[4plexowner]

The 8-10 GRM is a general rule of thumb.

Another rule of thumb is that each year a property will cost about 10% of its purchase price to own and maintain.

For example, a $400K property is going to cost, on avg, $40K per year to own and maintain (mortgage, insurance, taxes, maintenance, etc).

For me to break even on the property I need $40K per year in rents (which equates to a GRM of 10).

I use these guidelines to evaluate potential investment property.

~

My investment experience is limited to San Diego fourplexes.

The first one I purchased in 1998 and paid about 13 GRM. The property and its location justified the higher GRM.

In 1999 I paid 11.5 GRM for a fourplex in Mission Beach and thought I was paying too much.

I purchased four more properties at higher GRMs before coming to my senses.

By 2002 GRMs for multi-units were consistently over 15 and usually 16-20. That’s when I started selling.

[4plexowner]

Which is another reason that a low quality tract home in north county isn’t worth $700K – $2 mil.

[4plexowner]

As an investor, that $1700/mo rental is not worth $300K to me.

I am expecting gross rent multipliers (GRM) in the 8 – 10 range when our market bottoms.

Let’s be generous and see what the condo is worth to an investor at a GRM of 10:

(GRM of 10) x (yearly rent of $20,400) = $204,000.

At GRM of 8 the condo is worth $163,200.

The stupid person that sdrealtor refers to may buy this condo for more but that’s what it is worth to me.

Why would anyone care what this condo is worth to an investor?

Because housing that won’t sell becomes rentals and a savvy investor buying rental units isn’t going to pay the 20 GRM that this property is currently listed at ($409K).

[4plexowner]

I think you are referring to the two round or oval towers just across from the convention center. They are black or very dark brown.

If I remember correctly, a single penthouse unit sold for $1.5 mil (which was big money in the 1980’s) and the guy had a private entrance and elevator up to his unit. The rest of the tower (towers?) was empty.

~ ~ ~

I’m hoping that many of the condo projects currently planned for downtown don’t get built. It appears to me that the market is more than saturated already and there are still several thousand units to be built.

[4plexowner]

I agree that many current owners and developers won’t have the option of keeping their excess (non-owner-occupied) real estate as rentals.

That’s what short sales and foreclosures are all about.

Some units may have to be purchased and foreclosed more than once before reaching a price where an investor is willing to hold long-term as a rental.

Personally, I won’t be buying any rental units until gross-rent-multipliers are back in the 8-10 range. That means the $2500/month rental is worth $240-300K to me today.

How does a $700K 2 bedroom condo downtown become a $300K condo? I don’t know but that’s what I’m expecting. There will probably be many foreclosed “homeowners” and bankrupt builder/developers along the path.

[4plexowner]

It was a comment well worth repeating, IMO.

The San Diego rental market is about to be blessed with MANY more rental units.

There will be thousands of rental condos downtown.

There will be entire condo projects (both new-construction and conversions) that will fail to sell and will become rental units.

Most of those vacant SFRs sitting on the market right now will become rentals. (another thread posted that there are 2900 vacant SFRs currently on the MLS – don’t tell me that a vacant house is owned by someone who is “testing the waters”.)

Many of the tract homes that are currently on the market and are still being built will ultimately become rentals. How much demand can there possibly be to buy low-quality tract homes in the $700K – $2mil price range? (beam me up Scotty, there’s no intelligent life on this planet)

Contributing to this rise in rental inventory will be the exodus of wage-earners from San Diego.

Some of this out-migration will be of people formerly employed in the real estate industry. Many of them will try to remain in San Diego but will ultimately tire of life as a waiter or waitress (or other jobs in the “hospitality & leisure” category) and then move on.

The more worrisome exodus is of the people who are choosing to leave San Diego because the cost of home ownership is too high. Realizing they will never obtain the “American Dream” of homeownership in San Diego, they are moving on to other locales.

Along with this out-migration of people, I believe we may also see an increase in the occupants-per-dwelling number. As inflation continues to feed into the cost-of-living, people will choose (or be forced economically) to double and triple-up in existing housing units. This trend (if it occurs) will reduce the demand for local housing units.

