing on the market significantly better 1031 into something else.
the way seller financing has some disadvantage too. you have to pay 1, transaction cost, 2,tax for sale,3, tax on the income your lending.

Rent Control is the biggest concerns for holding the properties in the future!


niravmd

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Reply with quote  #18 
Quote:
Originally Posted by larrywww

...

In my market, I think the appreciation has stalled.   Even if there has been no crash, every investor needs to determine at this point their own personal exit strategy.   And I am primarily invested in the multifamily market, not single family homes, so that may be different as well.

...

Also, it's kind of bizarre---but if you set up seller financing, given the relatively low cap rates, you arguably may end up making almost the same money as a lender than what you were earning as a property owner----and you don't need to do any work.  (Which, BTW, is another sign that the market has reached speculative price levels).



What sort of cap rates are you seeing inland?

I saw a A grade complex listed with a cap rate of 3 in San Diego. [eek]

Who's buying at these prices? Foreign investors just looking for a place to park money? Or people with more money than sense? Not sure. 

I'm seeing much better deals on SFRs in the midwest. But things have changed in just the past 12 months. Good properties are getting snapped up with 2-3 days (as opposed to 2-3 months).




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taddyangle

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Reply with quote  #19 
Quote:
Originally Posted by larrywww


But even as to those who own good portfolios:

1. You need to weed out the assets that don't make sense in a down market
2. You need to be prepared to hold these assets a very long time---the cycles are increasing in length---and if the asset isn't increasing in value, it better have a very good return even in a down market
3. For assets that don't entirely make sense, there must be some kind of exit strategy.  And 1031 won't make sense if all you receive in exchange are highly overvalued assets---which is what you are (typically) selling to preserve your gains.  (Very tough right now to 1031 into ANYTHING that makes any sense).



This is exactly what we are doing.  In process of selling a low income CA duplex.  I spend more time managing this one, and it gives me the most headaches, so it is soon to be sold.  Funds to be used to pay off another mortgage so that we can hold the other assets for long term without stress.

I know when the market turns rents will follow, at least on the lower end.  I will expect to see rents decline on the higher end, but not enough to make a difference for our situation.  

The one situation I have not sorted is a UT property we 1031 into about 10 years ago.  Would like to sell this one, as it is in the outer area of UT and a condo, and I do not see it having the same potential as our others. No idea on where to take the funds from this one (taxes would be too high to sell).

Since we were hit really hard with the hurricanes, we are able to take losses, which we will then use to offset gains when we sell.  So this is what is prompting us to cash out on our CA duplex, vs the 1031 we had thought about doing last year.


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SFL

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Reply with quote  #20 
Sam Zell has written a book: "Am I Being Too Subtle?"; published in 2017.  

It's an easy, enjoyable and educational read from an extraordinarily successful investor.  I recently finished reading it and can highly recommend it to anyone posting on this thread.  


larrywww

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I have this book---the opening chapter tells a spellbinding story.  His father was a politically sophisticated individual living in Poland.  Once Hitler and Stalin announced their mutual non-aggression pact, he knew that Hitler going to invade Poland, by guaranteeing the Soviet Union would stay on the sidelines, it opened the way invasion.  His father left town on a 2pm train--I think it might have been the next day.  The Nazis bombed the rail line at 4pm as a precursor to their invasion---2 hours after they left.  He retreated from Poland and needed a travel visa from Japan.  The Japanese consulate was ordered by the government to grant no travel visas to Jews----but there was a rogue consular official in Japan who granted such visas to a large # of Jews----the Japanese equivalent of a Schindler.  It was on this basis that his father emigrated just in time.  Many of his relatives who stayed in Poland were killed by the Germans.

I can't promise the rest of the book is nearly as dramatic, but Sam Zell is a very seasoned investor who has made many profitable investments and is considered very good in some instances in timing the market.  

