The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: Jon Bon on February 23, 2019, 11:20:42 AM
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And did it hold up during the last property bubble?
I have been investing for about 6-8 years now, and I am VERY in-tune to my local rental situation. A and B neighborhoods have not been selling anywhere close to the 1% for years now. I am starting to see the C neighborhood (with very little chance at appreciation) drop below the 1% rule. Now I realize that some of the completely batshit insane real estate markets (SF, Seattle NYC, etc) the 1% rule might no longer hold true. I am starting to see a departure from the rule in my own city. There was a portfolio of rentals I just saw posted they averaged about between 1/2 and 3/4 percent. That is terrible! Not to mention you are going to get absolutely murdered on property taxes when you pay that kind of money for a house.
Is this what happened in 2002-2007? I was still in college and not really paying attention to the RE ratios then. Is RE just not worth it to invest in these days? Do I just have to dump it in a very expensive stock market and hope for the best?
TLDR
RE is expensive and it sucks.
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The answer is to dump new cash into whatever asset class is on sale when you get the cash in hand. If no asset class is on sale, the choices are to hoard cash for the next sale, pay off debt, or throw money at paper assets you won't need for decades. I have not purchased a property since 2012. I continue to fund the same periodic stock fund purchases I have made since then, pay off mortgage debt, and hoard cash. You are young, so you will likely have several more fire sale buying opportunities in your lifetime. Plan for them.
I may sell a property or two and pay off all the mortgage debt, or at least the loans at 5 percent or more. The return on that will likely be higher than buying a rental property at the peak of the market.
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The answer is to dump new cash into whatever asset class is on sale when you get the cash in hand. If no asset class is on sale, the choices are to hoard cash for the next sale, pay off debt, or throw money at paper assets you won't need for decades. I have not purchased a property since 2012. I continue to fund the same periodic stock fund purchases I have made since then, pay off mortgage debt, and hoard cash. You are young, so you will likely have several more fire sale buying opportunities in your lifetime. Plan for them.
I may sell a property or two and pay off all the mortgage debt, or at least the loans at 5 percent or more. The return on that will likely be higher than buying a rental property at the peak of the market.
Damn it I agree with pretty much everything that you said. One should not have to be holding cash because there is nothing else to invest in!
Its just no fun! I LIKE building a business. I like to rehab properties. Its a challenge that I appreciate. Its just annoying as hell to be on hold because of the "everything bubble" prevent anything from being fairly priced.
#comeonrecession
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The answer is to dump new cash into whatever asset class is on sale when you get the cash in hand. If no asset class is on sale, the choices are to hoard cash for the next sale, pay off debt, or throw money at paper assets you won't need for decades. I have not purchased a property since 2012. I continue to fund the same periodic stock fund purchases I have made since then, pay off mortgage debt, and hoard cash. You are young, so you will likely have several more fire sale buying opportunities in your lifetime. Plan for them.
I may sell a property or two and pay off all the mortgage debt, or at least the loans at 5 percent or more. The return on that will likely be higher than buying a rental property at the peak of the market.
Damn it I agree with pretty much everything that you said. One should not have to be holding cash because there is nothing else to invest in!
Its just no fun! I LIKE building a business. I like to rehab properties. Its a challenge that I appreciate. Its just annoying as hell to be on hold because of the "everything bubble" prevent anything from being fairly priced.
#comeonrecession
Warren Buffett is holding a lot of cash these days. I believe he mentions in his new annual letter that he has not bought any businesses because the decent ones are wildly overpriced. He is buying some equities, but not much else.
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There are small to medium size city markets in the midwest where you can still get 1.5-2% on class C multifamily properties and get close to 1% on class B SFHs.
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I don't even bother to look for rental properties anymore - there's nothing in my whole state that would make sense. Sold the last of my rentals in 2017 as they had appreciated through the roof.
I think we'll see the 1% rule again someday, but it might not be for quite a while, and I wouldn't put any money on seeing another great 2007 style crash again in our lifetimes (even if you're young). I'd expect a more general price stagnation, and maybe some slight declines if the Fed ever raises interest rates meaningfully again, coupled with rental rates continuing to slowly rise. In that scenario you'd creep back up on the 1% rule.
I am of two minds about the everything bubble - on the one hand, I'm much wealthier than I was 10 years ago because I rode that wave up. On the other, there's not much out there that gets me excited to invest. So extra money just gets dumped in VTSAX. Boring. But at this point (FI, still working part time for fun and hence running a significant surplus) boring is probably fine.
-W
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There's always a lot of dumb money out there, but right now there's a TON because there's an entire generation that has only experienced sub 5% interest rates and double digit appreciation and think it's normal.
-W
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Befuddled is a good word for how I am feeling too. I see houses get listed for stupid prices I would never pay only to be put into contract the next day.
So I guess I will add onto my house for a cost of $50k and get a $150 gain out of it? Wow listen to me! That sounds like a comment right out of 2005.
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Around here there are literally places that are $1million that might rent for $3500 a month or so that are *advertised* as "great investment opportunity".
Don't get me started on the nightly rental people, either. I've talked to people who think they can just multiply the nightly rate by 365 and subtract their mortgage payment.
Since getting out of the rentals, we've invested in:
-Solar for the house. Not a big amount but a nice 7%-ish return using fairly conservative numbers.
-ADU (basement apartment in our stupidly big basement).
-Lots of index funds.
I'm not interested in sitting on cash waiting for RE unicorns and/or a crash but I could see that being an option if you're super into RE.
-W
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I think the 1% rule is dead and gone and that's totally fine, because residential real estate investing has turned into something much more like stock investing. The value is in your capital appreciation, not your quarterly cash flow.
My SFR's are well below 1%, translating to an annual cash return after costs of around 2% of equity, but on the other hand they appreciate at between 5% and 10% per year. Those numbers look like the stock market, right? No one complains when the dividend yield on VTSAX drops that low, because you don't buy VTSAX for the cash flow. You buy it for the growth. As long as you look at real estate that way, it's still profitable.
Of course, it's harder to sell off a few percent of your real estate portfolio each year the way you can with VTSAX. I think the premium you used to get for holding an illiquid asset has all but evaporated.
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I think the 1% rule is dead and gone and that's totally fine, because residential real estate investing has turned into something much more like stock investing. The value is in your capital appreciation, not your quarterly cash flow.
My SFR's are well below 1%, translating to an annual cash return after costs of around 2% of equity, but on the other hand they appreciate at between 5% and 10% per year. Those numbers look like the stock market, right? No one complains when the dividend yield on VTSAX drops that low, because you don't buy VTSAX for the cash flow. You buy it for the growth. As long as you look at real estate that way, it's still profitable.eices
Of course, it's harder to sell off a few percent of your real estate portfolio each year the way you can with VTSAX. I think the premium you used to get for holding an illiquid asset has all but evaporated.
Interesting points Sol.
Taking what you are saying a step further so houses are the new equities if it is less about cash flow and more about speculation. So if that is true is it safe to assume that it would lead to a more boom a bust cycle due do the larger number of speculators? More speculators in the market and less buy and hold investors?
We have been booming for a while, one would think the bust is inevitable. But I have been waiting for the inevitable for years now.
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Patience, grasshoppers.
I have lived in the SF Bay Area for many decades. Prices do go down. Prices go down a lot sometimes, even in commercial and industrial real estate. Anyone remember the RTC? In the early 90's, you could buy strip retail centers in secondary locations that were 50 percent vacant on 12-15 percent cap rates based on ACTUAL income, i.e. the 50 percent occupied space.
Right now, all of China wants to invest in US real estate. India is not far behind. Everyone that lives here has a job if they can fog a mirror. Interest rates are still stupid low by historical standards. It's easy to get a mortgage with W-2 income.
Everything has to go right to sustain the current fervor. At some point, it won't.
Waltworks is playing Warren Buffett's hand. I am as well. Maybe the impatient young folks should consider doing the same.
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And did it hold up during the last property bubble?
I have been investing for about 6-8 years now, and I am VERY in-tune to my local rental situation. A and B neighborhoods have not been selling anywhere close to the 1% for years now. I am starting to see the C neighborhood (with very little chance at appreciation) drop below the 1% rule. Now I realize that some of the completely batshit insane real estate markets (SF, Seattle NYC, etc) the 1% rule might no longer hold true. I am starting to see a departure from the rule in my own city. There was a portfolio of rentals I just saw posted they averaged about between 1/2 and 3/4 percent. That is terrible! Not to mention you are going to get absolutely murdered on property taxes when you pay that kind of money for a house.
Is this what happened in 2002-2007? I was still in college and not really paying attention to the RE ratios then. Is RE just not worth it to invest in these days? Do I just have to dump it in a very expensive stock market and hope for the best?
TLDR
RE is expensive and it sucks.
I’m in the same market as you, Jonbon. It’s stupid ridiculous. I started investing in other markets where there still are some decent RE deals if you put in some work.
But I too, hold too much cash in hopes of finding the next great deal.
Sent from my iPhone using Tapatalk
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The 1% rule hasn't worked for central city neighborhoods in my city for probably 20 years. I've always been jealous of those who managed it elsewhere.
I could buy in the 'burbs but I tried that and the "commute" was just too much.
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I think the 1% rule is dead and gone and that's totally fine, because residential real estate investing has turned into something much more like stock investing. The value is in your capital appreciation, not your quarterly cash flow.
I think that's only true in a low-interest rate, full employment environment. Sooner or later the business cycle will turn and those annual capital returns will evaporate or at best stagnate long term.
I mean, realistically, nobody can afford a house *now*. If you double prices every 10 years or so at 7% annual appreciation, there won't be any buyers at all in short order. I guess we could go to a semi-feudal sort of residential RE situation where a few people own all the housing stock, but I think it's more likely housing prices will fall back in line with wages, though I'm agnostic about how that will happen (ie, housing prices could decline, or they could stagnate while wages rise).
There's also a lot of land to build houses on, and plenty of people doing the housing arbitrage thing already and leaving, say, the Bay area. That will only happen more. My sister and her husband are high high-end MDs (Rad Oncology and Derm) and just finished their residencies. They are high achiever types and are being competitively recruited - and they won't even consider the Bay area, or any other hot RE market city - because even making $300k+ a year, housing they'd want to live in is too expensive. If that kind of person won't move to a HCOL area, the writing is on the wall.
If you track lots of the "hot" markets (like Seattle) you'll notice that in the last 9 months or so sales have plummeted and listings have soared. Now, that's from a very low base, so it's still a semi-tight market - but give those trends another year and you'll be looking at competitively cutting prices to attract buyers when you go to sell.
-W
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I mean, realistically, nobody can afford a house *now*.
We don't need (or necessarily want, as investors) everyone to be able to afford a house. We only want slightly more buyers than we have inventory at any given time, in any given market, and that's exactly why prices in Seattle have gone so crazy. It doesn't matter than 70% of the city's population can't afford a house, because the other 30% make so much money they've bid up the prices for the very limited stock of houses.
If you double prices every 10 years or so at 7% annual appreciation, there won't be any buyers at all in short order.
Prices aren't doubling in a vacuum because some outside force decrees it, they are doubling in response to pressure from buyers. I don't think it makes any sense to hypothesize that you will price out of available buyers, in a market where prices are entirely set by buyers only. The fact that prices in markets like Seattle have been so crazy is a reflection of strong buyer demand.
I guess we could go to a semi-feudal sort of residential RE situation where a few people own all the housing stock, but I think it's more likely housing prices will fall back in line with wages,
Prices might fall in line with wages if there were enough houses for everyone who has wages, but that is definitely not the case in most major metro areas. The jobs are concentrated in small places with limited housing stock that is close enough to house people who work in those locations. The concentration of high wages around places with insufficient houses drives up prices, until only the best paid workers can afford them. It's not fedualism, but it's definitely a reflection of severe wealth inequality. There's a reason the median house price in Silicon Valley is over million dollars, and it has very little to do with what their minimum wage is. It's ALL about the super wealthy tech workers competing for limited space close to their jobs.
though I'm agnostic about how that will happen (ie, housing prices could decline, or they could stagnate while wages rise).
Or neither, as long as there are still enough very wealthy buyers for the limited supply of houses. I think that in major metro areas, we have to stop thinking about house prices the way we used to, by looking at median wages and interest rates. Housing has become such a restricted supply in places like San Francisco that medians don't necessarily apply anymore. The real housing market is a tiny fraction of the total population, just the richest folks competing for the rare properties that come up. Houses are like luxury goods in that situation.
The converse situation is somewhere like Detroit, where they ended up with way more houses than people who had money, due to local job losses. Suddenly you could buy three bedroom houses for $5k because there were six empty ones on every block. It's all local supply and demand relative to available purchasing power. In Seattle the purchasing power is high and the house supply is low, so prices skyrocket and houses sell quickly to a tiny fraction of people. In Detroit purchasing power is low to normal but the house supply is huge, so prices plummet because anyone who was even vaguely interested in a house could buy five of them. In Detroit, minimum wage actually matters. In Seattle not so much.
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I mean, realistically, nobody can afford a house *now*.
We don't need (or necessarily want, as investors) everyone to be able to afford a house. We only want slightly more buyers than we have inventory at any given time, in any given market, and that's exactly why prices in Seattle have gone so crazy. It doesn't matter than 70% of the city's population can't afford a house, because the other 30% make so much money they've bid up the prices for the very limited stock of houses.
If you double prices every 10 years or so at 7% annual appreciation, there won't be any buyers at all in short order.
Prices aren't doubling in a vacuum because some outside force decrees it, they are doubling in response to pressure from buyers. I don't think it makes any sense to hypothesize that you will price out of available buyers, in a market where prices are entirely set by buyers only. The fact that prices in markets like Seattle have been so crazy is a reflection of strong buyer demand.
I guess we could go to a semi-feudal sort of residential RE situation where a few people own all the housing stock, but I think it's more likely housing prices will fall back in line with wages,
Prices might fall in line with wages if there were enough houses for everyone who has wages, but that is definitely not the case in most major metro areas. The jobs are concentrated in small places with limited housing stock that is close enough to house people who work in those locations. The concentration of high wages around places with insufficient houses drives up prices, until only the best paid workers can afford them. It's not fedualism, but it's definitely a reflection of severe wealth inequality. There's a reason the median house price in Silicon Valley is over million dollars, and it has very little to do with what their minimum wage is. It's ALL about the super wealthy tech workers competing for limited space close to their jobs.
though I'm agnostic about how that will happen (ie, housing prices could decline, or they could stagnate while wages rise).
Or neither, as long as there are still enough very wealthy buyers for the limited supply of houses. I think that in major metro areas, we have to stop thinking about house prices the way we used to, by looking at median wages and interest rates. Housing has become such a restricted supply in places like San Francisco that medians don't necessarily apply anymore. The real housing market is a tiny fraction of the total population, just the richest folks competing for the rare properties that come up. Houses are like luxury goods in that situation.
The converse situation is somewhere like Detroit, where they ended up with way more houses than people who had money, due to local job losses. Suddenly you could buy three bedroom houses for $5k because there were six empty ones on every block. It's all local supply and demand relative to available purchasing power. In Seattle the purchasing power is high and the house supply is low, so prices skyrocket and houses sell quickly to a tiny fraction of people. In Detroit purchasing power is low to normal but the house supply is huge, so prices plummet because anyone who was even vaguely interested in a house could buy five of them. In Detroit, minimum wage actually matters. In Seattle not so much.
Sol has it exactly right. Median income is irrelevant in the most competitive markets. Only the highest income segment can afford to buy. And there are more qualified buyers than sellers.
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Tech workers buy million dollar houses on stock grants that vest in a rising stock market. When the market takes a tumble, and it sticks for more than a few months, the grants/options become underwater and can't be used as a down payment.
That's when the market will change. It happened during the dot bomb and it will happen again.
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I think that in major metro areas, we have to stop thinking about house prices the way we used to, by looking at median wages and interest rates. Housing has become such a restricted supply in places like San Francisco that medians don't necessarily apply anymore. The real housing market is a tiny fraction of the total population, just the richest folks competing for the rare properties that come up. Houses are like luxury goods in that situation.
The converse situation is somewhere like Detroit, where they ended up with way more houses than people who had money, due to local job losses. Suddenly you could buy three bedroom houses for $5k because there were six empty ones on every block. It's all local supply and demand relative to available purchasing power. In Seattle the purchasing power is high and the house supply is low, so prices skyrocket and houses sell quickly to a tiny fraction of people. In Detroit purchasing power is low to normal but the house supply is huge, so prices plummet because anyone who was even vaguely interested in a house could buy five of them. In Detroit, minimum wage actually matters. In Seattle not so much.
Median income is irrelevant in the most competitive markets. Only the highest income segment can afford to buy. And there are more qualified buyers than sellers.
Oh, wow, these are really insightful. This explains stuff that's happening for years but I didn't put my finger on exactly why. This is why. Suddenly it's obvious. @sol, @Another Reader, great posts.
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The 1% rule was dead in 2006 and 2007 on most single family rentals.
Biggest game-changer in the last three to four years has been extremely low bond yields. Since mid 2011, the US 10 year treasury can barely break 3% before it gets pushed back below that amount. This has dragged the return down on all assets, including rental real estate.
