Are SELLERS getting the Message?

or (c) - I have made enough from previous investments that day to day cash flow doesnt mean a while lot to me. I have other reasons for investing at this time, and if I can get out in 10-15 years with a gain then that fits into my strategy.

Thanks inonada for smacking down the ignorant flea About Ready/NYC10002/EddieWilson

that's assuming the propping is helping, not hurting long term.

petro, you amaze me. and not in a good way.

"nyc10022, I don't think that's really right. When you buy stocks, your cashflow (dividends) are quite low compared to your gains, even as a value investor. The point is to buy when the cashflow is high rather than low, and the gains will follow. Otherwise, losses will follow. The price is a reflection of all future cashflows, so the expectations on the gain on that (if you believe it's mis-priced) should be much higher than the actual cashflows unless you think the mis-pricing is going to take a very long time to correct (on the timeframe of the future cashflow)."

Except you are confused (like perfitz) and we're talking stocks.

Perfitz uses cash flow to "prove" he made good RE investment decisions, not factoring in the cost of the investment (and neative real ROI) plus underlying losses on the investments themselves. His logic was "I get a check, therefore I'm making money".

Furthermore, perfitz did NOT buy when cash flow was high, he bought when capitalization rates were at their lowest. Again, another fundamental mistake.

He never understood the distinction, although he pretends to now.

> Thanks inonada for smacking down the ignorant flea About Ready/NYC10002/EddieWilson

Sorta funny that perfitz is so dumb he doesn't even realize that he was dumb here!

my accountant tells me that I am making money, so does the millions i have in the bank. NYC10022 does your studio lease tell you that you are making money?

Yes, but when your accountant is your mom, that doesn't mean much. I figure she's got to be at least half as dumb as you.

Petrfitz, I can certainly understand cashflow not meaning a whole lot in terms of the actual cash, but at some point it affects your outlook on gains, no? If an asset is costing you, say, $4000 a month in cost of capital (whether provided by you or by the bank) but only yielding $2000 a month in rent, sure you can deal with the $2000 per month negative cash flow indefinitely. However, if you're expecting the $2000 a month in rent to only increase 3% a year while your $4000 a month in capital cost remains fixed, where should the gain be coming from? Even if someone is later willing pay cost-of-capital at $6000 a month for $3000 a month in rent, you're only looking at a 3% / year gain, no?

As far as the "smacking down", trust me, that wasn't one. That was just a friendly rebuttal to what I think was a missed point. Grown men will cry if I'm handing out a smackdown ;).

thank you for displaying your level of maturity NYC10022. a 12 year old wouldnt resort to a mom joke. Is it starting to get to you being an unemployed junior desk assistant with no hope of ever getting another finance job again?

nada, this is one of my many concerns about the propping that's getting done. creating another subprime bubble that is solely the burden of the taxpayer.

thanks for not smacking.
http://online.wsj.com/article/SB10001424052970204908604574334662183078806.html#mod=rss_opinion_main

inonada, you're giving perfitz way too much credit. He doesn't understand math.

He certainly doesn't understand NPVs.

hah bring up maturity levels and then post that comment.. do you feel that cognitive dissonance or are you completely oblivious?

Sorry to divert this conversation from this silliness but I just took a look at the seasonally adjusted Case Shiller and it looks to me like there is still a lot of seasonality not being removed. NY metro area (I'm aware it's not manhattan only) drops 14 points June 07 to April 08, drops less than a point April 08 to June 08, then drops 22.6 points June 08 to April 09, then rises .23 April 09 to June 09. Looks to me like we're still in for a bad winter especially relative to expectations. I would buy some puts if I had any faith in the stock market's ability to reflect economic reality.

nyc10022, petrfitz's decisions notwithstanding, I don't think I'm wrong. Suppose you have an asset that yields 10%, but you think the "right" yield / risk-adjusted cost of financing is actually 5%. So you buy and book 5% a year in cash flow. Eventually the market decides, you hope, that you're right and the asset doubles in price (i.e., the $10 asset that was yielding $1 becomes a $20 asset that yields that same $1). You think this will happen in less than 20 years, when you were making $0.50 in cash flow. Thus, you think the gains will be the main source of your investment profit, not the cash flow. I don't see why this is any different between a stock vs. a RE asset.

Of course, all this is predicated on cash flow. I don't think gains can be separated from cash flow, but capital gains & losses are a magnifier of what happens in cash flow because they account for all future cash flows.

AR - that FHA article reminds me.. I am sort of addicted to HGTV.. that show property virgins really is illustrative of the current market outside of NYC. You see kids in Las Vegas who were priced out for a long time getting an FHA loan for a house that really is a stretch for their current budget (to say little of future incomes). It is shocking to me that the FHA has been allowed to become a giant timebomb immediately after the failure of other similar entities.

Can't believe your logic is making me type this on the can I know nada. Unless you've got s govt backed IOU, no cast flow is guaranteed and neither is principal. That in and of itself is exhibit a in this GD2. When your kids go to MBA school, they'll have textbooks on this being the gd2.

Remember we are only in year 2 into this nationally and year 1 in NYC. Lmao. I'm nervous about my tenants renewal rates in 2014, if celinelover here isn't, then give me some of that good shit.