SFL

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Reply with quote  #22 
Quote:
Originally Posted by larrywww

I have this book---the opening chapter tells a spellbinding story.  His father was a politically sophisticated individual living in Poland.  Once Hitler and Stalin announced their mutual non-aggression pact, he knew that Hitler going to invade Poland, by guaranteeing the Soviet Union would stay on the sidelines, it opened the way invasion.  His father left town on a 2pm train--I think it might have been the next day.  The Nazis bombed the rail line at 4pm as a precursor to their invasion---2 hours after they left.  He retreated from Poland and needed a travel visa from Japan.  The Japanese consulate was ordered by the government to grant no travel visas to Jews----but there was a rogue consular official in Japan who granted such visas to a large # of Jews----the Japanese equivalent of a Schindler.  It was on this basis that his father emigrated just in time.  Many of his relatives who stayed in Poland were killed by the Germans.

I can't promise the rest of the book is nearly as dramatic, but Sam Zell is a very seasoned investor who has made many profitable investments and is considered very good in some instances in timing the market.  



The book is worth reading at least twice.  The opening chapter is interesting, but thankfully not likely to be highly relevant to those of us living in the US within our lifetimes.  

I found the rest of the book to be equally interesting as well as chock full of useful information.  

Zell does not consider himself a market timer.  In the final paragraph of page 143 (hardcover version), in which he specifically writes that he was not trying to time the market when selling Equity Office.  Rather, he had simply received a "Godfather offer" (too good to refuse).  





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Realtor's Mid Year report on sales in California by Leslie Appleton Young.  This is hot from the presses---was published yesterday:

Some statistics:

Unemployment in Fresno / Bakersfield and the Central is high single digits.
Everywhere else in California the unemployment is below 5%, and in many cities low single digits.

Sales up a little (compared to original forecast)---4.7% rather than 4.6%---not a major change.

If the market is showing any weakness, it's in the high end properties because of the fear of rising interest rates---the inventory in the upper end has been steadily increasing (compared to the rest of the market).   Those who have McMansions on the market---time to head for the hills!

There are only 2 counties in Southern California that are beyond their current peaks: (1) Orange (5.5% above) and (2) San Diego (2.0% above).

The only areas that are still significantly below previous peaks would include:

Santa Barbara   -25.9% (Who foresaw this?  This is one of the most desireable place to live in Southern California)
Monterey           -21.8% (another very desireable place to live).
San Bernardino -17.2%
Los Angeles       -15.5%
Riverside           -7.3%

The average below the peak in Southern California isn't very high 5.5%.  By any measure, it would appear we are near the peak----and keep in mind that the last peak was an artificial one bolstered by no underwriting type loans.

The other thing about counties like San Bernardino and Riverside----alot of the price rally is concentrated on the more desireable eastern areas and not the desert areas----keep in mind that these are the largest counties in California and both extend all the way to the Arizona border.  Are we seeing alot of price appreciation in Needles and Blythe?  My guess is: No.

There has been some talk about Inland Areas being still below the peak----but by any measure it looks like Riverside is almost peaked out and Ventura County 6.5% below the previous peak.  The 2 most important areas below the peak may have issues in terms of availability of employment nearby (even though that may not really be reflected in their unemployment rates, though traditionally someone will prefer to live in such areas even they are significantly underemployed, etc).

The areas in the Central Valley that are still below peak include:

Bakersfield: 21.6%
Fresno:       17.3%
Tulare         15.0%

Some of the more remote inland counties in California are faring in a similar fashion.  Sacramento County is only 6.5% below the peak, so that area is quickly being priced out for those in Northern California.  

If one looks at counties that are North of Sonoma and Napa, then the prices range anywhere from 10% to 40% below the peak.  (Mono wins the prize at 53.8%  below the peak).  But there aren't alot of good jobs in these counties, just like finding high paying jobs in the San Joaquin valley is a real challenge.

I still believe that the market is getting very close to being tapped out and that the rise in mortgage rates (if a trade war or other calamity doesn't happen first) would be enough to call a halt to significant appreciation going forwad, but that is just my view.  Other investors can gauge their risk levels accordingly.   I don't really want to replay all the arguments (I know what Bruce Norris thinks, etc).