Debt being cheaper drives down the cost of capital for a real estate investor and in turn, prices increase. I've wanted to buy for a while, but the only place that makes remote sense is my hometown of 100,000 people, 1% population growth and no real industry to speak of. That carries different downside risk than these single family rentals selling for 0.5% or less in Dallas Fort Worth, a market with 6% population growth
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Tons of high income tech workers who, quite wisely, rent in Seattle and San Francisco. Not sure what happens if a significant number jump on or off the home ownership train.
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Tons of high income tech workers who, quite wisely, rent in Seattle and San Francisco. Not sure what happens if a significant number jump on or off the home ownership train.
The young, single ones are fine renting. When they marry and start having kids, home ownership usually becomes a priority.
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This explains stuff that's happening for years but I didn't put my finger on exactly why. This is why. Suddenly it's obvious.
This is one of those unforeseen consequences of wealth inequality. If wages continue to bifurcate, with a small fraction of the people making even more crazy enormous amounts of money while the bulk of the population continues to see net negative income growth, then this situation could theoretically get even worse. Median wages could stay exactly the same, and yet house prices could continue to grow at 10% per year for decades because it's only the runaway top end of income earners that matter to house prices.
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The area I am familiar with is West Lafayette, Indiana (Big ten college town), and from time to time I see a solid 1% property that would be appropriate for my target demographic of highly educated employees of the university. These listings are few and far between, and they don't stay around for long. I suspect that things will change in a few years.
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This explains stuff that's happening for years but I didn't put my finger on exactly why. This is why. Suddenly it's obvious.
This is one of those unforeseen consequences of wealth inequality. If wages continue to bifurcate, with a small fraction of the people making even more crazy enormous amounts of money while the bulk of the population continues to see net negative income growth, then this situation could theoretically get even worse. Median wages could stay exactly the same, and yet house prices could continue to grow at 10% per year for decades because it's only the runaway top end of income earners that matter to house prices.
More likely, you will just see the wealth segregation patterns continue. A dozen red hot real estate markets with sky high costs and high paying jobs, and a slew of medium-sized towns around them. Endless internet conversations on whether it's better to be in the red hot zone or outside of it. I mean, this already describes every major metro area in the world, it's just a matter of radius size and how stark the contrast can be.
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I agree with Sol and others who think the 1% rule is not really applicable in the middle of the biggest cities in country, NYC, SF, Toronto etc. Places like that the 1% rule has become the 1/2% rule or worse. I am not sure if it will ever come back there (if it ever was?) just due to the very high concentration of wealth in a small area.
The change that I have seen that is a bit concerning to me is when the 1% rule has failed in the mid sized cities. I am talking metro areas around 1-3 million people. These are decent sized cities but the RE market in them has fundamentally changed. We don't have Amazon HQ2 to blame/credit the RE run up on SFH and investment properties. Is this going to swing back to 1% in mid-sized cities?
Personally I don't think it will while we have sky high valuations on nearly every asset class. The term I have seen thrown around is the "Everything Bubble" Which honestly feels kind of accurate. So I guess I will just have to be patience and bide my time (and cash)
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I agree with Sol and others who think the 1% rule is not really applicable in the middle of the biggest cities in country, NYC, SF, Toronto etc. Places like that the 1% rule has become the 1/2% rule or worse. I am not sure if it will ever come back there (if it ever was?) just due to the very high concentration of wealth in a small area.
The change that I have seen that is a bit concerning to me is when the 1% rule has failed in the mid sized cities. I am talking metro areas around 1-3 million people. These are decent sized cities but the RE market in them has fundamentally changed. We don't have Amazon HQ2 to blame/credit the RE run up on SFH and investment properties. Is this going to swing back to 1% in mid-sized cities?
Personally I don't think it will while we have sky high valuations on nearly every asset class. The term I have seen thrown around is the "Everything Bubble" Which honestly feels kind of accurate. So I guess I will just have to be patience and bide my time (and cash)
Too many people worldwide chasing too few income-producing assets in relatively safe locations. Many come from countries that are not safe for asset ownership historically and have decades or centuries of low rates of return. The US looks like an investors' paradise to those folks accustomed to thinking of building wealth patiently over generations and hoping it isn't confiscated in the process.
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Too many people worldwide chasing too few income-producing assets in relatively safe locations. Many come from countries that are not safe for asset ownership historically and have decades or centuries of low rates of return. The US looks like an investors' paradise to those folks accustomed to thinking of building wealth patiently over generations and hoping it isn't confiscated in the process.
Ok sure, I agree with that.
But it is not new. The US has been a great place to invest from about 1945-present. There have been really crappy governments confiscating their citizens processions for 1000's of years. Obviously China is a big player here today, but wasn't this the same case in the 80's and Japan?
This really reminds me of a book: https://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691152640
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Too many people worldwide chasing too few income-producing assets in relatively safe locations. Many come from countries that are not safe for asset ownership historically and have decades or centuries of low rates of return. The US looks like an investors' paradise to those folks accustomed to thinking of building wealth patiently over generations and hoping it isn't confiscated in the process.
Ok sure, I agree with that.
But it is not new. The US has been a great place to invest from about 1945-present. There have been really crappy governments confiscating their citizens processions for 1000's of years. Obviously China is a big player here today, but wasn't this the same case in the 80's and Japan?
This really reminds me of a book: https://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691152640
The difference is that you didn't have millions of people in the upper crust of questionable countries all trying to GTFO at the same time, and a globalized economy where anyone with $500 can jet across the world.
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It's really similar to the 90s Japan thing, actually. Remember when all of NYC was going to be owned by Japanese people and companies?
Yeah, not so much. Things will come back to earth, this time *isn't* different.
-W
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The sentiments in this thread appear to be based on the idea that the supply side of housing is fixed. Not all economists agree and many are working to change public policy to increase the supply of housing. For example read/listen to this story on planet money about bay area housing prices: https://www.npr.org/templates/transcript/transcript.php?storyId=633224790
The city I live in has a problem with housing affordability and the local government is working to increases supply by both literally expanding the physical boundaries of the city and changing zoning and other measures to create infill and also by selling publicly owned land parcels to housing developers.
Does anyone suggest that an increased supply would be purchased by the wealthy with little affect on prices?
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Does anyone suggest that an increased supply would be purchased by the wealthy with little affect on prices?
That probably depends on how much pent up demand remains. Are we talking wealthy investors or affluent first time buyers?
Most of the development I see is still targeting relatively high earners that were priced out of Boston and chose to commute in. SFHs that are priced Right are gone in a couple of days. Multifamily units being marketed as good investment opportunities are nowhere near satisfying the 1% rule.
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Does anyone suggest that an increased supply would be purchased by the wealthy with little affect on prices?
In some places you can build more houses, sure. Can you build them faster than the growth of the ultra-rich house-hunting population? In San Francisco, where the city is bounded on all four sides and literally has no more land? How about in cities where the only available land is a two hour commute from the urban core?
Big cities concentrate high paying jobs in densely packed skyscrapers. If all of those people want a quarter acre of lawn and a two car garage, suddenly you need miles and miles of residential neighborhoods stretching in every direction and the traffic gets horrendous. Building more homes doesn't always help, if you have to build them so far away that people can't deal with the transit times. This is the problem Seattle already has, for example. You can find comparable houses for half the price if you're willing to drive an extra 60-90 minutes in rush hour traffic, each direction, but most people would rather just pay the extra $400k and not deal with that.
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Does anyone suggest that an increased supply would be purchased by the wealthy with little affect on prices?
In some places you can build more houses, sure. Can you build them faster than the growth of the ultra-rich house-hunting population? In San Francisco, where the city is bounded on all four sides and literally has no more land? How about in cities where the only available land is a two hour commute from the urban core?
Big cities concentrate high paying jobs in densely packed skyscrapers. If all of those people want a quarter acre of lawn and a two car garage, suddenly you need miles and miles of residential neighborhoods stretching in every direction and the traffic gets horrendous. Building more homes doesn't always help, if you have to build them so far away that people can't deal with the transit times. This is the problem Seattle already has, for example. You can find comparable houses for half the price if you're willing to drive an extra 60-90 minutes in rush hour traffic, each direction, but most people would rather just pay the extra $400k and not deal with that.
There's plenty of room to build more housing in SF, could easily build up. Of the ~49 square miles of city-proper, huge swaths are two story SFHs. The Sunset and Richmond are prime examples. The houses are close together, but the density could easily double or triple with the type medium-rise housing that's common in Europe.
The fact is that the SF Bay Area has chronically underdeveloped housing. The California Legislative Analyst Office has a very good summary of the problem: https://lao.ca.gov/reports/2015/finance/housing-costs/housing-costs.aspx. Each local jurisdiction fights to prevent new housing, preferring development in neighboring cities, with the net effect that very little gets built. Classic tragedy of the commons.
It's true that developers prefer to build for the top end of the market, this is often the only way projects pencil out, especially when neighbors are persistent in advocating for lower density. High end homes depreciate, deteriorate, eventually go out of style, and as they get older they become more affordable moving down the income scale. But, we've built so little over the past few decades that this pipeline has stalled. More about this from the LAO again: https://lao.ca.gov/publications/report/3345
Many people work in the downtown highrises, but in SF there's a very large number of people who choose to live in SF while commuting to the big tech companies in the suburbs (Mountain View, Sunnyvale, Cupertino). They want the city lifestyle and for them the burbs are boring, yet that's where most of the highest paying jobs are. And people are desperate for any kind of living situation that they can afford. It's quite common for folks in tech to live in vans and box trucks at or near their place of employment, witnessed this myself.
I know less about what's going on in Seattle, but from what I can tell they are at least building denser and as quickly as they can to meet demand. Good for them. Wish I could say the same for the Bay Area. Things have truly reached crisis level here, and it's a crisis of our own making. If tech so much as sneezes the housing market here is going to catch a cold. Housing here is, as they say, priced for perfection.
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There's plenty of room to build more housing in SF, could easily build up.
"Building up" can definitely increase the housing supply, which is not the same thing as increasing the supply of houses. People aren't complaining about the skyrocketing price of apartments, but of houses. With yards for their dogs, and space for a garden, and a garage where they can store their tools.
Seattle has plenty of apartments, and ten new blocks going up at any given moment. Those are not the problem.
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There's plenty of room to build more housing in SF, could easily build up.
"Building up" can definitely increase the housing supply, which is not the same thing as increasing the supply of houses. People aren't complaining about the skyrocketing price of apartments, but of houses. With yards for their dogs, and space for a garden, and a garage where they can store their tools.
Seattle has plenty of apartments, and ten new blocks going up at any given moment. Those are not the problem.
That may be true in Seattle, but the problem in the Bay Area is with all types and levels of housing. The shortage of apartments and houses is severe and very real. For many this is a matter of survival not preference. People want to live in the city and close to work, would live in multi-unit housing (rental and owner occupied) if available. We just refuse to build enough of it. What does get built, after way too many years of permits and appeals, fills up quickly. The irony in all this is that we have (had?) an opportunity to build dense compact cities, the kind that would greatly reduce GHG emissions. But instead we've created urban sprawl 90 miles into the Central Valley in the name of preserving the "character" of neighborhoods.
Even the tech workers are giving up on the idea of ever owning (https://www.businessinsider.com/san-francisco-expensive-tech-workers-cant-buy-homes-2018-8). For the past couple of years now surveys indicate that about half of Bay Area residents want to relocate (https://sf.curbed.com/2019/2/20/18233498/poll-2019-leaving-san-francisco-oakland-silicon-valley). Many don't because the jobs are still here, but that's also starting to change as tech companies figure out that lower cost and lower tax/regulation locales are attractive.
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In some places you can build more houses, sure. Can you build them faster than the growth of the ultra-rich house-hunting population? In San Francisco, where the city is bounded on all four sides and literally has no more land? How about in cities where the only available land is a two hour commute from the urban core?
Big cities concentrate high paying jobs in densely packed skyscrapers. If all of those people want a quarter acre of lawn and a two car garage, suddenly you need miles and miles of residential neighborhoods stretching in every direction and the traffic gets horrendous. Building more homes doesn't always help, if you have to build them so far away that people can't deal with the transit times. This is the problem Seattle already has, for example. You can find comparable houses for half the price if you're willing to drive an extra 60-90 minutes in rush hour traffic, each direction, but most people would rather just pay the extra $400k and not deal with that.
Why don't they build a superfast train to a place further away? A commute wouldn't be so bad if it were fast. A train is even something you could work on (if you are lucky enough to have a seat).
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In some places you can build more houses, sure. Can you build them faster than the growth of the ultra-rich house-hunting population? In San Francisco, where the city is bounded on all four sides and literally has no more land? How about in cities where the only available land is a two hour commute from the urban core?
Big cities concentrate high paying jobs in densely packed skyscrapers. If all of those people want a quarter acre of lawn and a two car garage, suddenly you need miles and miles of residential neighborhoods stretching in every direction and the traffic gets horrendous. Building more homes doesn't always help, if you have to build them so far away that people can't deal with the transit times. This is the problem Seattle already has, for example. You can find comparable houses for half the price if you're willing to drive an extra 60-90 minutes in rush hour traffic, each direction, but most people would rather just pay the extra $400k and not deal with that.
Why don't they build a superfast train to a place further away? A commute wouldn't be so bad if it were fast. A train is even something you could work on (if you are lucky enough to have a seat).
California was working on High Speed Rail for about the past 10 years. But the plan was a political hot mess. To get buy-in from both the North and South end of the state the plan was to connect SF and LA, a route traversing difficult mountain passes and tricky geology. And then to make it more palatable to cities on the eastern side of the Central Valley, the route detoured further out of the way to hit these population centers. Then, instead of going over the Altamont Pass which already has a rail grade, they decided to run it down the congested Bay, sharing the corridor with CalTrain (again, for political support) and then through Pacheco Pass. These things made it way more expensive and way less attractive compared to air travel. The project ballooned from $33B to $77B and was way behind schedule and underfunded when the Governor finally hit the breaks on it.
In any case, jobs in the Bay Area are spread out all over the place and local transit options are not very good. We put the cart before the horse with HSR, would have been better off investing in getting the local and regional transit up to par first, then build out HSR gradually.
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"Building up" can definitely increase the housing supply, which is not the same thing as increasing the supply of houses. People aren't complaining about the skyrocketing price of apartments, but of houses. With yards for their dogs, and space for a garden, and a garage where they can store their tools.
Seattle has plenty of apartments, and ten new blocks going up at any given moment. Those are not the problem.
Yes, building up doesn't increase the supply of SFHs but it certainly can make the SFHs cheaper. The frugal might choose to forgoe that 1/4 acre lawn and buy an apartment and recreate on a public lawn. Is it possible that the situation in seattle could be even worse if it were not for that increasing supply of apartments?
Also, replacing SFH's with apartment buildings is a drastic infill measure and one not typically taken. More typical changes to increase infill are adjusting zoning so that duplex's or triplex's can be added in neighborhoods zoned only for SFH's and changing the "floor area ratios" (lot size/home size basically) requirements so that homes can be built on smaller lots or large lots can be subdivided.
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Yes, building up doesn't increase the supply of houses but it certainly can make the houses cheaper. The frugal might choose to forgoe that 1/4 acre lawn and buy an apartment and recreate on a public lawn. Is it possible that the situation in seattle could be even worse if it were not for that increasing supply of apartments?
That's my personal belief. Rents and housing prices in general went berzerk here for a few years with shocking annual price increases. Tons of new apartments have come online in the last few years (with plenty more in the pipline) and just this year rents and housing prices stabilized.
It has radically changed the character of some neighborhoods though.
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That's my personal belief. Rents and housing prices in general went berzerk here for a few years with shocking annual price increases. Tons of new apartments have come online in the last few years (with plenty more in the pipline) and just this year rents and housing prices stabilized.
It has radically changed the character of some neighborhoods though.
The Bay Area is learning rather painfully that it's impossible to stop change. Sure, you can preserve the superficial look of a neighborhood, but this comes at an enormous cost to society which invariable bubbles up as change in other ways. People end up doubling or tripling up in units, garages and garden sheds get rented out, kids live in common areas w/o a quiet place to do homework and sleep. Parents commuting multiple hours each way because this is the only way they can afford to make it. It sucks to see so many families and those other than ultra high income get priced out as they struggle to make ends meet.
Cities are (or should be, IMO) about people, not buildings. Architecture is important, but if a city refuses to adapt and instead becomes a museum it then loses its dynamism. It becomes a fake city that's only good for the monied class to bitterly cling to as they protect "what's theirs."
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I think I agree with what your are saying.
To me it is kind of the same idea as the high speed train (fantasy?) mentioned above. It is hard to build big things in the country. Its is 10x harder to build big things when someone else owns the land, or even has an interest. Sure the bay area needs 5x the current housing stock to make prices reasonable but that is just not happening. The individual has a lot of power in the states, private property rights are very strong. Regulations and courts can slow down or kill nearly any project given enough persistence. I am not saying this is good or bad, I just think it is how things are now. I can't recall the first time I heard the word NIMBY but it is most definitely a thing.
