06.30.08
Tale of two landlords
One of the key mistakes I have made in my real estate career is not accounting for vacancy in my cash flow projections. And vacancy will kill you, I’ve had 3 month vacancies that turned a cash flow positive property into a decidedly cash flow negative property.
Consider two landlords. Both need to find new renters. The first has a very desirable property in a great part of town, very close to transport and shops. The house has very nice woodwork details. Although the current tenant hasn’t moved out yet, the landlord lists on craigslist. He gets a lot of calls and sets up several appointments throughout the week. While the charm of the house is clearly apparent, the clutter of the tenant’s belongings detracts from the showings. Additionally, because there was so much interest, he raises the asking rent on the rental application $45 dollars higher than what was listed in the craigslist ad. The rent was already on the high side for the square footage. The rental application has a page missing. He gets a few applications and then starts working on them, making several calls to get more information on the applicants, delaying the decision process.
A week later, landlord 2 lists his house. It is in also a good location but not as convenient and desirable. He lists it at an asking rent that is under market and has a showing of only one hour. The house is vacant and spotless. He clearly states in the ad that the applicants are to bring their own credit report and application. Many people show up during the showing. It is clearly a good deal and many turn in their application, even though the lease start date is in less than 2 weeks and not negotiable. Landlord 2 makes a decision with 48 hours and has a tenant, the same tenant that Landlord 1 finally decides on. The tenant decides to go with Landlord 2 even though double rent is involved and wipes out any savings for six months.
Moral of the story, if you want a tenant fast, list under market and have your act together. Renting it quickly for less is usually better than 1 or 2 months of vacancy. Ability to expedite the process helps too.
06.22.08
Financed a real estate property lately?
Have you tried to finance or re-finance a property lately? It’s a different world. A reader’s question featured in the Benny Kass column wondered if the lenders would laugh in their face if they applied for a home equity line. Since all they have in equity is the down payment they made a year ago, it would be pretty tough to get a line of credit on that property. Hopefully their broker won’t laugh in their face as well.
I’ve recently talked to a mortgage broker as well. I wanted to refinance some land and I also have an ARM on a duplex that is expiring in October. I have the ARM at a great rate, 5.6% however unfortunately that kind of a rate is not available now, ARM or no ARM, for an investor. Homeowner rates are the highest they have been since September, 30 year fixed is at 6.42% and 5 year ARMS are at 5.89%. Since investor loans are at least a point more, I’m likely looking at a 7% loan which means a higher payment. So I have to decide whether to sell or absorb the higher payment. It’s a close to breakeven property.
Lenders will no longer finance land at a 80% LTV. They will only consider loans at 65% or 70% LTV for land. With the loan I currently have, it is at best 75% LTV depending on what the appraiser would say. So in that case I would have to come to the table with money.
It was not a very encouraging conversation, certainly not much in the way of options. I commented to the broker that he must have heard many stories like mine where we are stuck with negative cash flow property that is tough to refinance and that puts us in a tough spot. His answer was memorable, at least to me, “Actually, you are a success story”. Eeek, since I’m not feeling like a success story at all, I really feel for the “failures”.
06.16.08
The millionaire milk man in La Fortuna
Once upon a time there was a farmer that sold milk to his neighbors. He lived in a shack on his land where his cattle grazed, close by to a volcano. The area the farmer lived was beautiful, with lush rainforest, a lake and of course the scenic volcano which provided a show of red lava every night.
Over time more and more people came to visit the area but there wasn’t much in the way of accomodations.
One day the milk man decided that his land, with the scenic views of the volcano, would be the perfect place for a hotel. He sold a small section of his land to some gringos for $8 a meter and then went to the bank. The bank was happy to lend him some money for the hotel construction project. And so a millionaire was born.
Today that small section of land he sold is now worth $100 a meter. And the milkman? He is building his third hotel project. Some say La Fortuna is now overbuilt, there is too much inventory of hotel rooms for the demand. The banks, especially with the global credit crunch, are not lending as easily on construction projects.
But the milkman doesn’t care, even a downturn in the economy won’t bother him much at all.
06.08.08
The boom lives in Costa Rica
I’ve now been back from a 2 week trip from Costa Rica for a week. It was a bit harsh, re-integrating myself back into my life. The bills (especially all my mortgages). The cold (yes this is San Francisco, we don’t get summers). The sheer pile of things to do. I missed having wonderful breakfasts cooked for me.
Being invested in real estate, I always look for clues on the local market. I didn’t have to look very hard, the real estate boom is alive and well in Costa Rica .. particularly on the pacific coast where I spent most of my time. My first week I stayed in Jaco. Jaco is a beach town 2 hours due west of San Jose, the major city in Costa Rica. It was dark when I journeyed from the airport, but even then I was struck with the differences of this country compared to others I have been to. The lack of trash, the landscaped strip malls (!!), and the massive proliferation of billboards advertising real estate projects … that were all in English!
I saw signs advertising lots and condos. One sign must have been 25 feet high and it had spotlights so that it was quite visible at night. The properties offered were not very cheap, $200K seemed to be a popular starting price, the cheapest I saw was some lots starting at $59K that were some distance from the ocean (although the scenary was nice).
According to the local residents, the boom started about 5 years ago. That was when they started noticing the projects sprouting up around them. But the activity certainly intensified in the last two years. I could see that for myself. There were at least two cranes on the horizon looking towards the beach. I could hear work start in the early morning on the towers you see half completed here. As I lazed away the days in a hammock, I watched trucks chug back and forth carrying dirt away from a construction site (with no structures yet) to the north. No one was quite sure about the intent of the site, some thought it would be a private villa.
It is said that the housing crisis is most impactful on the entry level market. That the pricier properties are still selling. Well I hope that the affluent buyers are the target market for the Costa Rican boom, otherwise the real estate bust will surely spread there as well.
