Are People Really Leaving Big Cities? [Video + Transcript]

Rusty Tweed:
Also rents, we’re now starting to see dropping in Los Angeles. These are all recent articles that we pulled literally from the last 30 days. And as you saw in those pictures we showed you, in Pasadena, people are leaving and the rents are getting more competitive. Because again, you’re getting vacancies. Those same areas, literally at the beginning of this year, you had trouble even finding an empty spot, and rents were going up quite a bit. But now the opposite’s happening, there’s more and more vacancies. Landlords have to lower their rents in order to attract tenants.

And so we’re definitely seeing a big shift here in Los Angeles. Here’s a great quote, actually, Richard Burton, who’s the CEO of Zillow, and he’s talking about what’s going on, “The US real estate market is starting to show signs of a ‘big reshuffle’ as people move to homes with more privacy and space to make it easier to work from home. I believe we’re on the cusp of a big reshuffle. I’m sure I don’t need to explain it to you because we all experience it. We spend an average of nine more hours a day at home. Zoom meetings are changing the way families perceive space and privacy. Home offices are in high demand. Backyards are more attractive than parks and gyms.” And again, I’m sure you’re all running into this with people that you know.

And I know this is happening. I’ve had several friends move since the beginning of the year. One of my friends was living in Marina Del Rey, right when all this COVID-19 stuff happened, he sold his property there. Actually got a great price for it, and moved to Florida. Another good friend of ours, him and his wife moved this August, and left town.

We’re seeing things happening all around that are kind of shifting. And again, a lot of it is people are going, “Look, I don’t need to live in the big dense city where there’s a lot of issues that I’m worried about. I can go to somewhere else where I can buy a much better property for the same price or less, a much bigger property.” And we’re seeing just a lot of things happening. Another example, personally, we own a second home up in Park City, in Utah, and we were not planning on selling it. But just in the last month, we got an offer on it that was much higher than we ever expected that we would sell it for. And so we made a family decision to sell it, and it just closed last week. But again, Park City is one of these areas where there are a lot of people are moving, and it’s gotten attractive because everything’s going on, and the prices have been pushed up.

To give you guys some kind of a hardcore data to look at, we like looking at a U-Haul. And so we took some examples here. Here’s one that if you went and rented a U-Haul truck, and you wanted to go from Los Angeles to Austin, Texas, how much would it cost you? Well, it would cost you $2,665. But guess what? If you rented that same truck, only this time, you’re going from Austin back to Los Angeles. Guess what? It’s about one quarter of the price. It’s only $700. Big, big difference. Now, why are we looking at this, and why are we talking about a U-Haul? Well, obviously it’s expensive, to rent the truck, to go to Austin, but it’s a lot cheaper to come back, which is telling us that there’s a lot more people going to Austin from California.

And U-Haul wants to get those trucks taken back to Los Angeles, so they’re willing to rent them out for literally 25% of the cost it takes to get there. And so that allows them to get people to take the truck back to Los Angeles, and they kind of cycle through this all again. But that’s a pretty dramatic difference. Here’s another one showing going from Los Angeles to Houston, Texas here, it’s pretty similar. It’s about $2,800 for that one way trip. If you’re going from Houston back to Los Angeles, it’s less than half. It’s about $1,300. Now for the heck of it, we said, “Okay, what happens if you were to rent a truck and go from New York City to Indianapolis?” Well, in that case, that’s going to be close to $1,400. Taking that same truck from Indianapolis back to New York City, only $500, about a third of the cost.

Again, there’s a lot more people going from New York City than there is going back to New York City. Now let’s look at home prices. Now, we can’t do this for every city. We’re picking cities that we’ve been involved in, and we’re redoing properties ourselves. But if you were to take a look at the prices of homes in Texas, Houston, Texas, particularly. From January this year to October, their median home price in Houston went from $270,000 to almost $310,000, which is a 12% jump. Now remember, these prices have gone up this much during COVID-19, and the lockdowns, and everything else. Again, that’s telling us that there’s a lot more people moving into Houston than are leaving.

You take homes in Indianapolis, which is again, another market we do a lot of activity in. At the beginning of this year, the median home price in Indianapolis was $160,000. And that’s gone up 13%, and today it’s $184,000. Again, a big jump through all the market that we’ve been through. Beaumont, Texas, which is another market, really, we’re going to talk about it a little bit. Same thing, houses from the beginning of this year went from $170,000 median price to $190,000. Again, we’re looking at some markets where people are leaving, but those people have to go somewhere. So a lot of these Midwestern and Southern markets are seeing a big inflow of people from the bigger cities. And again, this map kind of shows that pretty clearly. Again, we’re looking here in Southern California, most of the cities are showing red, which means they’re shrinking. Inland Empire, surprisingly enough, is actually growing. I think that’s because it’s so inexpensive there right now, a lot of people are moving there.