So I dont think there is doing to be a high speed train or lots of new housing in SF. IMO the 1% rule is never coming back to the high income metros BUT what about the rest of the country. It was here just a few years ago, it has to com back right? The question is when and how.
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There's plenty of room to build more housing in SF, could easily build up.
"Building up" can definitely increase the housing supply, which is not the same thing as increasing the supply of houses. People aren't complaining about the skyrocketing price of apartments, but of houses. With yards for their dogs, and space for a garden, and a garage where they can store their tools.
Seattle has plenty of apartments, and ten new blocks going up at any given moment. Those are not the problem.
We're building lots of apartments, sure, and rents are stabilizing as a result, but that's after several years where 10% year-over-year increases were the norm. A lot of people here are complaining about the price of apartments, having been forced to move farther and farther from the city center as their wages failed to keep pace with market rents.
A house with a yard is a fundamentally different product from a fifth-floor apartment, and it's true that the supply of the former will not be increasing in Seattle. I fully expect the price of detached houses to keep increasing as the city keeps gaining more and more well-compensated people who will bid the prices higher than ever before, making such houses more and more of a luxury item.
However at the same time there's also a growing political movement to make it legal to build more apartments and townhomes and duplexes in more places, so that people who have no hopes of ever buying a "house" here will still have the opportunity to have some sort of housing in nicer, walkable neighborhoods close to where the jobs are.
Just last week we had a final public hearing for a very controversial but (in my opinion) rather modest set of zoning changes, adding a story or two of allowed height to most areas where apartments are already allowed, and allowing small-scale apartment buildings in a small sliver of the land currently zoned exclusively for detached single-family homes. The opinions on this law seem to break very strongly across generational lines. One blogger took a tally (http://hashtaghashtag.org/blog-1/2019/2/22/techtrash-or-mha-family-housing-and-planning-for-the-future) of people who spoke up at the hearing. Every single person opposed to the changes appeared to be over 50 years old to the blogger's eyes, while the vast majority of people speaking in favor of the changes appeared to be under 50.
Based on this I do have some concern about the long-term viability of sol's strategy of just expecting real estate to keep appreciating indefinitely, and for cash flow to be a secondary factor.
See, right now most of my neighborhood is zoned exclusively for detached single-family homes. This has pushed land prices way, way up because the law limits the number of homes in my neighborhood to basically the number that is already there. I've seen run-down houses purchased by developers for over half a million dollars and demolished in favor of a larger, fancier one. These aren't huge lots by any means, it's just that each one comes with a golden ticket: the right to live in a pretty nice neighborhood.
What if the land use rules change, and we print ten times as many tickets to live in my neighborhood? This doesn't seem like a very far-fetched outcome if we just wait a couple decades. Many of the people who spoke out in favor of single-family zoning at last week's hearing will be dead, and the Overton window will have shifted as a result. If this happens we might see a situation kind of like the price of taxi medallions in a post-Uber world. Where before the mere right to drive people around for money was a valuable thing because of the limited supply, now it's practically worthless.
I'm not saying that land will become valueless in a more liberal zoning regime, but whatever portion of the current land value is tied to the regulatory scarcity of housing could evaporate. How much is that? I'd love to see a good analysis on that front.
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IMO the 1% rule is never coming back to the high income metros BUT what about the rest of the country. It was here just a few years ago, it has to com back right? The question is when and how.
As far as I can tell the 1% rule departed HCOL metros long ago. The dynamic in these so-called "superstar cities" (http://www.toddsinai.com/pdfs/superstar_cities_2013.pdf) is different from areas where demand is lower and/or supply is more elastic. Structures are depreciating assets, they degrade and are always decreasing in value. Yet in a superstar city the overall property value often increases or at least holds its value. This is not just from the value of the unimproved land, but also the value of having gone through the permitting and approvals process to arrive at a legal dwelling.
In cities without supply constraints the value of the land and permits is quite a bit lower, so the depreciation of the physical building dominates the equation. I think this is why most investors in LCOL areas pay more attention to the 1% rule - it better yield a higher percentage to make up for the depreciation.
When I purchased my investment property in a HCOL it was pretty close to the 1% rule, but that was during the aftermath of the Great Recession when everyone was negative on real estate and it was trendy to rent rather than own (anyone else remember the news stories about this back then?).
In any case the missing 1% rule in LCOL metros is, IMO, related to an expectation that properties will continue to appreciate. We've had a good run so far, but I'm skeptical about future gains, including superstar cities. I don't pretend to know what the next black swan event will be, or when it might happen, but one thing that comes to mind is the possibility of an increase in mortgage rates that would limit purchasing power and depress prices.
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In some places you can build more houses, sure. Can you build them faster than the growth of the ultra-rich house-hunting population? In San Francisco, where the city is bounded on all four sides and literally has no more land? How about in cities where the only available land is a two hour commute from the urban core?
Big cities concentrate high paying jobs in densely packed skyscrapers. If all of those people want a quarter acre of lawn and a two car garage, suddenly you need miles and miles of residential neighborhoods stretching in every direction and the traffic gets horrendous. Building more homes doesn't always help, if you have to build them so far away that people can't deal with the transit times. This is the problem Seattle already has, for example. You can find comparable houses for half the price if you're willing to drive an extra 60-90 minutes in rush hour traffic, each direction, but most people would rather just pay the extra $400k and not deal with that.
Why don't they build a superfast train to a place further away? A commute wouldn't be so bad if it were fast. A train is even something you could work on (if you are lucky enough to have a seat).
They took this to the eleventh hour about 5 years or so back in Wisconsin. Were going to build a light rail or whatever they call them from Milwaukee to Madison. The problem is then you need to get from either end still to your destination so do you leave a car? not to mention the arguments of which towns along the way there might be a stop or two. Was only about 60miles but the arguing got so bad that the money that was funded they just let California have it and all I hear now is they built or tried to build a train to nowhere. I do think we will see more and more rail getting laid down. Know this is off topic but never-the-less.
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I've literally seen a few properties in Toronto and Vancouver which are renting in the 0.1% range. An order of magnitude off of what's considered prudent.
Most people are lemmings who can't think for themselves, follow the crowds, and are slaves to the short term. This in turn often self-induces a feedback loop both proving everyone right, and exacerbating the situation, and more people pile in.
"30% YoY gains? I'm in! No matter what I pay, it doesn't matter since it will be worth more next year, and I get a "free" place to live. Look at you Zoidberg! You're finally becoming a crafty consumer"
Then unfortunately you get to a point where society simply runs out of money. When the average home in Vancouver takes 100% of the average person's income to buy, further price gains simply can not be effected as no one can afford to buy. So you see people moving to what they can afford, below average homes at average prices which is where I think we are now in Canada. Everyone getting into 500 sq ft condos, and prices escalating, because that's literally the only thing people can afford. Meanwhile all homes at the average level or higher are crashing.
Then eventually you get the opposite effect. "Prices are falling along with the sky! Get out no matter what! At any price! Sell for whatever you can because it will be worth less tomorrow!" Then this opposing self reinforcing loop takes hold.
Eventually you get to a point where the mustachians with cash look at the numbers and say "you know what? Even if prices fall another 20%, its prime location in a world class city returning 1.4%/mth, even if I never sell or look at the property value again, this is a 500k investment that will return 12% per year forever" Prices start to climb, more people start to think that Hey maybe RE isn's so bad after all and the cycle repeats.
Unfortunately RE is funny in that the vast majority of consumers are financially illiterate and turn to Home flipping TV shows for investment advice. Prices are very very sticky, people get hugely emotialy attached to their homes, will pawn the TV and kids vs losing the home to the bank, and the only people willing to sell for less than they bought are doing so because they literally have no other choice. This means the RE cycle is loooooooong.
Contrast this with the stock markets. The vast majority of people are there to make money, much less emotional attachment, and you can go from insanely overpriced to a bargain you can't ignore in a year or two.
I too am eagerly awaiting a return to pricing sanity. I rent now because the numbers make more sense, despite having the stache to buy a house cash. I'm Warren Buffet in 1999 lamenting tech stocks that have returned 100%+ several years running despite no profits. It's damn frustrating to hear gloats from people up to their eyes in debt who indeed have make a tax free 500k cap gain about how I'm just a 'bitter priced out renter who lacks the courage to get rich' but alas, I'll stick with the numbers. I heard the same thing from co-workers at an old job about bit coin 18 months ago.
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Then unfortunately you get to a point where society simply runs out of money. When the average home in Vancouver takes 100% of the average person's income to buy, further price gains simply can not be effected as no one can afford to buy.
As we have previously discussed in this very thread, I'm not sure that it matters what the average person can buy when there are 10x as many people as there are houses. When a city only has enough houses for it's wealthiest 10%, then only the income of the wealthiest 10% matters to house prices. The 90% are irrelevant, and thus so is the average.
And increasing wealth inequality only makes this problem worse, right? Society as a whole may very well run out of money and ten million people may be literally starving in the streets, but if your neighborhood only has 2,000 single family houses with garden space and you have 2,001 billionaires who want them, then you're going to continue to see ever-escalating bidding wars. The vast majority of the population can sit and spin, bc they just don't matter.
The larger a city's population gets in relation the number of available detached single family residences, the smaller the percentage of top income earners becomes that are even in contention to buy, sliding up into an ever-smaller corner of the income distribution's top-end tail. In economically successful major urban areas, populations tend to swell even as the city's richest folks get more and more relatively richer than all of those new people, feeding this runaway feedback loop on house prices.
Places like Seattle aren't even that bad yet! Average house prices are still less than 8x the median family income in Seattle. Some California cities like Palo Alto, by contrast, have median home prices that are well above 20x their median income, because they have a minority of super-wealthy residents who compete for limited housing supply. Vancouver BC is somewhere in between (about 13.5x). Those prices have been bid up that high by buyers, not by average households, but by strong competitive demand from the wealthiest households competing for limited properties.
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The other question is: Why should the 1% "rule" come back in any location, LCOL of not? I'm not saying it won't, or that it will, but what makes you think it will, a sort of reversion to the mean?
The 1% rule was never a rule, but a guideline to help you screen profitable rental properties. In a changing world, maybe that rule changes. Any market will be priced at what a willing buyer and a willing seller agree at, no more, no less.
In a world with low interest rates, all assets should be priced more, that is part of the purpose.
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The other question is: Why should the 1% "rule" come back in any location, LCOL of not? I'm not saying it won't, or that it will, but what makes you think it will, a sort of reversion to the mean?
Well, I think the 1% rule is a rough approximation of what you need to make rental properties look attractive relative to stocks if you are only expecting 1-2% appreciation. If people's expectations of future appreciation start to wane, I would expect to see a lot of rental properties converted into owner occupied as landlords cash out their holdings and move to more attractive investments. That would A) decrease the rental supply causing rents to rise, and B) increase the number of listings causing sale prices to drop.
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The jobs are concentrated in small places with limited housing stock
Maybe off-topic, but this is why I think the only real solution to the housing crises in various metropolitan areas is to provide incentives for employers to set up in areas of low housing demand.
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If people's expectations of future appreciation start to wane, I would expect to see a lot of rental properties converted into owner occupied as landlords cash out their holdings and move to more attractive investments.
The tax implications would make this unattractive for many people wouldn't it?
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Just put the worst deal I've done on the rental market yesterday.
$900/month rent with a $70,000 ready-to-rent cost. That's 1.285%.
(Would have been $65,000 ready-to-rent cost but the HVAC broke after I bought it and before I rented it. :( Would have been 1.38%.)
Prior properties have been in the 1.6% to 1.7% range.
I think it's a combination of lots of out of town money driving up prices plus we're many years into a boom cycle, so fewer people have to sell their properties.
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If people's expectations of future appreciation start to wane, I would expect to see a lot of rental properties converted into owner occupied as landlords cash out their holdings and move to more attractive investments.
The tax implications would make this unattractive for many people wouldn't it?
I wouldn't say unattractive, perhaps a bit of a barrier but somewhat on par with selling a stock that had a good run and has now flat-lined and entered a slow decline. There is also the recapture of depreciation, but that only applies to the structures as land isn't depreciated.
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1% or more rule is alive and well in plenty of markets, just not the ones you are looking in.
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The 1% rule is a guideline for investors buying rentals. The rental rated have several factors causing that to change. The price of houses is dependent on many different factors also. If you are looking for descent cash returns which depend on the current rents and current house prices then the 1% rule makes a lot of sense.
However the long term migration in or out of an area will have a huge impact both on the price of housing and the price of rent in the future. I would want to be buying real estate in areas that people are moving into.
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That's a good point. I think a lot of the rust-belt and flood/hurricane damage southeast real estate that people are psyched about here the last few years is probably a mediocre to bad bet in the 10+ year time frame. But who knows?
Personally I'll wait for the current cycle to end before getting back into RE. There will be buying opportunities again, though I'm not about to predict when.
-W
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My personal opinion is the 1% rule has been a good way to measure risk and return. A generally fair way to say an investor will bear X amount of risk with Y amount of return.
However the central banks of the world seamed to have changed this. The last number I heard was that about 12 trillion dollars (euros, yen, pounds etc) had been injected into the world economy. SO this makes houses WAY more expensive. However wages and rents are much stickier and have not been able to keep up.
So until some of this QE unwinds or we hit another major real estate decline I dont see it coming back for a while. However the next bubble deflating might just have central banks inject 24 trillion into the system! :)
*Note it wont ever come back in the superstar cities as discussed above.
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As I've been looking to move back into the southern WA area. I started looking for a personal house. The rent in the Vancouver, WA (Portland, OR urban town) is going at about .5%. So when I started looking at renting a place, we were probably looking at places that would rent for 1200-1400 a month vs. a 300-350k house.
But I have noticed that a lot of the condos are still reasonably priced for what they are. I guess there's less demand for them? Even here they don't run close to the 1% rule, but they are probably around .8%.
So even for a personal home, when the rental market is completely out of step with the housing prices, I just can't as a good mustachian buy a house. I even put the numbers into a calculator of how many years to own, before owning is the better deal. The answer was never. So for most west coast cities, it seems that the only way to buy a good rental is to make your own on a flip.
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Deleted a post a deemed not relevant to thread as it regarded coastal real estate which OP acknowledged may be structurally different
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Tangentially related, academic paper on The Rise of Institutional Investment in the Residential Real Estate Market (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3324008) seems to argue that increased institutional investment is correlated with a rise in prices of properties
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As I've been looking to move back into the southern WA area. I started looking for a personal house. The rent in the Vancouver, WA (Portland, OR urban town) is going at about .5%. So when I started looking at renting a place, we were probably looking at places that would rent for 1200-1400 a month vs. a 300-350k house.
But I have noticed that a lot of the condos are still reasonably priced for what they are. I guess there's less demand for them? Even here they don't run close to the 1% rule, but they are probably around .8%.
So even for a personal home, when the rental market is completely out of step with the housing prices, I just can't as a good mustachian buy a house. I even put the numbers into a calculator of how many years to own, before owning is the better deal. The answer was never. So for most west coast cities, it seems that the only way to buy a good rental is to make your own on a flip.
Are you including the additional HOA fee with the condo when comparing it to houses? In my area the % is roughly equal once you include the much higher HOA fee. For example you can rent a 600k house for 2,600 (0.43%) or a 410k condo for 2,000 (0.49%). But the condo has a $350 per month HOA fee! So that would reduce the condo to 0.40% when compared to the house!
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As I've been looking to move back into the southern WA area. I started looking for a personal house. The rent in the Vancouver, WA (Portland, OR urban town) is going at about .5%. So when I started looking at renting a place, we were probably looking at places that would rent for 1200-1400 a month vs. a 300-350k house.
But I have noticed that a lot of the condos are still reasonably priced for what they are. I guess there's less demand for them? Even here they don't run close to the 1% rule, but they are probably around .8%.
So even for a personal home, when the rental market is completely out of step with the housing prices, I just can't as a good mustachian buy a house. I even put the numbers into a calculator of how many years to own, before owning is the better deal. The answer was never. So for most west coast cities, it seems that the only way to buy a good rental is to make your own on a flip.
Are you including the additional HOA fee with the condo when comparing it to houses? In my area the % is roughly equal once you include the much higher HOA fee. For example you can rent a 600k house for 2,600 (0.43%) or a 410k condo for 2,000 (0.49%). But the condo has a $350 per month HOA fee! So that would reduce the condo to 0.40% when compared to the house!
Most condos I look at are sub $150/month. I would assume that even applying the 1% rule to condos, you come out ahead per sqft wise in a lot of the west coast. But you also have to add in that part of the HOA fee for a condo is going towards maintenance/ repair work that you're not specifically liable for. So it's not a 100% bust.
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I've literally seen a few properties in Toronto and Vancouver which are renting in the 0.1% range. An order of magnitude off of what's considered prudent.
Most people are lemmings who can't think for themselves, follow the crowds, and are slaves to the short term. This in turn often self-induces a feedback loop both proving everyone right, and exacerbating the situation, and more people pile in.
