Risk and What It Is Not
Feb. 24th, 2013 07:57 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
walkitouthttp://www.calculatedriskblog.com/2013/02/housing-some-details-on-business-model.html
I love CR.
Anyway. McBride links to an article about a (really strange -- there's a profile of him in _Lost at Sea_ by Jon Ronson, unless I've gotten horribly confused again) billionaire who made a bunch of money in public storage and is now pouring money into approximately 2000 square foot houses in above average school districts in the Triangle (Raleigh-Durham-Chapel Hill, Wake is the main county involved -- I know this mostly because my sister lived in the area for a few years).
North Carolina is a really weird state. There used to be a good chunk of tobacco farming, but that's more or less gone. The Triangle has a bunch of tech. There's some recreational/retirement areas (notably Asheville). There's some pharma in the state and a few other things as well. The effect is that the average level of educational attainment is higher than most of the south, the standard of living a bit higher, the educational system a bit better, etc. There's also a good amount of turnover: the Triangle, in particular, is as often a stop along the way in a career that will also include the Bay Area, Austin, the Pacific Northwest, Route 128, etc. All of this adds up to a real estate market that tends to not build beyond demand, did not get particularly bubblicious, and doesn't ever really drop a lot, either. All of the demographic indicators suggest that you can reasonably expect North Carolina to continue to have high tech and/or pharma jobs for the foreseeable future and the environment is very accomodative to business.
Short form: if you buy real estate in North Carolina, you can live in it and have a nice life with a good job, you can rent it to a nice family that will stay in it for a few years before they move somewhere else in the country (who would otherwise buy, except no one wants to get stuck and we're all paranoid these days), and if you had to sell it odds on you'll get (most of) your money back, if not make (a bit) more. You can hire competent people to maintain the place. Etc. [ETA: Building code isn't too onerous. You don't have to worry about whether your roof can handle snow load, altho you do have to worry a little about hurricanes. Crappy insulation standards have no impact on whether people can keep the place warm in winter and not too many people figure out how that interacts with the cost of AC -- altho that could change.]
http://www.newsobserver.com/2013/02/23/2702528/california-billionaire-bets-on.html
I cannot argue with Hughes' investment strategy here. It is safe. There is no way you get screwed on this deal, and the returns are _way_ better than anything equivalently safe, assuming you've got decent personnel to handle renting/maintaining/etc. the inventory, an aspect to the business that I keep trying to understand (because scaling this is New -- historically, all big operations renting out housing did multi-family, not single-family detached) and not completely succeeding (I think it can be done -- I'm just looking for the down-and-dirty details).
Which makes this mysterious:
"“I think that this influx of institutional capital into the residential market is creating a bubble within the housing bust,” said Mark Vitner, a Wells Fargo economist in Charlotte. “It will end once the investors that are putting money into the funds come to realize that there are much lower-risk ways to earn the returns that they’re seeking.”"
"Vitner said Wake County may offer the company relatively low returns given the risks involved in acquiring, leasing and managing rental houses scattered across numerous neighborhoods."
"“It’s not a bad strategy, there’s just a lot more risk than I think people realize,” he said. “It surprises me that we’re seeing this much speculative behavior in the housing market after having gone through the bust that we went through.”"
Vitner is correct that there are risks involved in running this operation: this is true innovation, trying to scale single family detached rentals. But there is essentially no risk that you won't have renters who want to pay what you need to ask of them (for all the reasons I mentioned above). Nor is there any risk that the market will prevent you from selling these things for at least what you bought them for, some years hence (that's what more people moving in than houses being built means, after all).
I want to know where Vitner thinks you can get 6.5% returns as more of a sure thing than this. Because I am at a complete loss. OTOH, Vitner is in Charlotte, which IIRC is the place where the schools are so terrible my friend D. (ex-boss) felt compelled to _start his own school_, because even the private school options were so problematic. You can probably make a great living giving very mediocre financial advice to a population that will put up with crummy schools.
I love CR.
Anyway. McBride links to an article about a (really strange -- there's a profile of him in _Lost at Sea_ by Jon Ronson, unless I've gotten horribly confused again) billionaire who made a bunch of money in public storage and is now pouring money into approximately 2000 square foot houses in above average school districts in the Triangle (Raleigh-Durham-Chapel Hill, Wake is the main county involved -- I know this mostly because my sister lived in the area for a few years).
North Carolina is a really weird state. There used to be a good chunk of tobacco farming, but that's more or less gone. The Triangle has a bunch of tech. There's some recreational/retirement areas (notably Asheville). There's some pharma in the state and a few other things as well. The effect is that the average level of educational attainment is higher than most of the south, the standard of living a bit higher, the educational system a bit better, etc. There's also a good amount of turnover: the Triangle, in particular, is as often a stop along the way in a career that will also include the Bay Area, Austin, the Pacific Northwest, Route 128, etc. All of this adds up to a real estate market that tends to not build beyond demand, did not get particularly bubblicious, and doesn't ever really drop a lot, either. All of the demographic indicators suggest that you can reasonably expect North Carolina to continue to have high tech and/or pharma jobs for the foreseeable future and the environment is very accomodative to business.