But active listings have started to increase in April of 2018---for the first time in 32 months----Appleton Young feels that this might be a "tipping point"--even though she didn't make the statement at this point----and even if we are still seeing some single digit increases in many indicators.  The stock market and other indicators have started to show incredible amounts of volatilty that reflects the skittishness of current investors---so we will see.

Part of the problem with the inventory is how long sellers have held their homes.  Last year the average was 11 years---which was a really high number.  This year the #s are even higher, namely:

Gen Xers:   10 years
Boomers:   15 years
Previous:    27 years.

The fact that some seniors who have lived in their house an average of 27 years (the generations before Boomers) are finally joining the market is another sign that maybe this market is starting to peak---although the numbers are a mixed bag, with alot of indicators still positive (albeit in a single digit manner).  This is one indication that we finally have hit the animal spirits---but also that the prices can't keep increasing forever.

I realize that Bruce Norris doesn't see danger in the current market.  But my fear is twofold (1) that appreciation has been declining----which doesn't necessarily foreclose the possibility of retrograde movements---appreciation later one and (2) even Bruce thinks that the price rally will terminate when a non real estate catastrophe strikes----even though the timing is rather unpredictable.  It just  seems to that the majority of appreciation has already occurred---and I am not terribly interested in managing my properties in a flat market.

I realize that there are some traditional investors who never sell anything----more power to them---but then I would rather be a lender than a property owner---there are fewer responsibilities.






 

suh6

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Reply with quote  #24 
Good info, larrywww.

In terms of assessing peak price, if we adjust for inflation (2006 dollars vs 2018 dollars), all counties are still well below the peak.

This could be a tipping point, or just a temporary lull. I think it's the latter.
larrywww

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Reply with quote  #25 
That's an interesting point.   But how are you figuring inflation in house prices?  It is my understanding that CPI includes rent, but it does NOT include housing price.  So, I'm not sure what the metric would be for that.   

Did Bruce Norris ever incorporate that into his predictions?  I don't think he did---he says 17% affordability without any conversion factors---when a certain price mark hits, that's the peak.  Truthfully, I don't see how you can distinguish between simple price appreciation and what you are terming "inflation"---usually when a price peak arrives, you don't have to use a conversion to arrive at it.

My feeling is that if we are consigned to low single digit growth in future markets that this isn't enough of a justification to hang around.  I am less concerned with predicting the technical topping point of the market.

The argument might be stronger, IMHO, as applied to inland California where prices have lagged.  

I think whether you want to stick around is a question for each individual investor and I do NOT see the justification if appreciation slows down considerably---whether or not we have reached the technical peak or not.  Part of the problem is that the current market is so unlike past markets----is it possible to stay relatively flat for 5 years?  Well, I'm not going to manage a property for free for 5 years---that just doesn't make sense to me.  But, as always, investors can use their own respective scenarios, I am just expressing my own point of view.  I will say that I am skeptical that rents can go much higher---they have already increased so much.

It might also matter what asset classes you are holding---different asset classes may have different peaks.

The truth is that we really do NOT have a calculus for what happens in the current market.

The other point I would make---is that prices have inflated to such an extent that, unless I can acquire a property at a drastic percentage below current values, it makes no sense for me to participate.   At some point in the cycle I think it makes sense to take a break---I think I am there in the current cycle.

The reason why I think alot of investors have already exited----it's not just the relatively flat prices----but even Bruce Norris doesn't really have a specific---or even an approximate----exit date.  The problem is that it seems quite likely that the controlling factor will NOT even be related to the real estate market---but a black swan type event---and those can be unpredictable----and not give someone alot of time to react.   No one can rule out the possibility that the market may turnaround in a rather unpredictable manner---and that's unsettling.

In any case, if now is not the time then---when?

And what's the real downside in exiting at this point?  It's not like in previous cycles there have been serious retrograde movements----we haven't really seen a market retreat to almost nothing and then spring back into full blown appreciation.  Even if the market were to continue limping along with low single appreciation---that wouldn't be enough to make me regret my decision.