"30% YoY gains? I'm in! No matter what I pay, it doesn't matter since it will be worth more next year, and I get a "free" place to live. Look at you Zoidberg! You're finally becoming a crafty consumer"
Then unfortunately you get to a point where society simply runs out of money. When the average home in Vancouver takes 100% of the average person's income to buy, further price gains simply can not be effected as no one can afford to buy. So you see people moving to what they can afford, below average homes at average prices which is where I think we are now in Canada. Everyone getting into 500 sq ft condos, and prices escalating, because that's literally the only thing people can afford. Meanwhile all homes at the average level or higher are crashing.
Then eventually you get the opposite effect. "Prices are falling along with the sky! Get out no matter what! At any price! Sell for whatever you can because it will be worth less tomorrow!" Then this opposing self reinforcing loop takes hold.
Eventually you get to a point where the mustachians with cash look at the numbers and say "you know what? Even if prices fall another 20%, its prime location in a world class city returning 1.4%/mth, even if I never sell or look at the property value again, this is a 500k investment that will return 12% per year forever" Prices start to climb, more people start to think that Hey maybe RE isn's so bad after all and the cycle repeats.
Unfortunately RE is funny in that the vast majority of consumers are financially illiterate and turn to Home flipping TV shows for investment advice. Prices are very very sticky, people get hugely emotialy attached to their homes, will pawn the TV and kids vs losing the home to the bank, and the only people willing to sell for less than they bought are doing so because they literally have no other choice. This means the RE cycle is loooooooong.
Contrast this with the stock markets. The vast majority of people are there to make money, much less emotional attachment, and you can go from insanely overpriced to a bargain you can't ignore in a year or two.
I too am eagerly awaiting a return to pricing sanity. I rent now because the numbers make more sense, despite having the stache to buy a house cash. I'm Warren Buffet in 1999 lamenting tech stocks that have returned 100%+ several years running despite no profits. It's damn frustrating to hear gloats from people up to their eyes in debt who indeed have make a tax free 500k cap gain about how I'm just a 'bitter priced out renter who lacks the courage to get rich' but alas, I'll stick with the numbers. I heard the same thing from co-workers at an old job about bit coin 18 months ago.
I guess I like this post the best.
I don't see how the top 10 percenters can drive up RE costs forever. Imho, a good chunk of their income (or the bosses ability to pay them) is based on their companies stock valuation.
When the stock reverts to the mean or even crashes below it, the raises/bonuses etc get tossed out the window. Companies fold left right and center no different than in 2000. I don't think the fundamentals have changed.
Business fundamentals haven't changed either. Businesses exist to make profit, generally. A lot of these HCOL areas are driven by what I'll call a combination of The Everything Bubble and Another Tech Boom. These big (tech?) companies, it's only a matter of time before they realize they can instantly add 10-20% to their bottom line by relocating to Sioux Falls or something similar. Especially when a lot of the work is done on computers, and the concept of "showing up to work" gets more flexible.
Another point I would like to add. And this is definitely taking the long view. Is anyone else concerned about the possibility that we may start see population or buyer decline? As in, more people heading for senior care/the grave than new buyers to fill their shoes?
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I don't see how the top 10 percenters can drive up RE costs forever. Imho, a good chunk of their income (or the bosses ability to pay them) is based on their companies stock valuation.
I wish that were true! The US stock market has a long term average near 10%, and if house prices followed stock valuations then house prices would also rise at about 10%. Even in places like Vancouver, the long term trend is significantly below that.
Also a reminder that it doesn't make any sense to say "no one can afford to buy" at these prices, when it is the surplus of qualified buyers who are driving up the prices in the first place. Prices in places like Vancouver are rising because there are too many more people who CAN afford to buy at those prices. That will change some day, and then prices will fall in response to buyers' incomes. But while they're rising? Just like your investment in the stock index, housing is worth whatever the the market is willing to pay today and you can't really argue with that collective wisdom. I don't think you can time the market in real estate any more than you can time the market in stocks.
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This was a super helpful thread for me! We've been keeping our eyes out for rental properties in a couple local to us areas for a little over a year, and setting money aside for when the time was right. We haven't seen anything close to the 1% rule. And I'm even in a rust-belty area.
Will keep looking and saving but may or may not diversify into real estate depending on what (if anything) ever comes up. Good to keep options open though.
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I've never applied the 1% rule.
I just checked and we bought one property at 0.3%. The rents were way below market. Still today it is just 0.9% over ten years later.
Overall it has brought us slow and steady income. It has also appreciated, probably more than doubled. Based on current prices it would probably sell and produce only 0.45-0.5% for the next guy. Other properties are moving in the area at that ratio.
I have seriously questioned if we would be better to sell and invest in Vanguard funds for less stress. But I like having some real-estate and it is in a good area our vacancy rate was 1% over that time with just a few missed months.
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Personally I'll wait for the current cycle to end before getting back into RE. There will be buying opportunities again, though I'm not about to predict when.
-W
So as a new investor, this has been one of my biggest points of confusion. How do you wait it out? I think you (Waltworks) mention you're dumping extra money into VTSAX for now, which is "boring," and you're waiting for the next sale. But if the market crashes, won't your VTSAX be crappy too? So you'll sell that at a loss to buy the RE on sale?
Like I say, I'm new to all of this, but this has been one of my big points of confusion. Unless you're just willing to park your $$ in a high interest savings account or money market, getting maybe 2.5%, I don't see how anyone will have money ready for the upcoming "sale"...
Anyone? What am I missing?
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So as a new investor, this has been one of my biggest points of confusion.
Yea, me too. This community is pretty firmly in the philosophical camp that says "you can't time the stock market" and yet simultaneously in the opposing philosophical camp that says "you should time the real estate market".
If you want RE to be part of you asset allocation, then you should find the best deals you can there and buy them in accordance with your plan. I don't think it make sense to say "I think that real estate is overpriced and not worth my investment dollars right now" and then turn around and say "nobody can possibly know if the stock market is overpriced and not worth my investment dollars right now."
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Well.... I honestly have done quite well going from gold, to real estate, back to gold, back to real estate.
You usually have 1-3 years to decide if the markets on the way up or down. And u don't have to hit it perfectly at the top or bottom, u just have to hit the trend so to speak.
When RE starts slipping for a year or more, gold will start climbing and vice versa. The more interest they have in RE, the less they'll have in gold. Been that way for a loooong time. Like since biblical times.
I am loving the forum, but am a little perplexed at how "anti" a lot of the membership is at some other investments. My plan is to VTSAX "enough" for retirement, but also play with another 10% or so of my income. It's worked well so far.
Fwiw, it doesn't have to be gold either. Just find two asset classes that you KNOW something about, and that have an inverse relationship. I just like these two because they generally move slower. I don't have to worry about losing everything if I go on vacation for a month or two and the market changes. They also both have intrinsic value.
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I've timed the RE market... twice. I'm FIRE almost entirely because of that.
It's much, much easier than stocks, or has been until recently. You can have detailed, granular knowledge of your local RE that an egghead on Wall Street can't match. You can knock on the door of that run-down house and make friends with the fellow who is underwater on it. You used to be able to go bid on houses that would rent for 3 or 4% of their purchase price right on the courthouse steps, and you probably will be able to again someday in some places. And of course you can spam the whole local area with your we-buy-cheap-houses thing and find people who are senile and take advantage of them, if that's your thing.
No-recourse leverage at government-subsidized interest rates is freely available to most US residents, too!
None of that is true for stocks, where you're at a huge information and analysis-time disadvantage to legions of those eggheads, not to mention that there's plenty of evidence that stock prices are mostly a random walk.
Totally different things.
-W
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This ^^^^^
I did it twice as well, both of them in the last housing decline from 2009 and 2011. That's 90% of the reason I had my place paid for at 26 years old.
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This ^^^^^
I did it twice as well, both of them in the last housing decline from 2009 and 2011. That's 90% of the reason I had my place paid for at 26 years old.
I'm certainly not disputing that it's possible to make money in real estate. I've done it too.
But every time someone shows up here bragging about doubling their money by buying in at the 2009, I try to remember to point out that they could have quadrupled their money by buying the stock market index. It's been really hard to lose money investing for the past decade.
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Oh, everyone feels like a genius right now, for sure. Lots of people just got lucky with basically anything they invested in (except bitcoin, ha). I certainly got lucky. But the RE buying opportunity was pretty obvious for a couple of years. Stocks only seem cheap in hindsight (they were sitting right around 15 P/E, ie historically average or at best just 25% on sale as compared to the modern P/E 20 average).
To be clear, I'm not saying you can very accurately time the entire national RE market (equivalent to timing your buying/selling of VTSAX). I'm saying that you can have enough granular knowledge of some small portion of the RE market to do really well if you're patient and enjoy following local RE.
-W
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Stocks are or have become an efficient market. Dividends are determined by the owned company and legally everyone has access to the same information when making purchase or divestment decisions on identical shares within companies.
Real estate is an inefficient market with a relatively high barrier to entry. Rents are guided by the market but ultimately determined by the owner and any changes they make or have made to the property. The same information is available on Zillow but additional information is widely divergent depending on the personal relationships of the persons involved. The houses themselves are unique even with the same school district or neighborhood. Price changes can come relatively quickly (for real estate) but compared to stocks, it's glacial speed.
Real estate in any direct ownership form is not as passive as the stock market but there are tax advantages. Real estate leverage is subsidized by the US government through our low fixed rate loans. For me, the pro/con list between the stock market and real estate is a wash. Properly chosen stock market investments (VTSAX instead of American Funds) or properly chosen real estate investments (desirable property in healthy economies with acceptable financials vs overpriced junk in high crime shrinking cities). Either way you are going to do well and it will only be in hindsight that you will know which outperformed the other over a particular period of time.
Personally I invest both in VTSAX and real estate and since their correlation is very low, it's a financially conservative decision.
To answer the OP's question, will the 1% rule come back? It never left but I presume you meant, will it be easy pickings like it was 10-12 years ago? Will there be real estate blood in the streets nationwide? Probably not. But real estate is cyclical and there will be buying opportunities in your target markets eventually. Perhaps it will bring potential properties' profitability (holy alliteration, batman!) up to a point where it would be worthwhile to invest in that property instead of VTSAX. Perhaps not.
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1% or more rule is alive and well in plenty of markets, just not the ones you are looking in.
That's pretty much what I was thinking.
The capital to buy rental property is concentrated in a handful of metro areas, especially on the coasts. Everyone wants to have local rentals, so it's not hard to see why returns will be low in those areas.
On the other hand, there are still plenty of places in the rural US and the Rust Belt where a $30-40k SFH rents for $600-1000/mo because there's significant local rental demand and low local supply of capital. If you're willing to hire an agent to take care of rentals in an underserved market, you can still net well above 1%. It's just much less likely to happen in a metro that's attracting lots of people with money to invest.
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1% or more rule is alive and well in plenty of markets, just not the ones you are looking in.
That's pretty much what I was thinking.
The capital to buy rental property is concentrated in a handful of metro areas, especially on the coasts. Everyone wants to have local rentals, so it's not hard to see why returns will be low in those areas.
On the other hand, there are still plenty of places in the rural US and the Rust Belt where a $30-40k SFH rents for $600-1000/mo because there's significant local rental demand and low local supply of capital. If you're willing to hire an agent to take care of rentals in an underserved market, you can still net well above 1%. It's just much less likely to happen in a metro that's attracting lots of people with money to invest.
So that's your risk that you're taking on. The markets that supply greater return also have an increased risk of longer periods of vacancy/ capital loss.
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1% or more rule is alive and well in plenty of markets, just not the ones you are looking in.
That's pretty much what I was thinking.
The capital to buy rental property is concentrated in a handful of metro areas, especially on the coasts. Everyone wants to have local rentals, so it's not hard to see why returns will be low in those areas.
On the other hand, there are still plenty of places in the rural US and the Rust Belt where a $30-40k SFH rents for $600-1000/mo because there's significant local rental demand and low local supply of capital. If you're willing to hire an agent to take care of rentals in an underserved market, you can still net well above 1%. It's just much less likely to happen in a metro that's attracting lots of people with money to invest.
So that's your risk that you're taking on. The markets that supply greater return also have an increased risk of longer periods of vacancy/ capital loss.
Especially in rural areas, there's also the well and septic to worry about. Not small repairs if they need replacing.
Conversely, the decline in expected returns in many urban markets might also indicate a decline in risk.
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I'll go out on a limb and say that I think BOTH the ~1% rule properties in shrinking regions AND the 0.1% rule properties in the superstar cities are bad investments right now.
Lots of those 1% rule rust belt places are going to get just murdered with property taxes as the tax base shrinks. Rents are not likely to rise even with inflation. You might *never* be able to sell. There are places you wouldn't want *for free* that can rent for $500-800 a month (I'm not kidding, run the numbers on a $500/mo SFH with $2.5k in property taxes and all the usual maintenance/Capex/management/etc costs sometime - you wouldn't take it for free).
Likewise in the superstar cities, appreciation has been on a crazy run for a decade. That won't last forever and buying a place just to lose money every month on rent is the same sucker's bet that people were making in 2005. None of those places got magically more awesome in the last 10 years, and appreciation going forward (IMO) will *at best* match inflation.
I've been right about the RE market a couple of times before but my advice is of course worth what you paid for it.
-W
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Those rural area, declining city, low income, section 8 type areas used to be the 2% rule properties. That was only a handful of years ago that was the case. I agree with waltworks that those at 1-1.5% are still terrible investments.
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For properties you have where 1% rule is not applying, how much room do you have to raise rents. I know you can only get market rates, and you can't get blood from a stone, but there are roughly speaking only two things you can control: purchase price & rent requested
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For properties you have where 1% rule is not applying, how much room do you have to raise rents. I know you can only get market rates, and you can't get blood from a stone, but there are roughly speaking only two things you can control: purchase price & rent requested
The property we bought at 0.3% we were able to get it up to 0.5% in 6 months. There is rent control in the area & we were a bit worried because you need to tell new tenants the old rent. They can fight it but ours were artificially low because one was rented by the former owner’s son & the other was a 2bdm rented with a caveat to one person only. We also renovated them a lot. We explained the reasons for the large rent increase to the new tenants & they never fought it.
However, it was a bit nerve wracking waiting for the 30 days to pass.
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For properties you have where 1% rule is not applying, how much room do you have to raise rents. I know you can only get market rates, and you can't get blood from a stone, but there are roughly speaking only two things you can control: purchase price & rent requested
The property we bought at 0.3% we were able to get it up to 0.5% in 6 months. There is rent control in the area & we were a bit worried because you need to tell new tenants the old rent. They can fight it but ours were artificially low because one was rented by the former owner’s son & the other was a 2bdm rented with a caveat to one person only. We also renovated them a lot. We explained the reasons for the large rent increase to the new tenants & they never fought it.
However, it was a bit nerve wracking waiting for the 30 days to pass.
Care to share your numbers and rationale on that one? I know Canada is going to be different, but I'd like to know more about why folks are buying .3% properties.
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Care to share your numbers and rationale on that one? I know Canada is going to be different, but I'd like to know more about why folks are buying .3% properties.
0.3%? One can only wish...
Here's an article about 5 Vancouver properties renting in the 0.05-0.15%/month range.
https://vancouversun.com/news/local-news/five-metro-vancouver-mansions-being-rented-for-relatively-cheap-cheap-cheap
The reason is simple. Canada didn't see the huge declines that the US did in '08. An entire generation has only ever known RE to go up, and their idea of a "crash" is the period in '08 and home prices retracted like 10%, then quickly recouped it all 6 months later, and continued the upwards trajectory, peaking around 30% YoY gains. Given the short term memories of the average person, if 30% continued forever, then it really wouldn't matter that you're losing money every month, because that $5m home you just bought is appreciating at 125k per month. This can continue for a while (as it did), but once you approach 100% of your income to pay the mortgage/tax/insurance on the average dwelling, something has to give.
The other one I've read is a bit cultural. Canada has lots of immigrants, a huge number from South and Eastern Asia, a large proportion given out relatively small population. Over there I'm told from immigrant friends that RE is a bit of a racket, on average low wages make it impossible to get into, and landlords take all sorts of liberties that would be no where close to legal over here. Because of that, the culture is heavy into investing in RE, and sometimes try to play the same games as over there (ie my brother got 6 days notice to pack up and leave in the middle of a lease because the LL got a great unexpected offer on the condo).
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Then unfortunately you get to a point where society simply runs out of money. When the average home in Vancouver takes 100% of the average person's income to buy, further price gains simply can not be effected as no one can afford to buy.
As we have previously discussed in this very thread, I'm not sure that it matters what the average person can buy when there are 10x as many people as there are houses. When a city only has enough houses for it's wealthiest 10%, then only the income of the wealthiest 10% matters to house prices. The 90% are irrelevant, and thus so is the average.
And increasing wealth inequality only makes this problem worse, right? Society as a whole may very well run out of money and ten million people may be literally starving in the streets, but if your neighborhood only has 2,000 single family houses with garden space and you have 2,001 billionaires who want them, then you're going to continue to see ever-escalating bidding wars. The vast majority of the population can sit and spin, bc they just don't matter.