But you can see here, Vegas, Phoenix, Dallas-Fort Worth, pretty much every city. Well, I’m sure every city in Texas right now is showing very strong growth. So is Florida, Atlanta, Georgia. And again, we do a lot of stuff in Indianapolis. So you can see that’s yellow, which means that it’s growing just not as much as the green. But again, the whole North area here is pretty much red and shrinking. This is giving us a pretty good insight as to what markets we want to be in, and what markets we don’t want to be in.
Just to give you an example, this is a transaction we just closed on in the last 30 days. And so this was a client of ours that had a non-performing asset here in Arcadia. He actually had a restaurant that he owned and he owned the building that it was in, and probably five years ago he sold the restaurant and kept the building. Unfortunately, earlier this year, when everything was going crazy, his tenant actually called him up and said, “Hey, I’m sending you the keys, I can’t stay in business. I’m shutting down.” So unfortunately, the business closed and he was stuck with a vacant building.

The good news is, there was a developer that really wanted to buy it so he did get a good price for it. Not as good as he would have before this, but he got a decent price. He sold it for $2,800,000. We did a 1031 exchange. He actually bought a beautiful brand new building that we found in Reno, Nevada. And Reno is actually booming right now. In fact, you can see the Tesla Building in the back there. Tesla’s just booming up there, they talked about hiring another additional 3,000 employees for that Tesla plant. It’s very big. They’re talking about it, when they’re finished, it’s going to be around a 6 million square foot factory. Monstrous.

And most of the tenants in this building you’re seeing here on the left, were actually employees of Tesla. In addition, we bought a portfolio of single family manufactured homes. His blended return on those two parts of his portfolio was over $208,000, which put him at a 7.5% cap rate. Again, he came out of an asset here in Los Angeles that was non-performing, we put him in these other assets. And he’s a very happy camper right now with some really, really good income.

Let’s just talk about some of these other markets that we’re dealing in, and we’re very familiar with. Houston is a great city, we’ve done literally hundreds of properties in that area. We’ve done everything from triple net lease properties to multi-family, to manufactured homes, and single-family homes. Now, just to kind of give you a little bit of background here, we made the decision about four years ago, that at some point, we were going to have a recession. We were starting to look ahead and believe me, I’ve been through several recessions before and they’re painful, and they’re brutal, and they’re not fun at all. So we really wanted to pick some markets around the country that we could get very familiar with, do a lot of business there, and we wanted to pick markets that we felt were very stable, so that when we did have the next downturn, it would be very minimal for us. Houston was one of those cities. And like I said, since then, over the last four years, we’ve literally done several hundred properties there. And we’re very familiar with it at this time.

And we’re actually very happy we’ve been in this market because as you can see from the earlier chart, things are doing well here, despite all the things that are happening with our economy. The main thing we’re doing here right now are these manufactured homes. And we have an arrangement with a company that is one of the largest owners of manufactured home parks in the Houston area. You can see this map, but virtually, every one of these red dots you’re seeing are parks that we’ve actually been involved with. And you can see they’re all around the Houston area and suburbs. And so what we’re doing there is, we’re having investors buy these individual units and they come with a tenant in it, and they’re managed by the company that owns all these parks, and they even come with the maintenance contract.

And so your net income on these assets is about 11% to 12% cashflow, and that’s after all the expenses. And the average price for these is around $50,000 a unit. We’ve had clients buy one, we had one client in the other day who bought 22 of these units earlier this year. Out of those 22 units, he only had one vacancy and it was only vacant for a matter of weeks. The rentals in this market right now are very strong. And again, we’re kind of going over this fairly quickly just to give you guys an idea of what we’re doing. If you’re interested, please call or contact our office. But here’s just running the numbers here. Like I said, it’s around $50,000 a unit. By the time you take all your expenses away, you’re netting out, in this case, 11%. And that’s pretty common for the types of properties that we’re doing there.

We used to do property tours, which were a lot of fun. Usually about once a quarter, we would take a group of investors and fly out to Houston, and drive around and look at the parks we did. Unfortunately, with what’s going on right now, we can’t do that. But we will be doing that again when we’re allowed to, and when it makes sense. So I look forward to that. If you do want to get more information, if you go onto our website, there’s actually some very good videos of these property tours. Or if you’re interested, you can contact us in the office and we can send you out more information.