Bruce Norris has always said that at some point in the cycle your holdings are no longer investments---but a speculation.  I would argue that we have certainly arrived at the land of speculation as of right now.  It's been more than 3 years since Bruce Norris started transitioning from California to Florida---I doubt there is much sentiment that a departure now is somehow too early.
larrywww

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Reply with quote  #26 

I think there is fallacy here----the real estate market can’t crash because it is somehow insulated from economic downturns caused elsewhere in the US economy.  I think there are more than half a dozen factors that should usher in the end the current economic rally in the near future:

1. Rising interest  prices have been promised and should make further price increases very difficult.  Inflation is starting to gather steam, oil prices are rising, all of which are arguably going to force the Fed’s hand and force them to raise interest rates;

2. Rising valuations in the stock, commodities, real estate and economy in general have pricing at unsustainable levels.

3. Donald Trump has started a trade war with our biggest trade partners, Mexico, Canada, the EU.  And a trade war with China isn’t far behind.  The Republicans are no longer serving as a brake on Trump’s actions.  Our allies are starting to align against us in terms of trade, refugee policy, and other economic and political matters.    Donald Trump is doing his level best to add fuel to the combustible mix.  Europe is showing increasing signs of instability with Brexit, the elections in Italy and the ever present Greece situation.

4. The Middle East is a slow moving military, economic and political disaster that will eventually pick up speed----and adding Iran to the chaos isn’t going to improve things, especially since our allies show every indication that they will side with Iran, not the United States.  There are millions of refugees in a combustible Middle East and allies like Turkey, Israel, Jordan, Egypt are showing increasing instability.  Refugees are a sticking point with former allies inside and outside the region and Donald Trump has done everything humanly possible to destabilize this dicey situation.

5.The Trump administration has asked the Texas judge(a Bush appointee) who is presiding over the Obamacare lawsuit to completely dismantle Obamacare right after the midterm elections.    If the health insurance system was challenged before, what choice will this leave insurers except to materially raise prices and/or withdraw from the program?  How can the United States attack its own health system without offering some kind of replacement?  This will NOT end well.  The ONLY surprising thing is that they have telegraphed their intentions BEFORE the midterm elections.

6.  The outsized economic stimulus is eventually coming home to roost and will accelerate and worsen the severity of the ultimate downturn.  Ben Bernanke in a remarkably apocalyptic statement said that:

“The stimulus “is going to hit the economy in a big way this year and next year, and then in 2020, Wile E. Coyote is going to go off the cliff,” Bernanke warned.”

When was the last time?---or ever?---that you had a former Fed Chairman speak in such apocalyptic terms?  Since when is Ben Bernanke channeling zero hedge?   The only question I have is whether we will even reach 2020 before the downturn starts, given the other forces at work.

7. Added to this combustible mix: Korea is finally hitting their stride in nuclear missile technology.  And their diplomatic offensive will in all likelihood sow further chaos without pointing toward any likely solutions.

8. The only nation that seems to be enjoying the chaos?  Russia and our enemies in the Middle East, especially Iran and Islamic fundamentalists .  Yesterday Russia issued a statement telling Europe and the rest of the world that their Cassandra like statements about how bad US influence was for the world are finally being taken seriously.  hat was the Trump administration's reaction?  Trump has suggested that he wants Russia reinstated in the G7, contrary to the views of all of our other allies  (Russia was evicted due to their annexation of the Crimea).  Soon to come: The United States has done very little to tamp down Russian influence in the next election.

9. America is politically paralyzed, not unified, even on vital matters of economic and military policy.    Even assuming that the impact of any crisis could be lessened by political action, there seems little reason to foresee any unified action coming together anytime soon.

Am I the only person who thinks that we heading for an economic downturn?

The question isn't so much whether you should sell everything--but whether you should have done that already.

To those who think they can sidestep these various catastrophe and the Wile E Coyote bounce, I have but one response: Beep! Beep!