The larger a city's population gets in relation the number of available detached single family residences, the smaller the percentage of top income earners becomes that are even in contention to buy, sliding up into an ever-smaller corner of the income distribution's top-end tail. In economically successful major urban areas, populations tend to swell even as the city's richest folks get more and more relatively richer than all of those new people, feeding this runaway feedback loop on house prices.
Places like Seattle aren't even that bad yet! Average house prices are still less than 8x the median family income in Seattle. Some California cities like Palo Alto, by contrast, have median home prices that are well above 20x their median income, because they have a minority of super-wealthy residents who compete for limited housing supply. Vancouver BC is somewhere in between (about 13.5x). Those prices have been bid up that high by buyers, not by average households, but by strong competitive demand from the wealthiest households competing for limited properties.
How can there be 10x the people as homes? How can a city function if that's the case? So the top 10% have a roof, and the other 90% are homeless? I'm not sure how that works. Almost by definition there has to be an equal number of dwellings as people - unless of course you're talking about physical houses only, in which case that hardly changes anything given that the crazy price/income or price/rent ratios have extended all the way to the very bottom of the market. Unless you consider a 300 sq ft condo (that is still going for over $1000/sq ft) the epitome of the good life. Something like 70% of Canadians own their own homes now according to the stats, so I think it's perfectly reasonable to talk about the median home and the median income because the 10+ Price/Income ratios are seen across the entire spectrum of the market in some cities. I would consider a 300 sq ft market to be the absolute bottom of the RE ladder, and when you need almost 2x the average Canadian income to maintain the historically sensible ratio of about 30% for housing costs, something is wrong.
Simply stated, in certain cities there are almost zero dwellings in running the gamut from shoebox condo to 5br ocean front villa, that approach a reasonable financial metric - unless you factor in appreciation. Given (at least in Vancouver) that the median dwelling takes close to 100% of the average income, I'm not sure how physically people can buy.
And we already saw it play out a little in Toronto. People are so desperate to get into RE since they think it's no lose. They can't afford a median home, so they buy what they can - condos. This effected a pretty decent drop in house prices, while at the same time pushing up condo prices. You literally have above average people with above average incomes getting into bidding wars over below average places.
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Care to share your numbers and rationale on that one? I know Canada is going to be different, but I'd like to know more about why folks are buying .3% properties.
0.3%? One can only wish...
Here's an article about 5 Vancouver properties renting in the 0.05-0.15%/month range.
https://vancouversun.com/news/local-news/five-metro-vancouver-mansions-being-rented-for-relatively-cheap-cheap-cheap
The reason is simple. Canada didn't see the huge declines that the US did in '08. An entire generation has only ever known RE to go up, and their idea of a "crash" is the period in '08 and home prices retracted like 10%, then quickly recouped it all 6 months later, and continued the upwards trajectory, peaking around 30% YoY gains. Given the short term memories of the average person, if 30% continued forever, then it really wouldn't matter that you're losing money every month, because that $5m home you just bought is appreciating at 125k per month. This can continue for a while (as it did), but once you approach 100% of your income to pay the mortgage/tax/insurance on the average dwelling, something has to give.
The other one I've read is a bit cultural. Canada has lots of immigrants, a huge number from South and Eastern Asia, a large proportion given out relatively small population. Over there I'm told from immigrant friends that RE is a bit of a racket, on average low wages make it impossible to get into, and landlords take all sorts of liberties that would be no where close to legal over here. Because of that, the culture is heavy into investing in RE, and sometimes try to play the same games as over there (ie my brother got 6 days notice to pack up and leave in the middle of a lease because the LL got a great unexpected offer on the condo).
So basically this then?
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I think there are a lot of factors that play into the 1% rule.
Let’s say someone can afford a $1500 rent/mortgage payment.
-At 4% today over 30 years that is the same as buying a house around $300k.
The interest rate is currently going up. Not saying to 80's and 90's rates where they were around 10%.
Supply & Demand. I am starting to see lots of rentals going up in price as the supply shrinks. Less individuals are buying house.
Plus increase in wages. The push for $15 minimum wage had my dad stating that most people spend ROUGHLY 30% of their income on housing. If they passed the push our rentals were going up.
Finally: Mentality - Millenials with high student debt, less pension options, high job turnover/moving... They are forced to be renters and less likely to settle down and be homeowners. At least that is the *feeling* that I have gotten over the countless articles.
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Care to share your numbers and rationale on that one? I know Canada is going to be different, but I'd like to know more about why folks are buying .3% properties.
We liked the area (walk score 95+) & it was probably the most reasonably priced place at the time. We made a spread sheet of the 18 we visited including projected Reno’s, rents & expenses. Overall, it was the best deal. It also helps that the tenants pay the utilities. Once we bumped up the rents it was just cash flow positive. I think that is very important. I would not buy something I had to inject $ into every month. We keep a separate bank account for the rental so it’s easy to keep it separate. We’ve had to “loan” it money for 2 major repairs but it’s paid us back within 4-6 months. We’re happy if it can carry itself & break even. Any extra $ it’s makes goes towards its mortgage. Once the mortgage is paid it will provide about $15-20K a year.
It has appreciated a lot but we don’t plan to sell. I’ve had relatives regreat selling RE so my plan is to just make money off the rents.
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You have a property that's cash flow positive even though the rent when you bought it was .3% of the purchase price?
Sorry if I missed this, but what % of purchase price is the monthly rent now?
Is it cash flow positive because you put down a large down payment, or was the bulk of the purchase paid by mortgage?
I apologize if these are intrusive...just trying to understand.
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You have a property that's cash flow positive even though the rent when you bought it was .3% of the purchase price?
It's not, I'm sure. What K-Ice is probably saying is that the mortgage is less than the rent (hence the 2 repairs that already wiped out 4-6 months of profit each, probably no accounting for management or Capex or vacancy, etc).
Mortgage rates in Canada aren't fixed for long terms like in the US so if interest rates ever rise, oh man is the sh*t going to hit the fan. Of course, it could do that without mortgage rates rising too given the crazy valuations.
-W
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We liked the area (walk score 95+) & it was probably the most reasonably priced place at the time. We made a spread sheet of the 18 we visited including projected Reno’s, rents & expenses. Overall, it was the best deal. It also helps that the tenants pay the utilities. Once we bumped up the rents it was just cash flow positive. I think that is very important. I would not buy something I had to inject $ into every month. We keep a separate bank account for the rental so it’s easy to keep it separate. We’ve had to “loan” it money for 2 major repairs but it’s paid us back within 4-6 months. We’re happy if it can carry itself & break even. Any extra $ it’s makes goes towards its mortgage. Once the mortgage is paid it will provide about $15-20K a year.
It has appreciated a lot but we don’t plan to sell. I’ve had relatives regreat selling RE so my plan is to just make money off the rents.
I don't know that is common in Canada but it is absolutely bananas in the states. Breaking even means earning zero dollars correct? So that large down payment I assume you made is earning nothing for the 10-20 years while you are paying down the mortgage? So It will cash flow nothing, and you are banking on appreciation for all of your returns I assume. This feels insanely risky but you have done well so far? Is this type of speculation somewhat common in the big cities in Canada?
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We liked the area (walk score 95+) & it was probably the most reasonably priced place at the time. We made a spread sheet of the 18 we visited including projected Reno’s, rents & expenses. Overall, it was the best deal. It also helps that the tenants pay the utilities. Once we bumped up the rents it was just cash flow positive. I think that is very important. I would not buy something I had to inject $ into every month. We keep a separate bank account for the rental so it’s easy to keep it separate. We’ve had to “loan” it money for 2 major repairs but it’s paid us back within 4-6 months. We’re happy if it can carry itself & break even. Any extra $ it’s makes goes towards its mortgage. Once the mortgage is paid it will provide about $15-20K a year.
It has appreciated a lot but we don’t plan to sell. I’ve had relatives regreat selling RE so my plan is to just make money off the rents.
I don't know that is common in Canada but it is absolutely bananas in the states. Breaking even means earning zero dollars correct? So that large down payment I assume you made is earning nothing for the 10-20 years while you are paying down the mortgage? So It will cash flow nothing, and you are banking on appreciation for all of your returns I assume. This feels insanely risky but you have done well so far? Is this type of speculation somewhat common in the big cities in Canada?
It is speculation and it is risky compared to investing, which is probably why I know very very few middle class people invested in rentals in Canada.
Most people I know invested in RE here either work in the RE industry, or are high net worth, looking to diversify, and have a high risk tolerance within this asset class.
I literally can't think of anyone middle class off the top of my head who owns a rental property in a Canadian city, other than some friends who have bought a house with a suite that they can rent out to offset the mortgage.
Otherwise, between 20% down, the housing prices in Canadian cities, and the variability of our mortgages, it's not at all the same kind of investment that it is in the US.
Also remember, we have only a small handful of major cities, which is where the vast majority of jobs are. So our urban real estate market is kind of nuts as a result.
My expected gains on my rental are entirely speculation, but given what's happening where I own, it's actually a pretty safe bet.
Based on the past decade, had we just left it empty, we would be close to breaking even if we sold today, and my area is just starting to heat up.
Something extremely strange would have to happen for me to lose money, again, even of I just left it empty, based on the plans the city has for my area.
Even then, I'm only invested to diversify beyond maxing my tax advantaged accounts and to lock in the relatively low prices here as rent control for my parents who will be my tenants. I don't even factor this property in to my retirement planning. It's basically just a bonus.
So yeah, it's a different world here.
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Wild idea, but if all the world offers are bad investments whose revenue will never justify the price, perhaps don’t buy them? I remember forums in 1999 trying to justify dot com stocks based on fundamentals - I.e. why a 1000 PE was better than a negative PE.
The “everything bubble” is luring people into sucker bets based on FOMO, greater fool theory, and retirees’ requirement to generate income at any cost.
On a macro level, extreme concentrations of wealth have (1) raised demand for securities and (2) reduced the velocity of money to the point we have faced deflationary pressures for a decade despite historic low interest rates and falling unemployment. This “conundrum” is because those new quantitative easing dollars flowed into the portfolios of the wealthy, where they have hardly been cycled through the real economy, whereas lower income demographics would’ve spent extra cash the same day. The fed bought bonds, not products of labor such as infrastructure. The result was a bubble in all investable assets.
Breaking this cycle might involve (a) a reversal of quantitative easing that stresses the bubble to the point of breakage/panic, (b) a hyper-consumption binge by real-economy consumers that raises inflation, or (c) a contagious collapse in asset prices starting in any one sector as in 2008.
So yea, you don’t have to buy bad investments. Certainly not illiquid unhedge-able ones like physical real estate earning 2% per year plus whatever appreciation/depreciation greater-fool-theory delivers.
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Wild idea, but if all the world offers are bad investments whose revenue will never justify the price, perhaps don’t buy them? I remember forums in 1999 trying to justify dot com stocks based on fundamentals - I.e. why a 1000 PE was better than a negative PE.
The “everything bubble” is luring people into sucker bets based on FOMO, greater fool theory, and retirees’ requirement to generate income at any cost.
On a macro level, extreme concentrations of wealth have (1) raised demand for securities and (2) reduced the velocity of money to the point we have faced deflationary pressures for a decade despite historic low interest rates and falling unemployment. This “conundrum” is because those new quantitative easing dollars flowed into the portfolios of the wealthy, where they have hardly been cycled through the real economy, whereas lower income demographics would’ve spent extra cash the same day. The fed bought bonds, not products of labor such as infrastructure. The result was a bubble in all investable assets.
Breaking this cycle might involve (a) a reversal of quantitative easing that stresses the bubble to the point of breakage/panic, (b) a hyper-consumption binge by real-economy consumers that raises inflation, or (c) a contagious collapse in asset prices starting in any one sector as in 2008.
So yea, you don’t have to buy bad investments. Certainly not illiquid unhedge-able ones like physical real estate earning 2% per year plus whatever appreciation/depreciation greater-fool-theory delivers.
+1.
I feel the same way but couldn't express or explain it as well as you did.
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Wild idea, but if all the world offers are bad investments whose revenue will never justify the price, perhaps don’t buy them? I remember forums in 1999 trying to justify dot com stocks based on fundamentals - I.e. why a 1000 PE was better than a negative PE.
The “everything bubble” is luring people into sucker bets based on FOMO, greater fool theory, and retirees’ requirement to generate income at any cost.
On a macro level, extreme concentrations of wealth have (1) raised demand for securities and (2) reduced the velocity of money to the point we have faced deflationary pressures for a decade despite historic low interest rates and falling unemployment. This “conundrum” is because those new quantitative easing dollars flowed into the portfolios of the wealthy, where they have hardly been cycled through the real economy, whereas lower income demographics would’ve spent extra cash the same day. The fed bought bonds, not products of labor such as infrastructure. The result was a bubble in all investable assets.
Breaking this cycle might involve (a) a reversal of quantitative easing that stresses the bubble to the point of breakage/panic, (b) a hyper-consumption binge by real-economy consumers that raises inflation, or (c) a contagious collapse in asset prices starting in any one sector as in 2008.
So yea, you don’t have to buy bad investments. Certainly not illiquid unhedge-able ones like physical real estate earning 2% per year plus whatever appreciation/depreciation greater-fool-theory delivers.
The "all investments are inflated" idea makes sense. I just haven't been able to predict what will happen.
For example, what if instead of a crash, various investments just slowly deliver poor returns? What if for several decades, interest rates and bonds oscillate between zero and 2% nominal, providing a 1% average loss relative to inflation, while stocks' fluctuation revolves around an average real return of 3%? We wouldn't need a special crash to deliver financial returns far lower than past eras.
I also can't figure out the best investment. Paying down debt seems relatively better than usual, but that implies leverage is a bad idea. Will real estate be better than other investments, meaning investors should buy a lot of it? Or will it fail to cover payments somehow, meaning investors should stay away?
For now I'm in real estate more than anything else, but with low leverage. Hard to know the right move.
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Wild idea, but if all the world offers are bad investments whose revenue will never justify the price, perhaps don’t buy them? I remember forums in 1999 trying to justify dot com stocks based on fundamentals - I.e. why a 1000 PE was better than a negative PE.
The “everything bubble” is luring people into sucker bets based on FOMO, greater fool theory, and retirees’ requirement to generate income at any cost.
On a macro level, extreme concentrations of wealth have (1) raised demand for securities and (2) reduced the velocity of money to the point we have faced deflationary pressures for a decade despite historic low interest rates and falling unemployment. This “conundrum” is because those new quantitative easing dollars flowed into the portfolios of the wealthy, where they have hardly been cycled through the real economy, whereas lower income demographics would’ve spent extra cash the same day. The fed bought bonds, not products of labor such as infrastructure. The result was a bubble in all investable assets.
Breaking this cycle might involve (a) a reversal of quantitative easing that stresses the bubble to the point of breakage/panic, (b) a hyper-consumption binge by real-economy consumers that raises inflation, or (c) a contagious collapse in asset prices starting in any one sector as in 2008.
So yea, you don’t have to buy bad investments. Certainly not illiquid unhedge-able ones like physical real estate earning 2% per year plus whatever appreciation/depreciation greater-fool-theory delivers.
The "all investments are inflated" idea makes sense. I just haven't been able to predict what will happen.
For example, what if instead of a crash, various investments just slowly deliver poor returns? What if for several decades, interest rates and bonds oscillate between zero and 2% nominal, providing a 1% average loss relative to inflation, while stocks' fluctuation revolves around an average real return of 3%? We wouldn't need a special crash to deliver financial returns far lower than past eras.
I also can't figure out the best investment. Paying down debt seems relatively better than usual, but that implies leverage is a bad idea. Will real estate be better than other investments, meaning investors should buy a lot of it? Or will it fail to cover payments somehow, meaning investors should stay away?
For now I'm in real estate more than anything else, but with low leverage. Hard to know the right move.
Right now, the best investment I see is deleveraging any real estate financed at 5 percent or more. Even after tax considerations, the de-risking adds some value. That and a nice pile of cash in case this all turns out to be smoke and mirrors when the Chinese government pulls the rug out from under the flow of money out of China. I kind of think they won't, because they want to acquire a big, fat piece of the USA pie. If not directly, then indirectly through having Chinese citizens and their money move here or at least acquire US assets.
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That and a nice pile of cash in case this all turns out to be smoke and mirrors when the Chinese government pulls the rug out from under the flow of money out of China.
I thought this (https://www.bakermckenzie.com/en/newsroom/2019/01/chinese-fdi?mod=article_inline) was (https://meyersresearchllc.com/chinas-demand-for-us-housing-is-slowing-what-gives/) happening (https://www.wsj.com/articles/chinese-investors-back-away-from-global-property-markets-11546351201) already (https://www.wsj.com/articles/chinese-exiting-u-s-real-estate-as-beijing-directs-money-back-to-shore-up-economy-11548757800)?
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That and a nice pile of cash in case this all turns out to be smoke and mirrors when the Chinese government pulls the rug out from under the flow of money out of China.
I thought this (https://www.bakermckenzie.com/en/newsroom/2019/01/chinese-fdi?mod=article_inline) was (https://meyersresearchllc.com/chinas-demand-for-us-housing-is-slowing-what-gives/) happening (https://www.wsj.com/articles/chinese-investors-back-away-from-global-property-markets-11546351201) already (https://www.wsj.com/articles/chinese-exiting-u-s-real-estate-as-beijing-directs-money-back-to-shore-up-economy-11548757800)?
