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Investment Opportunities for the Highly Liquid

In one of the many economic clusterf***s of our time, there’s a real estate developer who actually went through the trouble of building an entire 559 unit condo in my neighborhood and then wound up going bust due to an inability to secure the financing necessary to roll over their debt. For obvious reasons, nobody wants to buy a condo from a bankrupt developer amidst a giant recession. Consequently, the building has been standing fully completed and totally vacant, amidst DC’s non-collapsing housing market. Now the whole building is up for sale with the idea being that you can operate it as rental apartments.

They’re asking $170 million for the whole thing, which amounts to 559 units. Meanwhile, two blocks north at “The V at City Vista” the cheapest apartment on offer is going for $1740 per month. $1740 times 12 times 559 is over $11.67 million dollars. That implies a 6.86 annual return on investment for a property that, no matter how much national or local real estate prices collapse, will have a resale value higher than zero. Now, obviously, you would have operating costs as well. But at the same time, there’s good reason to believe that $1740 per month is too low since that was the minimum rent from the nearby apartment.

The trick, though, is that to take advantage of this opportunity you need to have $170 million on hand that you’re willing to subject to some risk of loss. Which right now nobody does.

It’s important to recall that just as the economy can suffer from irrational exuberance during good times, a downturn can lead to irrational pessimism. During the boom, the fact that prices were rising in supply-constrained locations — Westside Los Angeles, San Francisco, near the beach at Miami, Manhattan, etc. — led people to believe that real estate was a can’t lose investment opportunity even in the endless sprawl of Phoenix or Las Vegas or the swamps to the west of Miami. Now I think that something of the reverse is happening. People are unwilling to put money into anything that seems to imply any exposure to real estate risk whatsoever.

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