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Old 09-09-2008, 08:54 AM
 
1,177 posts, read 2,681,828 times
Reputation: 3542

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Maybe someone can help me with this.

My mom's apt building was just sold after almost a year on the market. It's a 4-plex near the Fauntleroy ferry terminal in west Seattle. It was listed at
1 million and sold for around $800,000. I never thought it could sell for so much.

Now this is what I don't/can't understand.

How can anyone get a positive cash flow out of that? The rent from 4 renters is only $4,000 a month-and I don't think they can raise the rent much- they don't even have dishwashers for Pete's sake. How can someone make money when they are going in the hole every month to pay the mortgage on $800,000?

Can someone enlighten me please?
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Old 09-09-2008, 09:07 AM
 
Location: Edmonds, WA
121 posts, read 509,732 times
Reputation: 58
Here's just a theory...but figure someone bought an investment 5 years ago for 2-300k. They sold it for $750 and now have somewhere north of 500k in cash, but they have to do a 1031 exchange or pay a HUGE portion of that profit in capital gains. So, they buy an apartment building for 800k, put the 500 cash down, and all of a sudden, cash flow on a 300k loan is easy, not to mention that they get to use the entire 500k without having to take the tax hit.

Chances are, the buyers were desperate to close on a 1031 "target" in order to avoid the taxes. Commercial investors have that issue all the time. Once you've closed on your sale, you only have certain amount of time to close on another investment or you are stuck with the tax hit.
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Old 09-09-2008, 09:14 AM
 
9,638 posts, read 25,568,651 times
Reputation: 5341
Here's my theory:

In the past, cash flow meant a lot to commercial investors, rents were supposed to cover mortgage costs.
Then, prices started skyrocketing, and some people figured they could make so much more money simply by having the value of the building go up, and could eat the cost of subsidizing the building while that happened.
Rents don't tend to drop, or not very much, but real estate is volatile. Over the long haul, it's almost always a good thing to own, but...
Would you buy a building where you have to subsidize it every month since the rents don't cover the payments at the same time the value of real estate is dropping?
What's the old adage? I may be stupid but I'm not an idiot?
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Old 09-09-2008, 03:23 PM
 
24 posts, read 119,916 times
Reputation: 24
Yep, the bubble created lots of monopoly money to buy overpriced assets. From the top down its pretty much a zero sum game.

Oh yay, my house went up!
Oh no, so did everyone else.

Fun fun.
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Old 09-09-2008, 09:38 PM
 
Location: Steilacoom, WA by way of East Tennessee
1,049 posts, read 3,791,305 times
Reputation: 701
Quote:
Originally Posted by Ira500 View Post
Here's my theory:

In the past, cash flow meant a lot to commercial investors, rents were supposed to cover mortgage costs.
Then, prices started skyrocketing, and some people figured they could make so much more money simply by having the value of the building go up, and could eat the cost of subsidizing the building while that happened.
Rents don't tend to drop, or not very much, but real estate is volatile. Over the long haul, it's almost always a good thing to own, but...
Would you buy a building where you have to subsidize it every month since the rents don't cover the payments at the same time the value of real estate is dropping?
What's the old adage? I may be stupid but I'm not an idiot?
Here's my example.

I owned (past tense) 12 homes in the Puget Sound region until spring 2007, I bought them in 2005/2006. I was getting enough in rent to cover my mortgages and have a little left over only because I was using option arm loans and paying less than interest only. Say the full payment was $1400, and interest only was $1100, then you had the option of paying $700, guess which one I did, $700. I was only getting $900-$1200 on the houses in monthly rent.

My goal, riding the wave up in equity prices. I dumped all the houses in 2006/2007 and made a few hundred thousand before the bubble burst....talk about a nervous puppy, I knew the bubble was bursting, but I was able to sell 12 houses in a 6 month time period. Guess which kind of loan most of the mom and pop "investors" that bought my homes used?? You guessed it, Option Arms......there is NO WAY that they are cash flowing without that deal, but their payments will adjust upwards, while the home values have already plummeted since they bought. It's going to be ugly for the 2006/2007 buyers.

Take care out there......btw, I now live in TN where I own 34 acres of land, a home, pool, barns with views and I paid cash with my Seattle area money, but I'm now property rich and cash poor. So I'm living a modest lifestyle, but I'm debt free, so that's fine with me. Plus there is NO TRAFFIC here!!! Worth the money if you ask me!! I hate traffic!!!

Sorry, I rambled.....the moral to the story that I was trying to allude to is that many, many buyers bought NEGATIVE cash flow properties with the idea that the prices would only go up.....now what????

Tony

p.s. To sellers, I have 2 words......Short Sale!!! Do it now while you still can, it ain't pretty out there in property land...ask Fannie and Freddie.
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Old 09-09-2008, 09:45 PM
 
2 posts, read 4,509 times
Reputation: 14
Default West Seattle Development

Maybe the buyers are planning to mow down the apartments and build a high-rise or one really wealthy dude is going to build a multi million dollar dream home. That area has amazing views of the Sound the Olympics, great parks and fairly expensive homes (even though many are re-furbed cottages). There's also mixed use zoning so maybe it could be a business building going up.
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Old 09-13-2008, 11:05 AM
 
Location: Georgia, on the Florida line, right above Tallahassee
10,474 posts, read 14,853,529 times
Reputation: 6381
Quote:
Originally Posted by Tony1790 View Post
Here's my example.

I owned (past tense) 12 homes in the Puget Sound region until spring 2007, I bought them in 2005/2006. I was getting enough in rent to cover my mortgages and have a little left over only because I was using option arm loans and paying less than interest only. Say the full payment was $1400, and interest only was $1100, then you had the option of paying $700, guess which one I did, $700. I was only getting $900-$1200 on the houses in monthly rent.

My goal, riding the wave up in equity prices. I dumped all the houses in 2006/2007 and made a few hundred thousand before the bubble burst....talk about a nervous puppy, I knew the bubble was bursting, but I was able to sell 12 houses in a 6 month time period. Guess which kind of loan most of the mom and pop "investors" that bought my homes used?? You guessed it, Option Arms......there is NO WAY that they are cash flowing without that deal, but their payments will adjust upwards, while the home values have already plummeted since they bought. It's going to be ugly for the 2006/2007 buyers.

Take care out there......btw, I now live in TN where I own 34 acres of land, a home, pool, barns with views and I paid cash with my Seattle area money, but I'm now property rich and cash poor. So I'm living a modest lifestyle, but I'm debt free, so that's fine with me. Plus there is NO TRAFFIC here!!! Worth the money if you ask me!! I hate traffic!!!

Sorry, I rambled.....the moral to the story that I was trying to allude to is that many, many buyers bought NEGATIVE cash flow properties with the idea that the prices would only go up.....now what????

Tony

p.s. To sellers, I have 2 words......Short Sale!!! Do it now while you still can, it ain't pretty out there in property land...ask Fannie and Freddie.
Hotlinked your post to this thread....
//www.city-data.com/forum/busin...k-economy.html
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