Looks like some government-engineered braking, but the money is still flowing to the Bay Area and some parts of Southern California.
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Remember when Japan was buying all the big prestigious buildings in NYC?
Deja vu all over again...
-W
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You have a property that's cash flow positive even though the rent when you bought it was .3% of the purchase price?
Sorry if I missed this, but what % of purchase price is the monthly rent now?
Is it cash flow positive because you put down a large down payment, or was the bulk of the purchase paid by mortgage?
I apologize if these are intrusive...just trying to understand.
So to clarify, I guess those first few months at 0.3% were not cash flow positive but we were hamstringed until the owner's son moved out. A below market rental for him for a few months was a condition on closing. It made getting a mortgage a lot more challenging, as they weren't convinced of our projected income. After him and the woman above him were gone it was at 0.6%. Today it is at 0.9%.
We also self manage and do a lot of DIY. This also wasn't my partner's first rental property so we knew what we were getting into.
As I mentioned the tenants pay all the utilities, which helps keeps other monthly expenses lower. In a larger multi family, say 6 or 8 plex utilities can eat the rent from one entire suite every month. The assessed value was about 2/3 of the sale keeping the taxes lower. Aside from one month to turn over the suites that first time, we have had zero vacancy in 10 years.
I guess what I am trying to say is, yes you can buy something that is not 1%. But spread sheet as may details as possible and be sure it is cash flow positive with realistic projected rents.
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To Waltworks earlier point about not being able to sell half these rental places similar but on a different note I believe this is what is going to be happening in a lot of areas where the house building is going crazy. I would be willing to bet in my area nobody that has a builder build there house is going to ever make money on them when they go to sell and be lucky if they don't lose money. Yes there will be the exception but I am talking most cases.
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We also self manage and do a lot of DIY. This also wasn't my partner's first rental property so we knew what we were getting into.
You need to expense this at some chosen hourly rate (or just use what a management company would charge), not include it as part of your return. Unless you'd like to come manage rentals for me for free...
-W
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The "all investments are inflated" idea makes sense. I just haven't been able to predict what will happen.
For example, what if instead of a crash, various investments just slowly deliver poor returns? What if for several decades, interest rates and bonds oscillate between zero and 2% nominal, providing a 1% average loss relative to inflation, while stocks' fluctuation revolves around an average real return of 3%? We wouldn't need a special crash to deliver financial returns far lower than past eras.
Are equities really that inflated? Yes, we've had some amazing returns the last ten years, but prior to that was one of the worst crashes in our lifetimes. It seems to me that the current valuation lines up pretty closely with historical averages. The S&P 500 average total return not adjusted for inflation from 1957 (year it was founded) to 2005 was 10.532%. From 1957 to 2019 was 10.151%. Seems to me that we could see "average" returns from here and it would be about "average." Am I missing something?
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The "all investments are inflated" idea makes sense. I just haven't been able to predict what will happen.
For example, what if instead of a crash, various investments just slowly deliver poor returns? What if for several decades, interest rates and bonds oscillate between zero and 2% nominal, providing a 1% average loss relative to inflation, while stocks' fluctuation revolves around an average real return of 3%? We wouldn't need a special crash to deliver financial returns far lower than past eras.
Are equities really that inflated? Yes, we've had some amazing returns the last ten years, but prior to that was one of the worst crashes in our lifetimes. It seems to me that the current valuation lines up pretty closely with historical averages. The S&P 500 average total return not adjusted for inflation from 1957 (year it was founded) to 2005 was 10.532%. From 1957 to 2019 was 10.151%. Seems to me that we could see "average" returns from here and it would be about "average." Am I missing something?
They don't look to be on sale to me.
Source:https://www.multpl.com/shiller-pe
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The "all investments are inflated" idea makes sense. I just haven't been able to predict what will happen.
For example, what if instead of a crash, various investments just slowly deliver poor returns? What if for several decades, interest rates and bonds oscillate between zero and 2% nominal, providing a 1% average loss relative to inflation, while stocks' fluctuation revolves around an average real return of 3%? We wouldn't need a special crash to deliver financial returns far lower than past eras.
Are equities really that inflated? Yes, we've had some amazing returns the last ten years, but prior to that was one of the worst crashes in our lifetimes. It seems to me that the current valuation lines up pretty closely with historical averages. The S&P 500 average total return not adjusted for inflation from 1957 (year it was founded) to 2005 was 10.532%. From 1957 to 2019 was 10.151%. Seems to me that we could see "average" returns from here and it would be about "average." Am I missing something?
They don't look to be on sale to me.
Source:https://www.multpl.com/shiller-pe
Right, certainly not on sale. But are we at the cusp of 1929 where we can expect an 80% crash, or are we in 1995 where we can expect them to advance 50% more?
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Are equities really that inflated?
They don't look to be on sale to me.
"Not inflated" is not a synonym for "on sale."
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Schiller PE will drop a LOT as the 2009 earnings go away. And it has all kinds of problems with accounting rule changes in the 80s and 90s.
Earnings per share are at all time highs right now too, so there's that.
IMO stocks are only about 15% overvalued. RE is more like 50% most places in the US.
-W
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I honestly don't know how useful the 1% rule is in this interest rate environment. I see the value of it in a guideline, but it's no more than that. You actually have to do a cash-flow analysis these days.
I've considered jumping into RE, but do have a lot of the same concerns shared here. When I look at my local market (Denver), numbers are very tight. I could probably find a decent property with a cap rate in the 5.5%ish range. While that isn't a great return, I'm not convinced the 10 year return on stocks will be any better than that. They're over-valued in a similar way, it's just less obvious with a casual analysis.
I also think the Denver market still has plenty of room to appreciate. I could easily see prices appreciating 50%-100% over the next decade. I don't see this as a national trend though. If this happens, gains from appreciation will easily outstrip gains from cash flow.
Other factors to consider:
1. The last recession was RE focused. The next one probably won't be. A recession similar to the dot-com bust or the 70's oil shock would look a lot different to RE than 2008.
Given the pros and cons, I'm still seeing RE as a decent (if not great) investment. I would just be sure to build in a greater equity cushion today vs. 5 years ago.
I'd be curious to hear thoughts from more seasoned RE investors on this line of thinking. I'm admittedly a market observer, and not a market participant.
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Schiller PE will drop a LOT as the 2009 earnings go away. And it has all kinds of problems with accounting rule changes in the 80s and 90s.
Here's a fun tool you can use to play around with to create a Shiller PE with a custom time period:
https://dqydj.com/shiller-pe-cape-ratio-calculator/
Going to a shorter time period (e.g., 7 years and 7 months) for the Shiller PE doesn't appear to cause much of a drop.
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I honestly don't know how useful the 1% rule is in this interest rate environment. I see the value of it in a guideline, but it's no more than that. You actually have to do a cash-flow analysis these days.
I've considered jumping into RE, but do have a lot of the same concerns shared here. When I look at my local market (Denver), numbers are very tight. I could probably find a decent property with a cap rate in the 5.5%ish range. While that isn't a great return, I'm not convinced the 10 year return on stocks will be any better than that. They're over-valued in a similar way, it's just less obvious with a casual analysis.
I also think the Denver market still has plenty of room to appreciate. I could easily see prices appreciating 50%-100% over the next decade. I don't see this as a national trend though. If this happens, gains from appreciation will easily outstrip gains from cash flow.
Other factors to consider:
1. The last recession was RE focused. The next one probably won't be. A recession similar to the dot-com bust or the 70's oil shock would look a lot different to RE than 2008.
Given the pros and cons, I'm still seeing RE as a decent (if not great) investment. I would just be sure to build in a greater equity cushion today vs. 5 years ago.
I'd be curious to hear thoughts from more seasoned RE investors on this line of thinking. I'm admittedly a market observer, and not a market participant.
I’ve always been confused by the Denver appreciation. Sure there are a lot of people moving there, but it’s surrounded by completely usable and buildable land. Is there something keeping Denver from becoming a Dallas or Houston? It doesn’t have the issues of being an island or peninsula. And the mountains are only to the west, and are still more buildable than an ocean or lake.
Sent from my iPhone using Tapatalk
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From a geographic standpoint, it's not constrained like the Bay Area. Denver (but not Boulder) has also avoided the West Coast trap of restricting development. So housing will continue to be built. What I see in the local market:
1. There are a lot of gentrifying neighborhoods. Places that used to be run down are turning into wonderful places to live. While these areas have seen significant appreciation, there's still room for plenty more.
2. The available land for building is not in great spots compared to the employment centers (for the most part). Living somewhere accessible to downtown or Denver Tech Center will become more valuable as population increases and traffic increases.
3. Local investment in major employment centers continues faster than housing stock can keep pace. There's a massive new resort/convention center that just opened, the airport is going through a major expansion, and big companies continue to relocate offices here.
4. Similar to the national trend, home construction is focused on the high-end + downtown luxury apartments. Adding additional housing stock in the $500K-$1M range won't be a major factor in how a typical rental property is priced.
I could be totally wrong on this one. I absolutely see the potential for it, but that's no guarantee the appreciation will happen.
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Schiller PE will drop a LOT as the 2009 earnings go away. And it has all kinds of problems with accounting rule changes in the 80s and 90s.
Here's a fun tool you can use to play around with to create a Shiller PE with a custom time period:
https://dqydj.com/shiller-pe-cape-ratio-calculator/
Going to a shorter time period (e.g., 7 years and 7 months) for the Shiller PE doesn't appear to cause much of a drop.
Yes, quite a bit of the drop already happened (CAPE was at around 34 as of a year ago, I think).
My personal feeling is that after accounting for accounting changes and our era of buybacks happening instead of dividends, a "fair value" CAPE would be in the low to mid 20s - not the historical ~15. So stocks are expensive, but not crazy expensive.
RE, on the other hand, I got completely out of last year. Valuations are nutso and EVERYONE has a story about how their neighborhood is different/special... I remember how that turned out last time.
-W
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Schiller PE will drop a LOT as the 2009 earnings go away. And it has all kinds of problems with accounting rule changes in the 80s and 90s.
Here's a fun tool you can use to play around with to create a Shiller PE with a custom time period:
https://dqydj.com/shiller-pe-cape-ratio-calculator/
Going to a shorter time period (e.g., 7 years and 7 months) for the Shiller PE doesn't appear to cause much of a drop.
Yes, quite a bit of the drop already happened (CAPE was at around 34 as of a year ago, I think).
My personal feeling is that after accounting for accounting changes and our era of buybacks happening instead of dividends, a "fair value" CAPE would be in the low to mid 20s - not the historical ~15. So stocks are expensive, but not crazy expensive.
RE, on the other hand, I got completely out of last year. Valuations are nutso and EVERYONE has a story about how their neighborhood is different/special... I remember how that turned out last time.
-W
Why would doing stock buybacks rather than paying dividends justify a higher PE ratio? The tax disadvantages of dividends wouldn't move the needle that much, right?
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Buybacks aren't counted the same way at all.
https://seekingalpha.com/article/4086385-shiller-p-e-comparisons-distorted-buybacks
-W
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Buybacks aren't counted the same way at all.
https://seekingalpha.com/article/4086385-shiller-p-e-comparisons-distorted-buybacks
-W
That was an interesting read and thanks for sharing it. However, if I take the current CAPE of 30.74 and, per the author’s advice, chop off 15% to account for buybacks, I still arrive at a historically high 26.13 which implies a sub-4% earnings yield. The author’s points about interest rates and index funds are unconvincing as arguments why stocks are fairly valued even if they are the rationales driving investor behavior. Inflation and interest rates can change rapidly, and the big institutions which control the vast majority of shares have always been able to diversify.
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Buybacks aren't counted the same way at all.
https://seekingalpha.com/article/4086385-shiller-p-e-comparisons-distorted-buybacks
-W
That was an interesting read and thanks for sharing it. However, if I take the current CAPE of 30.74 and, per the author’s advice, chop off 15% to account for buybacks, I still arrive at a historically high 26.13 which implies a sub-4% earnings yield. The author’s points about interest rates and index funds are unconvincing as arguments why stocks are fairly valued even if they are the rationales driving investor behavior. Inflation and interest rates can change rapidly, and the big institutions which control the vast majority of shares have always been able to diversify.
Gotta do another 10% or so for the various accounting changes that have happened since the 1980s, though.
More fun reading:
https://www.philosophicaleconomics.com/2013/12/shiller/
Again, I think stocks are overvalued right now myself. But I don't think they're *crazy* overvalued as the CAPE numbers suggest, because I don't think the CAPE numbers from 1870-1980 or so are directly comparable.
-W
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Again, I think stocks are overvalued right now myself. But I don't think they're *crazy* overvalued as the CAPE numbers suggest, because I don't think the CAPE numbers from 1870-1980 or so are directly comparable.
Stocks are always valued based on investors' expectations of future earnings compared to today's price, right? CAPE necessarily uses past earnings, not forward earnings. That's how we end up in situations like this one, where CAPE is high because future expectations of corporate profits are much higher than the recent actual earnings.
From one point of view, that should be a good thing. It means whatever problems we had are resolved and everyone is expecting great things to happen in the future. The fact that some grumpy internet guys are unhappy that everyone else is happy doesn't mean the market is going to crash.
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Sol, agreed. There's a numerator and a denominator in these measures, which people seem to forget a lot.
If we see wages keep going up, earnings can catch up with prices some. Maybe. Should I say something about a permanently high plateau now? :)
-W
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Should I say something about a permanently high plateau now? :)
There's an argument to be made, I think, that the internet has made investing much easier. There is much more general knowledge out there about stock investing these days, participating in the market is easier than ever, mutual funds have damped the volatility, and awareness of the potential benefits is more widely publicized. Basically, more people are investing in the market today than ever before, which means more money is being funneled into the markets than ever before. That drives up prices, which lowers dividend rates and pushes up CAPE ratios. People are willing to pay more for less, because there is so much loose money sloshing around these days. America is prosperous, and we like to invest that surplus in our own future.
So yea, maybe CAPE of 30 is just the new normal. We no longer have to call a broker who goes to the floor and shouts out your buy order looking for a seller. There are so many more players now, and so much more professional analysis, that the whole investing world just moves faster and gets bigger.
The real threat to this trend, as is always the case in these situations, is a loss of confidence. We've raised entire generations of Americans who thought the stock market was a sucker's bet, a rigged scam designed to get you to remortgage the farm. Those folks refused to put their money into capitalism, and their refusal helped keep prices low for a long time. I guess we could have had a repeat of that failure, after 2009, but millenials still seem just as entranced by the easy money now as my parents were in the 80s. As far as I can see, confidence in the markets is high and that probably means prices will stay inflated until the bears convince everyone to put their money somewhere else.
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Lots of Walt quotes in thread
-W
So if you were a hypothetical 35 year old man who has been saving money in his Roth for years in case he ever saw “that” property but never saw one from 2011-2014 in a local RE area he understood, and now prices just seem outrageous... would you just keep trucking in stocks and just try to be ready next time? Granted I live in NYC, but I can’t seem to decide is it that the older wealthy people I know have real estate beyond their primary and that made them wealthy, or they were wealthy regardless and diversified.
My Roth is my emergency/play/etc fund invested in 100% stocks. I don’t expect things to be perfect, but I feel like I was overly cautious and now around here you’re playing the appreciation gamble.
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1% or more rule is alive and well in plenty of markets, just not the ones you are looking in.
That's pretty much what I was thinking.
The capital to buy rental property is concentrated in a handful of metro areas, especially on the coasts. Everyone wants to have local rentals, so it's not hard to see why returns will be low in those areas.
On the other hand, there are still plenty of places in the rural US and the Rust Belt where a $30-40k SFH rents for $600-1000/mo because there's significant local rental demand and low local supply of capital. If you're willing to hire an agent to take care of rentals in an underserved market, you can still net well above 1%. It's just much less likely to happen in a metro that's attracting lots of people with money to invest.
Rustbelter chiming in:
We bought a decent little duplex earlier in the year for $48k.
Rents are $600 for one side (long term tenant--does grass and snow removal) and $700 on the other (including pet fee).
This puts it at 2.71%.
I expect to put $3,000 into the place by the end of the year. Even that puts us at 2.55%
In the final stages of closing on financing for a commercial building: storefront with triplex.
Cost is $71,500.
Three units are totally refurbished and rent for $725 (average).
3.04% without the storefront rented.
Many believe that being close to Pittsburgh, and with new industry moving in, that we will see some significant appreciation over the next decade, but even without it, I'm a happy camper.
Only problem is... deals are getting harder to grab with you out-of-staters jumping into our county!
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Volunteer State (TN) chiming in (1% rule still applies):
I have bought plenty of multiunit (3plx/4plx) around 30-40k per door when rents were around 450-595
Currently the market is still pretty hot but the units are now around 55-65k per door and rents have gone up to around 650-700 per unit.
The thought is being close to Nashville the market is getting hotter. Many companies appear to be moving to the area. Maybe more lax ‘Right-To-Work’ laws, no personal state income taxes, and politics have played a role.