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Reply with quote  #27 
Quote:
Originally Posted by SFL


The book is worth reading at least twice.  The opening chapter is interesting, but thankfully not likely to be highly relevant to those of us living in the US within our lifetimes.  

I found the rest of the book to be equally interesting as well as chock full of useful information.  

Zell does not consider himself a market timer.  In the final paragraph of page 143 (hardcover version), in which he specifically writes that he was not trying to time the market when selling Equity Office.  Rather, he had simply received a "Godfather offer" (too good to refuse).  







It's funny everyone thought Sam Zell was timing the market perfectly. However, the offer was just too good to refuse. His investors got 243% ROI over 10 years on the portfolio including dividends. Great return no doubt. Sam said had he owned Equity Office by himself, he wouldn't have sold it.

Being a co-owner of a few really good multifamily buildings, I can relate to what Sam Zell said. There is no reason to sell once you own great performing assets. There are buildings that we would never sell unless we received a "Godfather Offer". Even with a Godfather Offer, I'm still not sure if we would sell them. This explains why multifamily buildings in our market normally only get churned every 30-50 years. Basically, every generation. The kids get a stepped up in basis, don't want to deal with it so they sell and take the money tax-free. 

I agree it was a great book with a lot of good information. 

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SFL

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Reply with quote  #28 
Quote:
Originally Posted by mlreits


Being a co-owner of a few really good multifamily buildings, I can relate to what Sam Zell said. There is no reason to sell once you own great performing assets. There are buildings that we would never sell unless we received a "Godfather Offer". Even with a Godfather Offer, I'm still not sure if we would sell them. This explains why multifamily buildings in our market normally only get churned every 30-50 years. Basically, every generation. The kids get a stepped up in basis, don't want to deal with it so they sell and take the money tax-free.  



There are lots of good reasons why this type of asset often only changes hands after the owner dies.  The step-up in basis is one of the big ones.

For large transactions, where the taxable gain is equivalent to more than five or ten times the owner's ordinary annual personal spending requirements, the money which isn't needed in the next couple of years would have to be reinvested.  If each such extra million is taxed at (say) 35%, and each such million had been yielding (say) an "unsatisfactory" 4.00%, then what is left post-tax of each such million ($650K) would have to yield 6.15% in order to provide the same income as the original million did at 4.00%.  In a 4% world, it is far from certain that you can find an equally safe opportunity yielding considerably over 6.15%.  

For many, a better option is just to keep their existing good assets, and to retain the benefit of being able to use them as collateral for loans in order to help finance the much more lucrative opportunities that arise during the periodic downturns which routinely force over-leveraged people to sell. 

You just don't want to end up being one of those over-leveraged people yourself.

I am a big fan of business biographies; you get to learn from the life experiences of others in your own field as well as those of others.  One of the great ones is Phil Knight's Shoe Dog; a best seller for good reason.  If you have the opportunity to read it I think you'd really enjoy it.  He's a great writer, on top of everything else.

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Reply with quote  #29 
Good suggestion on "Shoe Dog." That's a goldmine of entrepreneurial wisdom. I also share Knight's contempt for Adidas. I always thought it was a "lame" brand – the tracksuits of choice for Paulie Walnuts and Tony Soprano. 

Phil Knight: "Confidence. More than equity, more than liquidity, that’s what a man needs." 
mlreits

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Reply with quote  #30 
SFL,

Funny, I came across this book last week while searching for something else to add to my reading list. I ended up ordering Steve Jobs by Walter Isaacson instead. I'm in the midst of reading Elon Musk by Ashlee Vance. Sooo inspired. Thanks for the recommendation.

Paul, great quote from Phil Knight. This defines Elon Musk. For the typical folks, we would have settled and enjoyed life after the sale of PayPal and walking away with $180M. However, Elon plowed all of that money back into Space X, Tesla and SolarCity and almost went broke along the way. He got me to think bigger...much bigger. 

Thanks all. Have a Great 4th of July on the Greatest Country with the best opportunity in the World.

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