Scary stuff, AR. One can only hope that the recent events have tempered what I think was the real driver of the bubble: speculation by individuals as homeowners. Nothing like being handed a serious smackdown in the form of a disappeared downpayment plus the choice between negative carry, false hope, and bankruptcy to remove silly notions of "but home prices will always go up".

nyc10022, I dunno -- I think he does understand math and probably has an opinion / outlook on NPV. Maybe he's a proponent of the greater fool theory. Maybe he's a proponent of the "I'll scour the earth to find the best deal possible and that's my edge" theory. I'm just trying to understand his theory. FWIW, it's pretty clearly not "RE prices always go up".

EV, it's horrifying, absolutely. i guess too many people were paying attention to Fannie and Freddie's balance sheets, so they had to find a different conduit to suck the taxpayer dry.

but i'm sure they did it so some middle-class people won't have their property values fall too far.

inonada, these are largely first-time homebuyers. a whole new group of subprime borrowers. they're fresh and heading off to be slaughtered. and the FHA program is pushing them as fast as they can.

w67, careful not to strain yourself too much on the can. Understand your point about cash flows not being guaranteed, but given the fire hoses the Fed's been turning on to fight deflation, it seems to me that is a risk I'd be willing to take at the right price. Monetary policy is pretty strongly stacked on the side of 2014 rents being higher than 2009 rents.

what is guaranteed? if you want a clearly understandable non risky investment then get out of RE. Put your money into a ssavings account

On the FHA loans to first-time homebuyers in Las Vegas, it's not all bad. According to Case-Shiller, the bottom 1/3rd of the Las Vegas market is now down to 1/3rd the peak prices and at 1996 prices. At those levels, cash flow is very much in your favor. I briefly looked online at things like simple 1BR condos that were peak at $200K now going for $60K, and rents were on the order of $600. Nothing in life is guaranteed, but a 12% gross yield buys you a lot of margin-of-safety. Considered investment for like a couple of minutes, but decided that piddling around $60K at a time & renting in a remote location are no where near worth my time. But for that first-time buyer, it's a different story all together.

I still thought the prices were a bit high, maybe because of the delay between shooting and televising, but current price levels are definitely somewhat reasonable. There is a significant risk to buying in Vegas: the potential for population shrinkage, which could seriously depress rental prices. After all, it is a city built on discretionary and conspicuous consumption that went from 1.37MM people to 1.83MM people (metro area) over the last 9 years.

> nyc10022, I dunno -- I think he does understand math and probably has an opinion / outlook on NPV.

After reading moronic posts for him for a year or so, its clear he doesn't. Seriously, just read any of the old threads, search his name. Guy CLEARLY does not get NPV.

> Maybe he's a proponent of the greater fool theory.

Nah, he's just the greatest fool.

> FWIW, it's pretty clearly not "RE prices always go up".

You clearly haven't been reading his threads. That WAS his story. Only reason he changed it is because things went down. Dude called 15% up in Manhattan right before the crash!

"On the FHA loans to first-time homebuyers in Las Vegas, it's not all bad. According to Case-Shiller, the bottom 1/3rd of the Las Vegas market is now down to 1/3rd the peak prices and at 1996 prices. At those levels, cash flow is very much in your favor. I briefly looked online at things like simple 1BR condos that were peak at $200K now going for $60K, and rents were on the order of $600. Nothing in life is guaranteed, but a 12% gross yield buys you a lot of margin-of-safety. Considered investment for like a couple of minutes, but decided that piddling around $60K at a time & renting in a remote location are no where near worth my time. But for that first-time buyer, it's a different story all together. "

Inonada, I'm with you on Vegas. If I lived closer, I'd consider it.

Hell, I think perfitz's "deal" is on the market for 10 cents on the dollar for what he paid.

"decided that piddling around $60K at a time & renting in a remote location are no where near worth my time"

But, yes, agreed. Just don't live close enough.

"nyc10022, petrfitz's decisions notwithstanding, I don't think I'm wrong. Suppose you have an asset that yields 10%, but you think the "right" yield / risk-adjusted cost of financing is actually 5%. So you buy and book 5% a year in cash flow. Eventually the market decides, you hope, that you're right and the asset doubles in price (i.e., the $10 asset that was yielding $1 becomes a $20 asset that yields that same $1). You think this will happen in less than 20 years, when you were making $0.50 in cash flow. Thus, you think the gains will be the main source of your investment profit, not the cash flow. I don't see why this is any different between a stock vs. a RE asset."

Inoda, don't disagree with your theory here.

Problem is, its backwards for RE. Cap rates have historically run closer to 10%, and with rents sinking, they're still closer to 5%.

You're supposed to buy low, sell high, no the opposite.

You don't buy the asset when its at TWICE the price it should be at and wait for it to correct to half the price.

iknownada.. if you think collecting 12% on your RE rental is even anywhere near a 6% on a gov't bond, you are sadly mistaken. What you fail to do is "reserve" for damage to property, the occasional Meth lab, unrented periods, bad/non paying tenants, management fees, "loss" factor like someone stealing all you copper piping, missing toilets, the occasional toilet overflow, the emergent late nite gas line shut-offs, murder in the apt, death in apt, hurricane damage, storm damage, a car ramming into your property, fire, etc. etc. etc......