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Volunteer State (TN) chiming in (1% rule still applies):
I have bought plenty of multiunit (3plx/4plx) around 30-40k per door when rents were around 450-595
Currently the market is still pretty hot but the units are now around 55-65k per door and rents have gone up to around 650-700 per unit.
The thought is being close to Nashville the market is getting hotter. Many companies appear to be moving to the area. Maybe more lax ‘Right-To-Work’ laws, no personal state income taxes, and politics have played a role.
What type of neighborhood?
I could probably still find them in C neighborhoods, but that's section 8 with people stealing your appliances when they move out. No thanks. We used to have them in B neighborhoods and A if you looked hard enough.
I know Nashville has been bananas with its growth so I would expect anything in the city to be no where close to 1%?
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For reference, most old-school RE investors will look for 1.5-2% when looking at multifamily, for a variety of reasons.
So if you're getting 1% on multifamily, you are again not getting a great deal compared to historical price/rent ratios.
-W
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What type of neighborhood?
I could probably still find them in C neighborhoods, but that's section 8 with people stealing your appliances when they move out. No thanks. We used to have them in B neighborhoods and A if you looked hard enough.
I know Nashville has been bananas with its growth so I would expect anything in the city to be no where close to 1%?
Clarksville area 40 minutes from Nashville (Clarksville Exits 1 thru 11 of I-24) (Nashville starting at exit 44)
Clarksville was once just a military city (Fort Campbell) but has changed drastically with the base scaling down over the years. But industry and Nashville's expansion has been boosting the economy almost overnight.
For reference, most old-school RE investors will look for 1.5-2% when looking at multifamily, for a variety of reasons.
So if you're getting 1% on multifamily, you are again not getting a great deal compared to historical price/rent ratios.-W
I have learned that investing in a house vs multiunit are two different animals. My profit margin is MUCH higher on a multiunit than it is a single-family house (SFH). The cost savings of fixing one thing are multiplied. For example, replacing 4 SFH roofs costs more than one roof for a 4-plex. Even when it comes to replacing appliances/air conditioner/hot water heater that cost is divided over multiple units.
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I have bought 5 places near Independence MO and one place in Bullhead Arizona in the last few years. Prices ranging for 40K to 110K 3 are duplex and 3 are single family rents range from a low of $550 to a high of $800. So somewhere between 1.3-1.7%/month.
I read Mayor Pete book and his mortgage is $450/month. He's fixed his place up but looking at rentals in South Bend, IN, I bet he could rent it for 1500-2K a month that's a pretty nice return. I found 4 places in South Bend, on the first two pages of Zilliow that were well above the 1% rule. I was recently on a Costa Rican tour with folks from IA, PA, OH, WI, ID, and rural IL, and TX and everyone of them had real estate that was 1% rule.
My SWAG (scientific wild ass guess) is that you give find rentals in parts of 30 out of the 50 states. that meet the rule. Pretty much everything below the Mason-Dixon like excepting VA. The whole rust belt, small city Texas, except for Austin suburbs and maybe Dallas or Houston suburbs. The plains states, scattered places in NM, AZ, UT, and NV. Where I don't think you can find 1% places is the West Coast, New England, and most of the Atlantic states, and most cities with a population over 1 million. Although I'm far less certain my 1,000,000 population claim.
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My SWAG (scientific wild ass guess)
I love this.
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I have bought 5 places near Independence MO and one place in Bullhead Arizona in the last few years. Prices ranging for 40K to 110K 3 are duplex and 3 are single family rents range from a low of $550 to a high of $800. So somewhere between 1.3-1.7%/month.
I read Mayor Pete book and his mortgage is $450/month. He's fixed his place up but looking at rentals in South Bend, IN, I bet he could rent it for 1500-2K a month that's a pretty nice return. I found 4 places in South Bend, on the first two pages of Zilliow that were well above the 1% rule. I was recently on a Costa Rican tour with folks from IA, PA, OH, WI, ID, and rural IL, and TX and everyone of them had real estate that was 1% rule.
My SWAG (scientific wild ass guess) is that you give find rentals in parts of 30 out of the 50 states. that meet the rule. Pretty much everything below the Mason-Dixon like excepting VA. The whole rust belt, small city Texas, except for Austin suburbs and maybe Dallas or Houston suburbs. The plains states, scattered places in NM, AZ, UT, and NV. Where I don't think you can find 1% places is the West Coast, New England, and most of the Atlantic states, and most cities with a population over 1 million. Although I'm far less certain my 1,000,000 population claim.
There are 1% rule properties inside Austin?
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I have bought 5 places near Independence MO and one place in Bullhead Arizona in the last few years. Prices ranging for 40K to 110K 3 are duplex and 3 are single family rents range from a low of $550 to a high of $800. So somewhere between 1.3-1.7%/month.
I read Mayor Pete book and his mortgage is $450/month. He's fixed his place up but looking at rentals in South Bend, IN, I bet he could rent it for 1500-2K a month that's a pretty nice return. I found 4 places in South Bend, on the first two pages of Zilliow that were well above the 1% rule. I was recently on a Costa Rican tour with folks from IA, PA, OH, WI, ID, and rural IL, and TX and everyone of them had real estate that was 1% rule.
My SWAG (scientific wild ass guess) is that you give find rentals in parts of 30 out of the 50 states. that meet the rule. Pretty much everything below the Mason-Dixon like excepting VA. The whole rust belt, small city Texas, except for Austin suburbs and maybe Dallas or Houston suburbs. The plains states, scattered places in NM, AZ, UT, and NV. Where I don't think you can find 1% places is the West Coast, New England, and most of the Atlantic states, and most cities with a population over 1 million. Although I'm far less certain my 1,000,000 population claim.
There are 1% rule properties inside Austin?
Given that google tells me that Austin's population was 950k in 2017, OP most probably counted Austin in the 1mil+ category.
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Given that google tells me that Austin's population was 950k in 2017, OP most probably counted Austin in the 1mil+ category.
Mind you Austin, is the only major Texas city I've never been to, but I'd be shocked if you could find many (any?) 1% rule places there.
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There is not 1% rule RE available in UT. Full stop.
-W
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I have bought 5 places near Independence MO and one place in Bullhead Arizona in the last few years. Prices ranging for 40K to 110K 3 are duplex and 3 are single family rents range from a low of $550 to a high of $800. So somewhere between 1.3-1.7%/month.
I read Mayor Pete book and his mortgage is $450/month. He's fixed his place up but looking at rentals in South Bend, IN, I bet he could rent it for 1500-2K a month that's a pretty nice return. I found 4 places in South Bend, on the first two pages of Zilliow that were well above the 1% rule. I was recently on a Costa Rican tour with folks from IA, PA, OH, WI, ID, and rural IL, and TX and everyone of them had real estate that was 1% rule.
My SWAG (scientific wild ass guess) is that you give find rentals in parts of 30 out of the 50 states. that meet the rule. Pretty much everything below the Mason-Dixon like excepting VA. The whole rust belt, small city Texas, except for Austin suburbs and maybe Dallas or Houston suburbs. The plains states, scattered places in NM, AZ, UT, and NV. Where I don't think you can find 1% places is the West Coast, New England, and most of the Atlantic states, and most cities with a population over 1 million. Although I'm far less certain my 1,000,000 population claim.
The OP is in a “rust belt” state. Some areas are .5% rent to sale price. I can still find some 1% rule properties but it is exceedingly difficult in any of the big cities and A/B locations.
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There is not 1% rule RE available in UT. Full stop.
-W
I bet with 10K in improvements you could rent this place for $600+
https://www.zillow.com/homes/for_sale/house,condo,apartment_duplex,townhouse_type/2085045672_zpid/pricea_sort/39.885504,-109.732819,38.098902,-112.685394_rect/8_zm/0_mmm/
Same thing for this place.
https://www.zillow.com/homes/for_sale/house,condo,apartment_duplex,townhouse_type/243137148_zpid/pricea_sort/39.886557,-109.731446,38.099982,-112.684021_rect/8_zm/0_mmm/1_fr/
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We talked about this upthread. Those C area properties, like very rural, low income, or “bad” neighborhoods, used to be 2% rule properties. You probably wouldn’t do well with those places unless it could turn 800+.
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Bwahaha.... not familiar with Carbon county... you know how all those coal fired plants are getting retired?
Yeah.
You would get eaten alive. Perhaps literally.
Look, at the very low end, you need WAY more than 1% rule. I would not take that place for FREE. Repeat: you cannot give me that property.
-W
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Bwahaha.... not familiar with Carbon county... you know how all those coal fired plants are getting retired?
Yeah.
You would get eaten alive. Perhaps literally.
Look, at the very low end, you need WAY more than 1% rule. I would not take that place for FREE. Repeat: you cannot give me that property.
-W
Pay me money or this property will show up in your stockings next Christmas.
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I always think it's hilarious when there's an MLS listing that says it's an "investment opportunity" or something similar. You can literally just assume the opposite, pretty much every time. If it was an investment opportunity it wouldn't be on the MLS, folks.
-W
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Bwahaha.... not familiar with Carbon county... you know how all those coal fired plants are getting retired?
Yeah.
You would get eaten alive. Perhaps literally.
Look, at the very low end, you need WAY more than 1% rule. I would not take that place for FREE. Repeat: you cannot give me that property.
-W
If it was a good investment wasn't the question or the claim. I simply said you can find properties in"scattered places in UT" that hit the 1% rule. You said no, full stop. I spent 10 minutes on Zillow and found a few and showed you two.
I totally get that 1% is just a guideline it doesn't guarantee a good investment. Quite frankly, missed out on a lot of money, because I've steadfastly avoided buying rental properties where I've lived in the SF Bay area and Honolulu which has never been close to the 1% rule, but it didn't matter because of the tremendous price appreciation over the last 30+ year. On the other hand, I feel pretty strongly that if you do buy a 1% property and are willing to hang onto it for at least 10 years, your after-tax returns will be north of 5% and with smart leverage near 10%
Neighborhoods change and even if they are bad they can still appreciate. 3 out of the 5 properties I bought in Vegas were in bad neighborhoods and two I think still are but in the last 3.5-8 years they've averaged 16% CAGR price appreciation and rents are up 30-50%. Since Vegas properties are no longer close to 1% I've stopped buying there.. Sure, Carbon County, UT is probably a shit hole, and for all I know may stay that way forever, but being a slumlord can be profitable.
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Look, Clif, everyone who bought anything in the last decade did great. A blind monkey could have made money investing in Vegas, or basically anywhere, 5-8 years ago. That doesn't mean squat going forward, nor does it mean you/me/anyone is some kind of RE genius because they did well. I'm FIRE because of RE appreciation/dumb luck, but that doesn't mean I tell people to go start buying places today to do what I did.
Can you find run down shacks in dead end places that you'll lose your shirt on that make the 1% rule? Yes. All over the place. So you're technically correct. Good work. Go stop by East Carbon (it's on the way to Moab if you fly into SLC!) sometime and report back. Nothing says investment opportunity like a WW2-era company coal mining town that is half the size it was 30 years ago.
Here's the thing - and I've posted this before, but I'll post it again. The 1% rule is useless at the very low end, because overhead (maintenance, especially) just doesn't scale down. A $20k SFH costs less to maintain (assuming you can find someone to do the work) than a $200k SFH - but not 90% less. Management costs aren't going to go below a certain level, so your 10% for management number has to get revised up a lot, insurance for C/D/F neighborhoods can be crazy expensive relative to the value of the house, and you start running risks of tenants committing major crimes/rendering the place uninhabitable. I could go on and on.
Your costs can only go so low at the low end and you'll lose your shirt if you assume that $200 a month for that $20k house is going to make you money. And of course, in this particular case you might not be able to rent the house at ANY price going forward, since the mines are in the process of shutting down.
-W
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I don't claim be a real estate investing genius, or hell even very good at real estate investing. As you say any idiot could have made money buying in Vegas (or most other places in the country) over the last decade.
I do claim to be a pretty good overall investor because I'm willing to look at all kinds of asset classes and make judgments that say this asset class is cheap on both relative and absolute basis.
Nobody thought I was smart buying TIPs with near 4% yields in 1999 and 2000 when the typical internet stocks were going up 5% a month. Lots of folks ignored me when I said Dec.2008 and through the spring of 2009 that stocks were super cheap. Plenty of people thought I was crazy buying in Vegas in 2010. It took a full year to get an accepted offer because the banks REO department were overwhelmed. In 2010, Vegas was filled with deserted neighborhoods, with foreclosed and vandalize homes and prices continued to drop. I think what made buying these asset classes at the time a smart decision, wasn't because they did particularly well, but because my downside risk was low.
Before I buy any asset, I ask myself one simple question, will the income from this asset be highly likely to support a 4% withdrawal without drawing down the principal? For 4% TIPs bonds, the answer was unless Uncle Sam, hell yes. The PE and dividend rates of stock back in 2008-9 also meet these criteria. This has not been true of fixed income for a long time. I'm very nervous if this will be true of equities over the next decade or two, and the same thing is true for real estate in expensive areas. I'm still comfortable recommending real estate that meets the 1%, although the 1% rule should be a starting point, not the sole criteria for investing in RE, because it is very likely to support a 4% withdrawal rate.
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I don't claim be a real estate investing genius, or hell even very good at real estate investing. As you say any idiot could have made money buying in Vegas (or most other places in the country) over the last decade.
I do claim to be a pretty good overall investor because I'm willing to look at all kinds of asset classes and make judgments that say this asset class is cheap on both relative and absolute basis.
Nobody thought I was smart buying TIPs with near 4% yields in 1999 and 2000 when the typical internet stocks were going up 5% a month. Lots of folks ignored me when I said Dec.2008 and through the spring of 2009 that stocks were super cheap. Plenty of people thought I was crazy buying in Vegas in 2010. It took a full year to get an accepted offer because the banks REO department were overwhelmed. In 2010, Vegas was filled with deserted neighborhoods, with foreclosed and vandalize homes and prices continued to drop. I think what made buying these asset classes at the time a smart decision, wasn't because they did particularly well, but because my downside risk was low.
Before I buy any asset, I ask myself one simple question, will the income from this asset be highly likely to support a 4% withdrawal without drawing down the principal? For 4% TIPs bonds, the answer was unless Uncle Sam, hell yes. The PE and dividend rates of stock back in 2008-9 also meet these criteria. This has not been true of fixed income for a long time. I'm very nervous if this will be true of equities over the next decade or two, and the same thing is true for real estate in expensive areas. I'm still comfortable recommending real estate that meets the 1%, although the 1% rule should be a starting point, not the sole criteria for investing in RE, because it is very likely to support a 4% withdrawal rate.
I don't know clifp personally, but he has been around investing forums for many years and I will vouch for his knowledge and skill. Arebelspy does know him IIRC and can chime in with his opinion. Clifp and I are in total agreement, and if you think about it, so is Warren Buffett.
Personally, I don't believe the future is necessarily like the past. All the FIREcalc and similar predictive models on which people rely depend on the future being like the past. Mostly the post-WW2 past. Heretic that I am, I would never be comfortable in today's world relying exclusively on the 4 percent rule on a portfolio of paper assets. Too many people worldwide have too much cash and are chasing too few decent quality assets right now. Real estate is overpriced in most markets as well. At some point, this will change, probably because of a series of events we can't predict today.
Liquidation of income producing assets has never been my plan. My plan was and is buy quality assets on sale and hold indefinitely. Nothing has changed, except there is little to nothing to buy today that meets Clifp's and my criteria.
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I don't claim be a real estate investing genius, or hell even very good at real estate investing. As you say any idiot could have made money buying in Vegas (or most other places in the country) over the last decade.
I do claim to be a pretty good overall investor because I'm willing to look at all kinds of asset classes and make judgments that say this asset class is cheap on both relative and absolute basis.
Nobody thought I was smart buying TIPs with near 4% yields in 1999 and 2000 when the typical internet stocks were going up 5% a month. Lots of folks ignored me when I said Dec.2008 and through the spring of 2009 that stocks were super cheap. Plenty of people thought I was crazy buying in Vegas in 2010. It took a full year to get an accepted offer because the banks REO department were overwhelmed. In 2010, Vegas was filled with deserted neighborhoods, with foreclosed and vandalize homes and prices continued to drop. I think what made buying these asset classes at the time a smart decision, wasn't because they did particularly well, but because my downside risk was low.
Before I buy any asset, I ask myself one simple question, will the income from this asset be highly likely to support a 4% withdrawal without drawing down the principal? For 4% TIPs bonds, the answer was unless Uncle Sam, hell yes. The PE and dividend rates of stock back in 2008-9 also meet these criteria. This has not been true of fixed income for a long time. I'm very nervous if this will be true of equities over the next decade or two, and the same thing is true for real estate in expensive areas. I'm still comfortable recommending real estate that meets the 1%, although the 1% rule should be a starting point, not the sole criteria for investing in RE, because it is very likely to support a 4% withdrawal rate.
I don't know clifp personally, but he has been around investing forums for many years and I will vouch for his knowledge and skill. Arebelspy does know him IIRC and can chime in with his opinion. Clifp and I are in total agreement, and if you think about it, so is Warren Buffett.