In summary, I see lots of new rental housing becoming available in the next two years. These new rentals will come from two sources: 1) over-supply of condos and tract homes; 2) reduced demand for housing as people leave San Diego and increase the occupants-per-dwelling number.

[4plexowner]

You’re not alone anxvariety.

I was buying last week and I’m looking to buy again this week.

I’m hoping to get another strong down-day and I will back up the truck. I might even borrow my neighbor’s truck and back it up too!

Just keep accumulating silver and gold.

powayseller – the FDIC is just another underfunded government agency – in any financial meltdown they will be overwhelmed – and, even if they aren’t overwhelmed, they will be restoring your lost bank account with freshly printed money (ie, you will have less purchasing power after they have ‘made you whole’ even though your account balance will be restored)

[4plexowner]

Just because I’m paranoid doesn’t mean they AREN’T out to get me!

[4plexowner]

Carrying a 2nd mortgage is very risky, IMO.

The buyer has very little incentive to make payments on the 2nd and there is very little recourse the seller can take against a non-performing 2nd.

The only real consequence to the buyer of not paying the 2nd mortgage is that his credit would probably get messed up.

As I understand it, the best legal remedy the seller could get would be a lien against the property. There would be no way to force a sale of the property or to garnish any of the buyer’s income.

The lien could remain in place forever. It would only have to be resolved during a sale or refi of the property.

So there the seller sits with a non-performing 2nd and a lien against a property that he no longer owns or controls.

That doesn’t quite sound like a win/win/win scenario to me even though the odds of it occurring might be low.

The only reason I would carry a 2nd is if the deal couldn’t happen otherwise. And then, after the 2nd had seasoned for six months I would sell the note at a discount. It makes more sense to discount the asking price of the property up front and find a buyer who doesn’t need an owner-carried 2nd.

[4plexowner]

No information about deposits that I could find at their website: http://www.vantagepointesd.com/index_flash.html

Found these via Google search:

prices at Vantage Point start in mid-300’s

“And he has a $5,000 deposit down for a 16th-floor unit at Vantage Pointe, a complex that is expected to be finished in 2008.” http://www.signonsandiego.com/uniontrib/20050417/ news_1b17specula.html

[4plexowner]

China is a tough country to base economic analysis on.

I keep in the back of my mind that China is hosting the 2008 Olympics and the World Expo in 2010. They are also working towards joining the WTO somewhere in the next few years.

They also have an aging ruling class that knows they have to keep the people happy or they will be out of work quick (via revolution). There are literally 100’s of millions of farmers moving out of rural China and into the cities every year. These people need jobs which means China needs a growing economy.

The massive flow of rural Chinese to the cities is causing China to build an LA-sized city every month! Think of the resources that entails. They are also building and renovating for the upcoming Olympics and World Expo. In Shanghai they are scraping 1300 acres for the World Expo site.

As with most governments, the statistics coming out of China are questionable. Some analysts believe the Chinese have been understating their growth rate for the last few years by several percentage points – instead of the reported 8 or 9%, growth is really running at 12% or so. This subterfuge makes sense because China has been out shopping the globe for natural resources and wanted to (and still do) disguise their level of demand.

One of the reasons global energy demands are increasing is because China DOES have a consumer class and this segment of the population is growing. The Chinese are willing to work for $4/day w/o bennies because they want the Western lifestyle – the cars, refridgerators, A/C, etc – this demand for resources is in addition to the resources that went into building the cities that these rising consumers are living in.

It is reasonable to assume that China would like to be a world power. I believe they could do this very quickly by offering the world a precious metals backed currency. A Chinese economist is telling the government to increase their gold reserve from 600 tons to 2500 tons quickly and the government is encouraging the citizens to buy gold. Something to watch.

These factors make me think that the Chinese will continue the status quo for a little longer. I don’t think they will start dumping US dollars and treasuries wholesale before 2009. The longer they wait the more they let their internal consumer demand develop and grow.

Summary: China is not completely dependent on the US. There are trends occurring in China that will continue with or w/o the US consumer buying Chinese goods.

Tangent 1: Casey Research (www.caseyresearch.com) is very positive on energy and precious metals stocks but bearish on the base metals stocks.