Short form: if you buy real estate in North Carolina, you can live in it and have a nice life with a good job, you can rent it to a nice family that will stay in it for a few years before they move somewhere else in the country (who would otherwise buy, except no one wants to get stuck and we're all paranoid these days), and if you had to sell it odds on you'll get (most of) your money back, if not make (a bit) more. You can hire competent people to maintain the place. Etc. [ETA: Building code isn't too onerous. You don't have to worry about whether your roof can handle snow load, altho you do have to worry a little about hurricanes. Crappy insulation standards have no impact on whether people can keep the place warm in winter and not too many people figure out how that interacts with the cost of AC -- altho that could change.]
http://www.newsobserver.com/2013/02/23/2702528/california-billionaire-bets-on.html
I cannot argue with Hughes' investment strategy here. It is safe. There is no way you get screwed on this deal, and the returns are _way_ better than anything equivalently safe, assuming you've got decent personnel to handle renting/maintaining/etc. the inventory, an aspect to the business that I keep trying to understand (because scaling this is New -- historically, all big operations renting out housing did multi-family, not single-family detached) and not completely succeeding (I think it can be done -- I'm just looking for the down-and-dirty details).
Which makes this mysterious:
"“I think that this influx of institutional capital into the residential market is creating a bubble within the housing bust,” said Mark Vitner, a Wells Fargo economist in Charlotte. “It will end once the investors that are putting money into the funds come to realize that there are much lower-risk ways to earn the returns that they’re seeking.”"
"Vitner said Wake County may offer the company relatively low returns given the risks involved in acquiring, leasing and managing rental houses scattered across numerous neighborhoods."
"“It’s not a bad strategy, there’s just a lot more risk than I think people realize,” he said. “It surprises me that we’re seeing this much speculative behavior in the housing market after having gone through the bust that we went through.”"
Vitner is correct that there are risks involved in running this operation: this is true innovation, trying to scale single family detached rentals. But there is essentially no risk that you won't have renters who want to pay what you need to ask of them (for all the reasons I mentioned above). Nor is there any risk that the market will prevent you from selling these things for at least what you bought them for, some years hence (that's what more people moving in than houses being built means, after all).
I want to know where Vitner thinks you can get 6.5% returns as more of a sure thing than this. Because I am at a complete loss. OTOH, Vitner is in Charlotte, which IIRC is the place where the schools are so terrible my friend D. (ex-boss) felt compelled to _start his own school_, because even the private school options were so problematic. You can probably make a great living giving very mediocre financial advice to a population that will put up with crummy schools.
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Mixed feelings on this one...
Date: 2013-02-25 01:05 pm (UTC)Here, in the East Bay 'burbs we've seen an interesting phenomena- just outside our little neighborhood we've seen apartments that have degenerated and the owners, rather than fixing them up to prior standards, chose to turn them into section 8 housing which has cause quite a migration from Oakland and something of a demographic change. I don't mind but I know alot of people in our neighborhood that do and feel it will bog down our schools and start the domino effect that will lead to our houses becoming lower in value. Petty crime in our particular city has increased since the economy bellied up- but I'm not sure at all if that is a result of the demographic change or just those suffering due to the economy. I do know in some outlying communities- what one might call bedroom communities, whole developments of new houses had people just up and leave because they couldn't pay their mortgages. Some of them are now renting in our area.
With economic flux you tend to see a pretty prevalent migration pattern but it seems cyclical to me- eventually people will move on. I agree that realty is a long run sort of investment if people can manage to hang on during a downturn.
Sorry, just rambling, but I think this is an interesting topic.
Rambling on real estate is perpetually interesting, at least to me
Date: 2013-02-25 02:42 pm (UTC)CR covered a lot of the built-but-never-occupied-shadow-inventory, especially the Inland Empire, and there was also a lot of coverage of jingle mail -- altho a fair amount of people who walked on an upside down mortgage didn't go far, just rented in the same neighborhood for a much lower price.
There are places where real estate is not a valid long run investment: you'll die before it recovers, if it ever does. Youngstown, for example, and Detroit and other cities are actively tearing down parts of the city because of depopulation and the expense of just keeping the street lights running, never mind the rest of the utilities. However, I think that Silicon Valley and the Triangle and similar places _are_ places where, if you hang on, you'll recover what you put into it before you die (assuming you didn't buy at the peak of a boom when you were in your late 50s or something like that).
The article about Hughes/the houses 4 rent operation did make a point that they were not only buying the Right Size (2000+ sq ft) in the Right Place (above average schools), but they were not buying fixer-uppers, much less buying crap to foist off on renters with no other choices (who tend also to be less reliable on making the rent). In some cases, they were buying _new_ housing from the _builder_ -- and this is in an area that didn't overbuild, so they were paying (close to) "normal times" prices for those new houses. Buying high quality housing to rent is New, but could make sense: it'll increase their pool of reliable renters who will pay a good amount, it'll reduce their turnover (both of which reduce the wear-and-tear), and it'll reduce/delay their necessary maintenance (a new house hopefully won't need a new roof for a few years).
The remaining question in my mind is: can you manage the housing to catch the occasional bad apple (no one is going to rent these things to run a crack house, but you could get someone who doesn't tell you about a roof leak until the whole thing has toxic mold, and you could definitely wind up with a hoarder or someone with an aging pet or whatever) without spending all your money on the management process? You can automate rent collection and maintenance inspection, lawn care, etc. and in the Triangle, you should be able to get all the lawn and house maintenance done by contract or in house consistently at a low labor rate.