Personally, I don't believe the future is necessarily like the past. All the FIREcalc and similar predictive models on which people rely depend on the future being like the past. Mostly the post-WW2 past. Heretic that I am, I would never be comfortable in today's world relying exclusively on the 4 percent rule on a portfolio of paper assets. Too many people worldwide have too much cash and are chasing too few decent quality assets right now. Real estate is overpriced in most markets as well. At some point, this will change, probably because of a series of events we can't predict today.
Liquidation of income producing assets has never been my plan. My plan was and is buy quality assets on sale and hold indefinitely. Nothing has changed, except there is little to nothing to buy today that meets Clifp's and my criteria.
Well said. That is very similar to my thoughts on the current markets, although you articulated it much better than I could.
Back-testing is useful to a point. But never forget that most hedge funds that rely on back-testing market strategies don't do all that well. Heck, there was a little hedge fund called Long Term Capital that relied exclusively on back-tested models developed by phd's. Markets change over time in ways that are impossible to reliably predict.
There are also a decent number of things about the current market that are fundamentally different than prior market history. Valuations are higher, interest rates are historically low (which increases valuations and decreases future returns), and dividend yields are pretty low compared to most of the markets history.
I'm curious, where are you and Clifp putting excess capital these days? I'm splitting mine between the markets and paying down the mortgage (3.875% risk free return). I'm considering putting some capital in real estate for diversification. Prices are higher than I think reasonable, but I don't see the risk/reward ratio as being materially worse than the equity markets.
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Well, I'm still dumping a couple of thousand a month into the stock market in taxable accounts. That's a long term investment horizon thing, and I'm expecting most of those companies and their shares to last through the next disaster, whatever it may be. I'm long retired, so nothing goes in to pre-tax accounts. At some point, the pre-tax accounts will have to be liquidated thanks to RMD's.
My biggest focus right now is paying off rental mortgages over 5 percent. I have too many mortgages for most lenders to take on and then sell to Freddie/Fannie so refinancing these is almost impossible. Although I qualify for Fannie Mae financing, the hits for rental mortgages beyond 6 make refinancing unattractive and few lenders want to be bothered anyway. Reducing leverage when you expect the real estate and the rental markets to become more difficult and less profitable makes sense to me.
Finally, I am hoarding some cash. My guess is assets will go on sale at some point and it will be helpful to have the cash to buy. No one can predict what assets will go on sale or when, but being ready to take advantage of the market, while possibly costing some returns for now, will likely pay off.
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So the argument is whether to:
a) Violate the 1% rule to buy rentals in economically vibrant areas, or
b) limit investments to C,D, and F neighborhoods where ROIs would be adequate if you were able to collect more than 6-7 months/year?
If these are truly the only options, the term "dry hole" might apply to real estate investing. If you already know your return will be awful, why make either bad decision? Why not load up in preparation for the upcoming fire sale?
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Yeah, we might all be agreeing here - I have no rentals now. I won't buy any rentals at current prices either in desirable areas at .25% or in meth ghost towns for 1.5%. There is nothing on the open market that is appealing.
That said I'm FIRE so I'm not super concerned about it either way. If I was accumulating I would probably have a significant cash pile built up (~2% money market or CD, obviously, not just under the mattress) if I wanted to do RE going forward.
The 1% rule will be back, IMO. I won't dare guess when, though.
-W
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So the argument is whether to:
a) Violate the 1% rule to buy rentals in economically vibrant areas, or
b) limit investments to C,D, and F neighborhoods where ROIs would be adequate if you were able to collect more than 6-7 months/year?
If these are truly the only options, the term "dry hole" might apply to real estate investing. If you already know your return will be awful, why make either bad decision? Why not load up in preparation for the upcoming fire sale?
I agree with both statements. I've never invested in RE before, but am still heavily considering it. I live in Denver, so my rough math puts cap rates on most properties I've looked at roughly in the 5-6% range, depending on assumptions.
The reasons I haven't fully given up on the idea of RE investing in this environment are:
1. I expect the Denver housing market to continue to do better than the national housing market over the coming years. This doesn't mean the national housing market won't suck. I just expect Denver to continue doing well as a city.
2. My other investments are in stocks. If I wait for Real Estate to be on sale, the stocks in my portfolio will likely also be on sale. I don't see a benefit to waiting.
3. I would limit my leverage. If I can get a pre-tax cash flow of 5-6% on a chunk of capital, I would probably still do better than the stock market. And the higher cash flow on capital of real estate (compared to dividends) gives me more comfort in my portfolio withdrawal assumptions.
Now, I also get that these might be stupid justifications for overpaying. I just don't see a lot of better places to put my money right now.
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So the argument is whether to:
a) Violate the 1% rule to buy rentals in economically vibrant areas, or
b) limit investments to C,D, and F neighborhoods where ROIs would be adequate if you were able to collect more than 6-7 months/year?
If these are truly the only options, the term "dry hole" might apply to real estate investing. If you already know your return will be awful, why make either bad decision? Why not load up in preparation for the upcoming fire sale?
I agree with both statements. I've never invested in RE before, but am still heavily considering it. I live in Denver, so my rough math puts cap rates on most properties I've looked at roughly in the 5-6% range, depending on assumptions.
The reasons I haven't fully given up on the idea of RE investing in this environment are:
1. I expect the Denver housing market to continue to do better than the national housing market over the coming years. This doesn't mean the national housing market won't suck. I just expect Denver to continue doing well as a city.
2. My other investments are in stocks. If I wait for Real Estate to be on sale, the stocks in my portfolio will likely also be on sale. I don't see a benefit to waiting.
3. I would limit my leverage. If I can get a pre-tax cash flow of 5-6% on a chunk of capital, I would probably still do better than the stock market. And the higher cash flow on capital of real estate (compared to dividends) gives me more comfort in my portfolio withdrawal assumptions.
Now, I also get that these might be stupid justifications for overpaying. I just don't see a lot of better places to put my money right now.
Math on that cap rate?
I'm seeing stuff with 0.5 to 0.6 percent rent as a percentage of value per month in the Phoenix market. Cap rates are in the threes with that rent to value...
ETA: Free and clear cap rates are in the threes and leverage is negative.
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The only way something in Denver is going to get you 5-6% is with appreciation at this point, unless this is one of the ignore-maintenance/management/capex type things that people do when they want to talk themselves into a property.
-W
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+2
I would also like to see the math on 5-6% with limited leverage in Denver.
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I don't know clifp personally, but he has been around investing forums for many years and I will vouch for his knowledge and skill. Arebelspy does know him IIRC and can chime in with his opinion. Clifp and I are in total agreement, and if you think about it, so is Warren Buffett.
Personally, I don't believe the future is necessarily like the past. All the FIREcalc and similar predictive models on which people rely depend on the future being like the past. Mostly the post-WW2 past. Heretic that I am, I would never be comfortable in today's world relying exclusively on the 4 percent rule on a portfolio of paper assets. Too many people worldwide have too much cash and are chasing too few decent quality assets right now. Real estate is overpriced in most markets as well. At some point, this will change, probably because of a series of events we can't predict today.
Liquidation of income producing assets has never been my plan. My plan was and is buy quality assets on sale and hold indefinitely. Nothing has changed, except there is little to nothing to buy today that meets Clifp's and my criteria.
Well thank you. I should hasten to add that, if you're in your 20s or 30s who is LYBM in order to become FIRE, I don't think there is any wrong with index stock investing. Virtuallly, all of my alternative investment require that I'm an accredited investor. (A million dollars in liquid asset or $300K income) For me, it is partly because I find it intellectually stimulating to invest in different things, and also I just think it is prudent to diversify because there is so much cash chasing easy-to-buy assets.
The largest and lowest risk investment was purchasing a stake in 16 medical office building in Toronto. Now that Toronto RE market is also very high, but as the rich old guy who put the deal together said. Canadian banks are better regulated, Canada has single-payer health care, which means that the Doctors are going to get paid, and so they can pay their rent. He promised a 7% return and other than currency fluctuations it is been 7.02% He should be the rents for every building for the next 10 years.
I also continue to invest in inexpensive homes in MO that meet the 1% rule.
I've supplied hard money lending on real estate. I get 10% plus 2 points for the loan, and this last one I'll also got a 1/4 of the profit, (which won't be that much)
I loan money to establish midsize business (revenue from 2-10 million). The business range from large local advertising/PR firm, to a company that runs head lice removal clinics, to a company that makes a high-tech Green fertilizer. Every deal is different but typical I get 8-10% upfront interest and deferred interest of 8-10 after three to ten years.
Recently, I've been doing royalty deals like Kevin O'leary does on shark tank with post revenue starts. The biggest investment has already return nearly 1/2 my money one year, the royalty stops when double my money which should happen 4 years, and then I have a small equity position. On the other hand, my other royalty investment so far has returned a massive $13 after 6 months on a $25K investment.
I've also made about 25 Angel investment, I got very lucky in that 3rd investment I made was the most successful and made follow on investments, the returns from that have basically funded my other Angel investments.
I'm curious, where are you and Clifp putting excess capital these days? I'm splitting mine between the markets and paying down the mortgage (3.875% risk free return). I'm considering putting some capital in real estate for diversification. Prices are higher than I think reasonable, but I don't see the risk/reward ratio as being materially worse than the equity markets.
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The only way something in Denver is going to get you 5-6% is with appreciation at this point, unless this is one of the ignore-maintenance/management/capex type things that people do when they want to talk themselves into a property.
-W
I believe the earlier poster is talking about leveraged ROI, not cap rate. E.g. your ROI on your 25% down payment.
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Our area is definitely not a 1% residential zone, far from it with the insane prices in the city nearby.
There are always blind spots in the market if you look. I'm always surprised at how few people talk about Commercial property on this site. Around here rents are at best about 0.3% of a typical selling price for a SFH, maybe a little better for one of the few apartments or townhouses around, or if you buy rural (which has its own set of issues, such as septic fields etc).
In the commercial area it is much different. I bought a mixed use commercial building that actually has two apartments (and 42 other units, storage, offices etc) for about what I would have paid for a duplex. The building needed a lot of work, but it was at 1.5% when I bought it, and now that the work is all but done and I am close to fully rented it is closer to 4.5%. It did require a year of full time labour to upgrade, not to mention $90k in materials and tradespersons (I can frame, drywall, putter and do basic plumbing and electrical, but I can't upgrade a sprinkler system or install a fire alarm system).
A year of hard work and a bit of risk has moved my FIRE date from 12 years in the future to basically now, though I have no desire to stop working on things.
Most RE investors are completely fixated on residential property, and don't even consider commercial. Commercial rents are often higher, you can often get multiyear leases, the tenants have an interest in maintaining the property, and at least around here the rents can be triple net (they pay rent, utilities and property taxes). Of course there is a risk if a tenant goes out of business, but you have a lot more remedies against a business than residents - you can lock the doors and auction their stuff if they disappear, for example.
That said, my next buy might be residential, if I find the right property, or it might be a small business with the right parameters for me. Come up with/research a set of criteria that make the math and your efforts worthwhile, then keep looking and talking to people. The good opportunities come up and vanish very fast, the garbage stays on the market for awhile waiting for the greater fool to come along.
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In the commercial area it is much different. I bought a mixed use commercial building that actually has two apartments (and 42 other units, storage, offices etc) for about what I would have paid for a duplex. The building needed a lot of work, but it was at 1.5% when I bought it, and now that the work is all but done and I am close to fully rented it is closer to 4.5%.
My guess is you are in flyover country or some other location where business is not booming. In the Bay Area, you won't find anything like what you describe. Too much competition and cap rates in the threes. Right now, the Phoenix market is also overheated. There is nothing in commercial or industrial properties that makes any more sense than residential. The world is awash in liquidity. Too much cash out there chasing too few assets.
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FWIW I have learned that appraisers in my area use the .08% rule. So even banks as slow as they are to adjust to the market have realized if they only lent at 1% rule for investment properties they would not have very many loans to make!
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Banks can and do loan on way worse than .8%, JB. Remember - they don't care if you make a profit, they just care if you're going to be able to pay the nut each month (and that they'll be able to make themselves whole via foreclosure if not).
If banks only loaned on, say, .5% rule and better houses, I'd guess most of the "investment" properties purchased in the last half-decade would not have been funded.
-W
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Banks can and do loan on way worse than .8%, JB. Remember - they don't care if you make a profit, they just care if you're going to be able to pay the nut each month (and that they'll be able to make themselves whole via foreclosure if not).
If banks only loaned on, say, .5% rule and better houses, I'd guess most of the "investment" properties purchased in the last half-decade would not have been funded.
-W
What you are saying is of course true. What I was getting at is that loans are subject to the selling price being lower then the appraisal price. So based on rents houses currently are valued at .08%. Granted this is just a single data point in a single market. This does not account for all cash/large DP buyers. The is also something to be said about the independence of an appraiser but that is a whole different conversation.
So it might be fair to say the .08% rule is the new 1% rule.
*For now at least!
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Just curious. @Jon Bon, you keep writing ".08% rule."
Are you saying that banks in your part of the Midwest lend on rental properties where the monthly rent is .08% of the purchase price? In other words, they will mortgage a $100,000 property that charges rent of $80 per month?
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Just curious. @Jon Bon, you keep writing ".08% rule."
Are you saying that banks in your part of the Midwest lend on rental properties where the monthly rent is .08% of the purchase price? In other words, they will mortgage a $100,000 property that charges rent of $80 per month?
I'm on the lower end of experience level, but when I bought my SFR rental the bank never asked about rent. All they cared about was my assets, credit score, and income.
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JonBon, I'm also confused. When I've purchased rentals, the approval of the loan l is purely based on purchase price/appraisal (plus my credit/assets). AFAIK the bank is completely uninterested in the rental rate.
Now, if I've got several rentals and I'm using the cashflow on them to qualify for another loan, then the bank cares that I'm getting more money from the rental than I need to put in. They have some formulas for that that are 50% rule-like, as I understand it.
They don't ever analyze a property based on anything like the 1% rule, though, in my experience. Can you explain how it works where you are?
-W
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I’m guessing that the appraiser used rental income to guesstimate the home value. I’ve had appraisers use 75x monthly rent as one of their line items for valuation.
Potentially, this appraiser is using 125x monthly rent, or a .008 rate for valuing the property.
Given the area the property he is in contract in, that would make sense as a valuation, as I have property in the same location. It is almost entirely driven by investors and values are only based on rent multipliers. This area used to be consistently 1% rule properties, but over the last few years, properties are selling in the .75 - .85 range.
Sent from my iPhone using Tapatalk
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Yup sorry guys, decimals are tricky.
I could have written .008 or .8% as both would have been fine, but I combined them. Yay math!
So on the appraisal there was a traditional "comps" section but there was also an income approach where comps were pulled on rents. Further down there was a section potential operating costs, reserves for bigger items roof etc. Basically a mini income statement of the property. So based on that income statement the value was pretty much exactly following the .8%. So in the end they came up with 2 different numbers that were very close.
Now that I think about it they probably just use the larger of the two numbers so they can make more loans! This was new to me as well, I usually dont look at my appraisal all that closely as I follow the market in my area better then most.
Again just a single data point in a single market but I thought it was noteworthy.
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Huh. I've NEVER heard of an appraiser doing that (estimating home value based on prospective rents), and I've done the rental property rodeo more than a few times. Appraisals in my experience are 100% about the bank making sure that if they foreclose, they'll at least break even selling the place. They could care less about what it would rent for.
-W
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Huh. I've NEVER heard of an appraiser doing that (estimating home value based on prospective rents), and I've done the rental property rodeo more than a few times. Appraisals in my experience are 100% about the bank making sure that if they foreclose, they'll at least break even selling the place. They could care less about what it would rent for.
-W
I haven't financed any properties in years, but the old residential appraisal forms had the income approach included on the form.
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Huh. I've NEVER heard of an appraiser doing that (estimating home value based on prospective rents), and I've done the rental property rodeo more than a few times. Appraisals in my experience are 100% about the bank making sure that if they foreclose, they'll at least break even selling the place. They could care less about what it would rent for.
-W
I haven't financed any properties in years, but the old residential appraisal forms had the income approach included on the form.
+1
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Anecdotal, but closing on a single family rental on Friday. Purchase price is 30,500 +2,500 in repairs. Will rent for $700-$750. Class C property.
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Huh. I've NEVER heard of an appraiser doing that (estimating home value based on prospective rents), and I've done the rental property rodeo more than a few times. Appraisals in my experience are 100% about the bank making sure that if they foreclose, they'll at least break even selling the place. They could care less about what it would rent for.
-W
If you are purchasing a property and plan on using prospective rent on that property as part of the income you need to qualify, then the lender will request an appraisal which includes the estimate of market rent for the unit(s). You pay more for the rental appraisal. (This all depends on lenders rules and procedures, whether they will even allow prospective rent to count towards income)
They also use those estimated market rates to generate the income based market valuation of price, and that is based on comparable. i.e. if comparable properties sell for 100x market rents or comparable properties sell for 50x market rates. So this "rule" will change based on market conditions as decided by comparables (and the appraiser)