Just read NAR report about real estate market projections...

[Alice_Gatsbi]

And 35% of their responders said that the market will return to its pre-pandemic numbers by 2023 (appx) the rest were sure that it will never be the same again. What are you projections? How will the market will change? Will it be still profitable to invest in commercial property?

[james.hendrickson]

Alice - can you post the report?

Its hard to know what specifically is going to happen with urban core real estate. One thing that's different now that wasn't the case in past recessions is communication technology has improved a great deal. So its possible that entire industry sectors (such as consulting, or software creation/tech) won't need to have centralized offices at all. This could result in a long term sustained weakness in demand for downtown office space.

At this point that's just speculation. I'd have to see the report to comment intelligently.

[TexasHusker]

"Will it still be profitable to invest in real estate" is a purely subjective question, as investing in real estate is kind of like "investing in the stock market." Which stock? And what do you consider profitable? Are you buying a stock for price appreciation, income, or both? Or a short-term swing? Or to trade options against?

I buy real estate for income, in particular vacation rentals. Here is what I have seen: Ten years ago, I wouldn't buy a vacation rental that had a CAP rate of less than 16. Today, it would be virtually impossible to buy a vacation rental for much above 12. Why? Because professional investors who have previously invested in apartment buildings and office spaces are shifting toward short term rentals, and are perfectly satisfied with CAP rates of 10 or even less. So as they flood the market with cash offers, prices increase, and yields decline.

I suppose investors might accept CAP rates in vacation rentals all the way down to 5. I mean, where else can you put your money and earn 5% and sleep at night? If investors are willing to push CAP rates this low by paying more and more, prices will just keep escalating.

[disneysteve]

That interesting TH. Why do you think the pros are switching from residential and commercial to vacation rentals? I would think the short term stuff is a lot more work. Much easier to sign a long-term lease for a business than have to worry about filling a place week after week with different customers. And a 10% return is still quite good. 5% not so much as a diversified stock fund should beat that without any effort involved. It wouldn't seem worth the effort or risk to buy if you're only going to see a 5% return.

[TexasHusker]

There’s a lot of things at play, and the CAP rate only represents a portion of your return. Not unlike the dividend of say WalMart stock - the dividend is certainly a part of your return, as well as hopefully capital appreciation.

So, even if a CAP rate is “only” 5, you are also holding an asset that appreciates long term most of the time. And if you have a mortgage, someone else - the lessee - is essentially doing all of the investing for you.

Vacation rental investors are just like other commercial real estate landlords - they are probably paying someone to manage the investment, just like a mutual fund shareholder is paying some to manage the fund.

I own a property management co., and we have clients who have never even seen their property first hand. They just get their monthly check. We have a couple who invested $425K from a self directed IRA. That property will produce $80K this year top line, and it’s probably an $800K property now pretty easily.

Investors are seeking yields. Yields in office buildings and retail spaces are falling, so those investors are seeking better yields elsewhere. The advent of VRBO and Airbnb has brought vacation rentals into vogue. They were not considered a bona fide investment play 20 years ago. Neither was Tesla or Bitcoin.

Just like public companies, real estate can be mismanaged, so the income isn’t what it should or could be. So keen investors want to find situations where an asset is being poorly run or misused entirely. If they turn it around, the CAP rate rises.

A friend of mine bought an old large empty building here that had a CAP of zero. No income. Not a good investment, huh? Well he refurbished it and turned it into a giant storage, spa, and repair shop for classic cars. He sells memberships for $200 a month - you can store your car there and you have 24/7 secured access if you want to come get your car. I have a membership there.

Well he has around 200 cars stored, so he’s bringing in $40K a month, plus renting space to a mechanic and a detailer. So now a healthy CAP has been established and that building is also a business, and is now worth a chunk. That’s how RE works.

But the long and the short of it is, the current CAP rate is really only a portion of the total picture.

[TexasHusker]

I recently purchased a cabin called "Songbird" for $230,000. Here is my proforma on this property, including a 25% management fee that I pay into my own company:

[disneysteve]

I own a property management co., and we have clients who have never even seen their property first hand. They just get their monthly check. We have a couple who invested $425K from a self directed IRA. That property will produce $80K this year top line, and it’s probably an $800K property now pretty easily.

You've mentioned this before. This is a very intriguing arrangement. I may reach out to you one of these days.

[TexasHusker]

You've mentioned this before. This is a very intriguing arrangement. I may reach out to you one of these days.

any time. Although I want to reiterate I am not an active buyer in this market. Number one, I think that rental activity is going to plateau some. Right now there is pent-up demand. When things stabilize, annual revenues are going to drop. Number two, everyone is frantically chasing the market, driving prices of properties to levels that are, in my estimation, untenable. Number three, the two big players in the market, VRBO and Airbnb, are charging guests more and more fees to book properties. When VRBO started this a few years ago, service fees were 5-10 percent. Now we are seeing them approaching 20 percent. That isn't sustainable. This is a hidden tax to owners, as owners have to keep rents low enough to make the grand total work. So this is a threat long-term to earnings and values.

I have thought a lot about trimming my positions some, gathering up some cash, and finding a new venture to diversify into.

Nothing lasts forever.

[TexasHusker]

moved to another thread

[TexasHusker]

Everyone things of Vanguard for their IRA. Here's an IRA asset:

https://cabinsneargatlinburg.com/cabins/mountain-dew

[LivingAlmostLarge]

Let me add that I saw a reddit thread on how expensive VRBO and Airbnb has become that people are looking at hotels much more about price. Yes the homes are great with kitchens but when it costs double? At least for me I'm going back to cheaper hotels. I'd rather have takeout or eat on a patio than cook and stay in a home for double the price of a hotel.

[disneysteve]

Let me add that I saw a reddit thread on how expensive VRBO and Airbnb has become that people are looking at hotels much more about price. Yes the homes are great with kitchens but when it costs double? At least for me I'm going back to cheaper hotels. I'd rather have takeout or eat on a patio than cook and stay in a home for double the price of a hotel.

This is really a shame. It's a perfect example of destroying a good thing. We've been using VRBO for 20 years and love it. We use it every year when we go to Florida. We greatly prefer staying in a rental home with multiple bedrooms and bathrooms, a full kitchen, a washer and dryer, maybe a private pool, etc. The fact that it is also cheaper than a plain hotel room made it even better. We'd probably do it anyway even if it cost a little more than a hotel, but it will make us stop and think a bit harder.

[LivingAlmostLarge]

This is really a shame. It's a perfect example of destroying a good thing. We've been using VRBO for 20 years and love it. We use it every year when we go to Florida. We greatly prefer staying in a rental home with multiple bedrooms and bathrooms, a full kitchen, a washer and dryer, maybe a private pool, etc. The fact that it is also cheaper than a plain hotel room made it even better. We'd probably do it anyway even if it cost a little more than a hotel, but it will make us stop and think a bit harder.

Maybe but at least in the areas we were checking out including fourth of july it was cheaper to do a hotel than vrbo. VRBO was adding on $300 cleaning and owner and then "resort" fee

[disneysteve]

Maybe but at least in the areas we were checking out including fourth of july it was cheaper to do a hotel than vrbo. VRBO was adding on $300 cleaning and owner and then "resort" fee

That's ridiculous. The cleaning fee used to be $50 or $60 and was usually waived if you stayed at least 7 days.

[LivingAlmostLarge]

That's ridiculous. The cleaning fee used to be $50 or $60 and was usually waived if you stayed at least 7 days.

Have you looked lately at the fees?