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Investor exhaustion with investment properties hits: Blackstone’s acquisition pace has fallen by 70 percent from peak last year. Running the numbers on rentals in high priced markets.
By: Dr housing Bubble
Existing home sales had another weak month and the blame continues to be on the notorious polar vortex. On the other hand, California is in a record drought and we are in an endless summer yet sales have hit multi-year lows as well.
Could it be that over paying for a pre-World War II house is not
exactly fitting in the budget of the regular local buyer? It is one
thing to speculate but another to see what is happening on the ground.
The granddaddy of rental investors, Blackstone has tapered off its
investment buying binge dropping in acquisition volume by 70 percent
from their record highs from last year. These are folks that run the
numbers in bulk. I speak to many local investors and many have not
purchased properties in SoCal since early 2013 since the numbers simply
did not make sense then and they certainly do not make sense now for
cash flow opportunities. The rest of investors are the late comers and
the speculators, otherwise known as flippers.
It is interesting to see the mindset shift once again similar to 2006
when the volume was turned up so high that even uttering the words
“correction” labeled one as a “doomer” or some other attack not based on
numbers. Unless you see real estate going up forever, you are
basically camping out in a nuclear war shelter counting your stockpile
until the end of days. Yet numbers matter. In many states and in
certain markets, prices do make sense and have room to grow. Not so
much in California at least in the short-term. This is why as we
mentioned a site dedicated to housing data Zillow
has reached 70,000,000 unique readers a month. Apparently “setting it
and forgetting it” does not apply to housing. Let us run the numbers
assuming you were looking for cash flow properties in Arizona and
California.
Looking at investment properties in Arizona and California
In SoCal $500,000 gets you very little especially in L.A. and Orange
Counties. It might get you a nice condo in a sought after market. As
an investor, you are looking at cash flow on a variety of fronts. Tax
benefits are overplayed in many cases and most long-time investors
understand this. In fact, most seasoned investors will tell you to
allocate close to 50 percent of your gross rents to costs outside of the
regular mortgage payment. Many investors that I know are not your
Blackstone’s. They are folks that buy properties with at least 25
percent down and finance the rest through conventional banks or through
other lenders. They do put a large amount of skin in the game so the
numbers absolutely matter.
So let us take an example of two markets right now with Arizona and
California. It is very doable to find a $150,000 property in Arizona
that will rent for $1,500 and a $500,000 condo in California will get
you close to $2,500. This is very common. For some $500,000 in SoCal
seems like a great deal so we’ll run with that. I think people assume
that this unlimited investor buying spree is going to continue deep into the future. We are already seeing near record low sales volume even though prices went crazy in 2013.
So let us put together some figures here:
Sure, some will tell you to close your eyes and simply pick a place
and buy since real estate always goes up in certain markets. But for
investors, numbers absolutely matter and if Blackstone was optimistic on
the future they would be buying up these high priced properties but
they are not. I think the above numbers highlight why investors are
balking big time. Novice investors will throw out figures like “that
$2,500 a month in rent on that $500,000 home is great!” $30,000 in
gross rents seems great when you don’t crunch the numbers. They fail to
mention that you will fork out $132,000 of cold hard cash and still
have a $375,000 mortgage as well. I was very optimistic on the low HOAs
above because in some areas in Orange County HOAs of $300 and higher
per month are routinely common especially with condos.
You’ll notice that even in Arizona that $150,000 investment property
with 25 percent down is going to bring in something like $445 per month
assuming no vacancies, maintenance, or other unforeseen costs after your
outlays are factored in. Your tax benefits will absolutely depend on
your tax bracket but if you are shelling out this kind of money, you are
probably already at a very high tax bracket so any rental income you
get is going to get taxed nicely. Something tells me Blackstone is not a
poor organization.
But look at the figures for California. You are running in the red
with a 25 percent down payment here. This also assumes you are fully
rented, no monthly expenses, and you don’t need to do any major
repairs. People are waiving contingencies on these crap shacks and fail
to realize that a roof or slab work will likely eat up a few years of
profits. Plumbing work? Flooring? Labor is not cheap in SoCal.
What about appreciation? This is where speculation dives in and this
is why a correction is very likely to occur. You pay rents from net
monthly income! Investors are 30 percent of the market in SoCal. If
they are seeing these crude numbers is it any shock that they are slowly
pulling back? So when the year-over-year gains go stale and even
negative (which is very likely) do you think they will ramp back up?
The current pace makes no sense for investors already. The only reason
to purchase would be to flip and this is practically the definition of a
mania if we are not seeing underlying incomes increase. It is also why
California is largely becoming a part of the new renter nation.
As an investor seeking out rental cash flow you can see why investing
in California overall is a poor proposition. The momentum we see today
comes from the 21 percent jump in the median home price in 2013:
It is interesting to hear those that talk about gains not actually
putting their money where their mouth is. If you assume that prices
will go up, go for it and buy that house in Culver City or Pasadena.
Why not? This is a sure bet from their perspective. Make it a rental
and reap those unlimited rewards. As I mentioned from talking with
investors that are deploying their own hard cash, California is not even
on their radar. The flippers
on the other hand are still out there. Whether you rent or buy, you
should understand the nature of running the numbers especially on the
biggest purchase of your life. California for a generation has been
nothing but boom and bust. So it is interesting to hear these same
people talk about a permanent plateau as if this was the history of
SoCal:
The facts show boom and bust. Just the reality of our market. I’m sure the 7,000,000 folks that lived through a foreclosure wished they ran the numbers.
Arizona Property Management & Investments
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