Tangent 2: I feel like I get enough exposure to the base metals via some of the precious metals stocks so I don’t take positions in the pure base metals stocks that Zeal recommends. I do like the diversity that some of the jr resource stocks offer (both Zeal and Casey Research recommend jr resource stocks): uranium / gold; gold / zinc / moly / uranium; silver / zinc; gold / iron – my portfolio is focussed on silver/gold/energy but I get some exposure to the base metals too.

[4plexowner]

That’s interesting about McMillin’s condo project.

Builders in other markets are also cancelling projects – Las Vegas, Florida, Arizona.

I read this week of a Florida (?) condo project that is now being marketed as rental apartments because of the changed market for condos.

We have seen at least one UTC condo converter offer the converted units as rentals because they weren’t selling.

Anybody aware of any other cancelled condo projects or condos that became apartment projects?

[4plexowner]

Wikipedia says that the world’s total GDP in 2005 was $44.4 trillion dollars. American GDP was $12.2 trillion dollars.

Depending on whose numbers you want to use, the financial derivatives market in 2005 was $150-200 trillion dollars.

How do you explain financial activity that is three times the size of GDP?

I’ll use PS’s words: “all kinds of financial and monetary supply shenanigans”.

With precious metals backed currencies, these financial games would not be possible.

[4plexowner]

I think we have to assume that Mr Bernanke and Mr Paulson will do everything they can to maintain the current economic status quo.

Hiding the M-3 money aggregates in March of this year made their job easier. They can now run the printing presses with less oversight.

It is probably reasonable to assume that they will try to maintain the housing market or revive it if it turns down significantly.

Another poster pointed out that tax incentives could be offered for real estate investment.

More frightening than additional tax breaks would be some kind of “every American deserves to own a home” program with huge subsidies provided by the government.

These subsidies could be offered in many different ways. Maybe special housing grants to city workers (police, fire, EMT, etc) for purchasing a home in expensive cities. Same thing for teachers, etc. How about housing grants for military service? Get $20K in mortgage credit per year of service!

Given unlimitted access to the printing presses that produce the world’s reserve currency (for now) there are lots of options.

We might even see housing grants for 13 million illegal (oops, I mean ‘undocumented’) aliens.

For that matter, why bother subsidizing the purchase? Why not buy some of the vacant condos as housing for government/civil workers? Provide it as part of the pay package.

Sounds far fetched doesn’t it?

I’m trying not to underestimate the absurdity of what our government and central banking system might attempt in the next few years.

The article linked below sums up why I moved my investment money out of real estate and into the precious metals. This is a real estate holding company summarizing why they are selling their real estate holdings ($350 million worth!):
“There is virtually no upside left, and instead, tremendous downside risk. There will be a significant “flight to quality” by lenders and investors. The risk of remaining heavily invested in real estate is extremely high. Values are far more likely to fall precipitously than to rise modestly. Most real estate should therefore be sold and the extraordinary profits harvested. ” http://news.goldseek.com/DollarCollapse/1149879518.php

I believe the “flight to quality” that they refer to will drive gold to at least $1650/oz and silver to $80/oz.

I own the real estate that I currently live in and plan to keep it. I have stopped telling other people what they should do inre real estate and investing but I am always willing to share what I have done and why. In a nutshell: sell investment real estate and buy precious metals.

[4plexowner]

My biggest concern for condo owners who have ANY intention of selling in the next two years is that they will be undercut in price by the condo builders and converters. These condo owners will be competing on a playing field where they can’t win.

I’m keeping track of some 4 unit condo projects in my area. I figure they will cost the builder about $300K per unit in build/carry costs.

The first of these projects came on the market at $549K and has now dropped to $449K per unit (w/o selling any units as far as I can tell).

Let’s say someone buys one of these units for $449K and then decides to sell.

Who can drop prices more easily? The builder who will make a profit on anything over $300K or the owner who owes the bank $449K?

Here’s my guess: in a declining market the builder is going to price his units below whatever price the owner is asking which means the owner WON’T BE ABLE TO SELL their unit until the builder has sold ALL of his units.

STAY AWAY FROM CONDOS!!!!!!

[Author]

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