Learning, Sharing, and Teaching > Real Estate and Landlording

ROI in a bubble

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Sammiecakes:
I live in a real bubble area right now, prices are through the roof crazy by case shiller or history or any other measure. Anyway, a house on my block went for sale several months ago and the buyer told my neighbor he was planning to use it as a rental house. Well, it went up for rent a week or so ago and the rent is apparently 0.35% of the purchase price per month. I mean I know its none of my business but I really am curious why anyone would do this? If they have a mortgage I am certain the house is losing money. If they don't have a mortgage any significant expense any year and they will be losing money. I guess they are counting on more appreciation, but really? How much more can you count on in an area that is already in a huge bubble by most quantitative measures?

Help me out mustachians. Am I missing something? Why do this? Part of the reason I am asking, I guess, is because a friend of mine almost bought the house so I spent a lot of time with them looking at it and I have an idea of what problems it has (and it wasn't nearly in perfect shape when for sale). Maybe I just have no vision ;)

Cwadda:
There's no way of knowing you're in a "bubble" market (unless you have a crystal ball) and there's also no way of knowing how much something will appreciate.

I am in agreement. I would never buy something that is taking money out of my pocket each month. It's no different than putting your money into a bank account that pays NEGATIVE interest. No cash flow = pass for me. It's not an asset, it's a liability. No thanks, I'll pass every time.

But then again, there are plenty of "investors" that buy in markets, get the appreciation thing "right", and make tons of money, more than I ever will.

Jon Bon:
Maybe its a bubble.....

Or a more factual statement: "Things are expensive as shit."

I get that you cant time the market, so you buy little pieces of stock at a set interval of time. Its much harder to do that with a house.

I would be ok buying a few shares of the below chart if it were a stock, but I am not sure I would want to buy the entire company you know what I mean?

RangerOne:
Its entirely possible I suppose that the person who bought and started renting it out paid cash or put a higher than normal amount down to where holding the property is cash flow positive. Average down for a rental condo is probably 25% right so do the math from there.

Some of the places where prices are already crazy, like orange county, have never been cash cows as far as rent goes. But at the same time the property values are very resilient and likely to appreciate a lot over a long enough horizon. So for those with deep pockets they are still desirable. It is also super easy to find renters for condos in some nice areas.

I do think there are some in the category of wanting to hold onto a quality asset and are willing to accept lack luster cash flow.

Most cities where people are worried we are in a bubble, like my area San Diego, are at the very least terrible sellers markets and honestly have been since at least 2013. Buying right now definitively sucks. Everything nice is bid up with many offers. And there are few reasonable places on the market at the starter home end.

I doubt we are at the peak of housing bubble sadly, though a stock crash or tech crash, could hurt housing prices I suppose by killing jobs. But places like San Diego, if current price trends continue, every year the passes makes it more likely that we are.

If lending regulation remain tight to prevent a bubble we should see price increases level off assuming people with incomes are getting priced out of buying by debt ratio limitations. The alternative is that wild speculation or lending loosens so that unqualified people or rich people can bid up housing further. I kind of see the later happening.

This winter will be real interesting when the Fed starts its QE unwind. So far mortgage interest rates, stocks and bonds have all pretty much ignored rate hikes from the Fed. If that changes and for instance mortgage interests rates start to go up things could get crazy.

Mr Mark:

Yep, .35% monthly rent is a terrible investment unless the market keeps appreciating, which it well might. But is it not then tempting to sell and rent yourself?

It could also be 'hot money' from China, Russia, Venezuela et al looking to buy anything bricks and mortar in US$ in a nice place.

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