Posted on 03/05/2005 8:05:02 AM PST by Willie Green
TRENTON, N.J. -- Many people agonize for months before deciding to buy a house. Jonas P. Lee is more decisive: He often buys several in a day.
This year, the 38-year-old Mr. Lee says he plans to buy more than 1,000 homes for Redbrick Partners LP, a New York firm he runs with the help of an MIT economist to invest in single-family rental property. What millions of mom-and-pop landlords do locally, Redbrick is trying to do on a grander scale.
Mr. Lee, a former Web entrepreneur who grew up in New York's posh Westchester County, doesn't see much value in most suburbs at today's lofty prices. Instead, he is buying in working-class neighborhoods in such cities as Baltimore, Philadelphia and Trenton. Even there, however, he is running into tough competition from people determined to cash in on America's decade-long housing boom.
(Excerpt) Read more at post-gazette.com ...
What these operators are doing is looking for places where the house prices are dramatically lower than that, but that will justify good rents with a little fixing up. That typically only happens at the edges of shifting neighborhoods, where over this line crime is high etc, and over that line things are better and prices are more normal. Buy things at the line or over it, at the run down dump prices (75,000), then rent them to people from the other side of the line at fixed up prices (800-1200 a month). Obviously there are extreme risks in this. Of not renting the places, of the neighborhood going south on you, etc.
In tonier places the game at the moment is a trade that is the reverse of this. People take over rental property and divide it into condos, to capture the vastly higher prices people pay (at these low mortgage rates etc) to own, than can be carried by the capital of the rental property, at existing rents. In CA, the Boston area, anyplace owner prices are in nosebleed territory, that is the profitable trade, not holding to rent.
In parts of the country that aren't overpriced and are underpriced, apartments can be held in large blocks, but typically not justified in private homes. Each apartment winds up valued at 50-100k, typically. Some small operators own a few buildings this way, most are run by larger chains that operate in whole regions, with hundreds of units (and up).
The other profitable real estate activity is building additional single family houses, wherever demand or nearby prices are high, and zoning and infrastructure things aren't unmanagable. Companies like Pulte and Lennar do that. You can make a new house in Phoenix for 100k, that will sell in 3 months for more than that. That by size and amenities etc, would go for 250k or more in the NE and for 500k or more in CA.
That is effectively arbitraging construction costs against nosebleed house prices. If there is any level of mansion people will leave Boston, New York, or the bay area to have, then that will eventually cap the explosion of house prices in the hot markets.
We rented our other for $2100 in a month. Great views and amenities. Went fast. But the 1500-1800 market belongs to the renters, for now.
PS we're in it for equity build up in the long haul.
Wait until earthquakes or a terrorist strike nail the coasts. People will be leaving in droves.
No, the people who stand to get creamed if the bubble bursts are (1) the homeowners in the hottest markets and (2) the regional banks in those areas, especially those top heavy with mortgages.
Some mortgage backed securities are one-way shorts, too (meaning, the excess return over e.g. treasuries is tiny if everything goes perfectly for them, and if everything goes to heck so will they).
As soon as my dot com was bought at the top of the bubble, I started shorting overvalued junk. I'm not broke or in prison. The "trading" element (as oppoesed to shorting) got me. Had I just maitained my original positions and gone on vacation, I would have been better off.
I'm aware of the risk and would take all the appropriate cautions.
I hadn't thought about the builders. That might be worth looking into.
However, assuming that investors in those stocks are more savvy and that some level of discount is built into their stocks, I'm wondering if there exists an even more pure play for overpriced housing?
I'm curious as to whether it is possible to bet against the people with the excuses that I referenced in my first post. They aren't investing in securities. I imagine not, but thought this was a good thread to toss out the question.
By the way, I'm not profiting from bad times. I'm profiting from the excess greed of others. Remember that the bubble was Clinton's, and it was engineered. I suspect the Real Estate bubble is a remnant of that era.
bump for later review
You bought too high!
All real estate profits hinge on up front costs. If you buy too high you must be damn lucky to ever get a return on investment. 99.9999% of the time in this situation you will not be lucky. Mortgage Auctions, repos and depressed properties are the answer.
I just bought a 2br/1bh home that is in a commercial zone for 8,700 bucks! For another 30K I can have it in tip top shape. At that point it will be worth over 50K just for the house alone not including the commercial potential of the property.
Wow, what area are you in?
Bull crap on "Get Rich Quick" you can do all the things these gus advertise yourself and "Get Rich Slow." Real estate speculation is for suckers, What you want to do is find the "Deal" in a growing area.
Find the "DEAL" in the hotest neighborhood. Find the piece of property that is buyable at a purchase price 50% 60% 70% (etc.) less than all the other properties surrounding it.
These deals don't come everyday but they are out there. You just got to know where to look!
SOuthern Ohio, Rural part.
The basic idea is to bet somebody else's money. Pick a hot market where prices are going up and chase them. Get as close to nothing invested as possible through high LTV mortgages, stoked by mortgage insurance if necessary. Sell in a year if the price went up. Rents are just partially covering debt service.
If the price doesn't go up you have a huge mortgage liability to service and nothing much to show for it. Default. Give the house to the bank. Let it be the one to sell it at a loss. Not very honest, and won't do wonders for your credit rating. I don't doubt that a few operators get several "hits" in a row and make money, though.
(PS so do people who play craps...)
This turned into an excellent thread Willie!
What happens when the baby boomer generation retires and decides they don't want to pay the high property taxes associated with the nose bleed prices. Looks like there's a hige correction coming when those folks move on.
We're seeing people retiring early and moving to West Virginia from suburban MD and NJ.
Hasn't this been a strategy for years in rural areas where people buy five or ten "rental properties" for cheap?
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