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Real Estate market Crash? That's...

By: StudioCity'98

...fairly dramatic. Did you really mean crash?


Everyone knows all RE is local. Very tough to make a blanket statement about RE. Gotta be much more specific in terms of locality, demographics, price range, type of property…etc. And if you're asking about SoCal then proximity to the coastline is always going to maintain demand w/a price premium attached.


Overall though I don't see any catalyst that is going to create a RE crash now. That could change if we go into a deep recession, but now we’re still ok.  Mortgage underwriting standards are nothing like they were in 2007 before the GFC.  Bank balance sheets are as strong as they’ve been since I started in the Biz.. Interest rates are low, and now even falling again. Credit Default Swaps spread are stable. There's very little systemic risk potential in the system.


This economic expansion is getting very long-in-the tooth after 10 years. There might be a decrease in the rate-of-change of the rise in prices. There is some stagnation of sales velocity in some places around SoCal. In those areas motivated sellers will have to come off their asking prices to create offers.


Coastal and other highly desirable neighborhoods will always be relatively stable in SoCal. There are just too many people with insane amount of money in the world who will always want the SoCal way of life regardless of cost-of-living or taxation.  I've been all over the world and it's my not so humble opinion the during the Fall & Winter each year that LA is one of the most beautiful places anywhere when the temps cool down and the mountains turn green.


Though starter homes are in trouble for a variety of reasons. Many of those under 32-35, can't afford them number one, and number two, they just don't view homeownership in the same light as generations before did. In the gig economy anything can be done with an app.  So, they rent. They rent due to equal parts preference and necessity  And this is a national phenomenon too. Price-to-Rent ratio is as high it's ever been.


7 of the top 11 least affordable places to buy in the nation are in Cali. [e.g. the equivalent home price in LA for a $2000 rental is over $910,000. And seriously, who in the flying fawk would want to live in a $2000 rental?  That's the effing 'hood.  Rental rates are rising at the fastest pace in 10 yrs. Which is great if you're the landlord.  Or better yet, the owner of Multi-family Real Estate.


As such, I’ve been advising my people in direct RE investing through Multi-family Apartments since the early ’90’s. And then again in 2009.  Direct Real Estate investing is all about scale. Multi-family apartment investing scales well. Never buy anything under 20 doors, the numbers don’t work. The best Multi-fam investments is 200-300 doors.

With interest rates so low now there's no return in holding Bonds in one's portfolio.  My clients and I own multi-family in several states across the country. The lowest return we get is 18%, and that's IRR.

Cash-on-cash return approaches 100% in some lower-cost MSA's like Daytona Beach, Tampa, Boise, Charleston, the Front-range of Utah, and class A in SW Houston and downtown around the Medical Centers. We’ve now sold out of overpriced, and/or over-built places like Nashville, Dallas, Denver, San Diego and Atlanta.

Cap rates in almost all of California have been so low for so many years now that it rarely makes sense to buy anywhere in the state anymore unless one wishes to be a Slumdog Millionaire in the IE, Bakersfield or Fresneck. I have no interest in that. Too much hassle, and costs involved in keeping drugs and Cholo’s from destroying value.


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Class A properties prices have appreciated so much we have 60%-100% unrealized CapGains. Thank Jeebus and the Tax Code for 1031 tax-free exchanges.  Or usually we just refinance and take cash out of the property redistributing to the syndicate [if there happens to be one] seeking to reinvest further upmarket.

Owning Single Family as rentals suxx though. Way too much work and hassle for too little return. Avoid falling into that trap.

But during the next recession [which we're very likely going into right now] if prices do come in to levels where the numbers make sense take your investable funds and seek out great, cash-flowing multi-family properties. If you can’t do it yourself, which I do not advise unless you’ve done it before and really know what you’re doing, you can always seek out syndicates that are pooling money to buy.

Word of warning on RE syndicates: Make damn sure that the organizers of the syndicate are putting their money in the deal too. Watch out for operators who pool the money of others just to take the management and disposition fees outta the deal. Syndicate Leeches are everywhere. Avoid them no matter how good the deal looks on the Pro Forma.

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