Unless you have multi-units in multi-state assets.... you are nowhere diversified. Look at when 9-11 happened, no LL could've predicted that and what do you think your rental condo did that year? i think the gov't bond kept paying...

Geez w67th, you must have some extra-special govt bonds since 10-year treasuries are yielding 3.45% and 30-year treasuries are yielding 4.23% right now. Just to understand how far off you are, your yield offage translates to a difference in price of about 20% for the 10-year and about 40% for the 30-year. Furthermore, although bonds have a lower risk profile than RE generally, your 10-year and 30-year leave you exposed to inflation risk. If you want to get rid of that, you're looking at T-bills which yield nothing at the moment.

So we got a gross yield of 12% on an asset whose expected rate of increase is, say, 3% per year (long-term inflation rate). You do some NPV math, this works out to about the same as a 15%-yielding asset with no future increases. Take out 3% a year in various costs, you're left with a 12%-yielding asset. The cost of capital from the bank on say 80% is 6%. Say the cost of capital of your 20% equity is 11%, so you get a blended cost of capital of 7%. The asset is yielding 12% on a net basis, so you're still left with 5% excess yield. Suppose you say, "No way, 11% cost of capital on my 20% equity is way to low, for that risk I expect a much higher return". OK, how's about 30% cost of capital for your equity (i.e., you expect to make 30% a year on that money to be compensated for the risk). In that case, your blended cost of capital comes out to 10.8%, so you're STILL ahead.

Look, I'm not saying that it's without risk, but at some gross yield there's plenty of a margin of safety, combine that with a 50% higher yield than the 8.3% yield from stevejhx's magic 12x historical price/rent ratio formula, and it's a buy signal. We're not talking about Manhattan-style 4% gross yields here.

I'll ask you the same question I ask bulls, except in reverse. At what yield are you a buyer?

Inonada, I am not an expert, just a SE user and sideline buyer, but I'll tell you that I am looking to buy in a 14X ratio, and expect 6-7 percent yield (maybe not this year, but starting in 2011 and going a bit higher after that). I can't think of RE future growth after an almost 400% in Manhattan on the last 10 years unless we are talking about 10-20 years ahead. Why am I willing to buy? Because I would like to be able to live in NY in the future and I will rent it out in the meantime, and I believe RE will weather inflation better than other assets. Why not the stock market? In my country we say the one who got burnt with boiling milk cries when he sees a cow....

> We're not talking about Manhattan-style 4% gross yields here.

But isn't that the point? Buying at a 12% yield, sure, I'll take a look.
4% yields and possibly getting worse... maybe not the leverage investment to take.

Sorry, perfitz, don't look good for you.

i know nada, I will buy at negative yield. The best yields I've gotten were on empty store-front condos and a desperate seller..... to buy with a tenant in place means the seller is dictating price/yield.

I understand you just finished your mba or junior finance class and the HP is hot in your hands and you can make that calculator sing like Timberlake, but what so many young RE investors don't get is that there are cycles to RE, and given the uncertainty and unless you have an inside track (like renting to your parents or starting your own Subway franchise in the space), the curve/trend is to enjoy some traveling and look and not buy. IMHO.

junior bankers always have their calculators out... the senior bankers tries to see if the deal will pass credit and the counterparty risk....

and don't get me started on G... that's a pull out azz number and who says rents are gonna rise... I'd say put a pubic haricut on it... says down 5%/ yr for 4 years then start rising by 1% for 5 yrs... and don't forget the RESERVES! An investor has a healthy reserve, a schmuck things every single cent of NOI is to buy his girl the new diamond wonderbra.

Mimi, FWIW I think that a 6-7% yield is about right at current interest rates if you're planning on staying long-term and are not looking for a serious profit....

So, Real Estate if it were 30% cheaper in Manhattan would be a great investment, as long as you don't require significant, uh, profit.

Sounds perfect, sign me up!

nyc, if things were 30% cheaper, then if you're chomping at the bit like Mimi, then buying is not unreasonable.

FYI, w67th, no mba, no finance classes, not a banker, not junior, not a RE investor. But you're right about everything else you guessed about me.

"nyc, if things were 30% cheaper, then if you're chomping at the bit like Mimi, then buying is not unreasonable."

To live in, assuming rents stayed the same, yes. To invest in, probably not.

Therein lies the big mistake.

I think we're in agreement, nyc10002. I read Mimi's post as "to live in", not as "to invest in". I think it starts getting interesting for investment in the neighborhood of 10%, and I think we're a long, long ways away from that, but maybe not.

Crud, nyc10022, I hope you weren't insulted by me taking you down to the LES zip-wise accidentally there...

ha, no problem.

Though remember, the argument started with perfitz the moron, and that was specifically about investment properties.... which he has lost his shirt on.

" think it starts getting interesting for investment in the neighborhood of 10%, and I think we're a long, long ways away from that, but maybe not. "

I think we have a long way...