Author Topic: Those who Invest in high priced cities like NYC, SF, LA, Boston, Seattle, why?  (Read 2375 times)

andysandp

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For those who invest in high priced cities such as NYC, SF, LA, Boston, and Seattle, how do you determine if a Rental is a good investment?

The 2% and 50% rule is probably not going to work in these cities.  You would probably just break even after paying Mortgage and all Expenses.

Are you simply basing your Investments on Appreciation?

Is your rule of thumb, as long as the Rent covers or breaks even with the Mortgage and all other Expenses, it's OK?

These cities have done extremely well, but past is past, what about the future?

Curious to hear people's thoughts.


« Last Edit: February 25, 2017, 01:26:43 PM by andysandp »

Slow2FIRE

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I have one property in a city that is the next step down in pricing:  Denver very near Boulder.

What are the "all other Expenses" you speak of?

If you mean:
Mortgage (PI)
Expenses (Taxes, Insurance, management fees, a percentage for maintenance, a percentage for vacancy, money for future capex, money for advertising)

I'd consider the deal if in a solid neighborhood with good schools, low number of rentals and everyone carefully maintaining their properties.

andysandp

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I have one property in a city that is the next step down in pricing:  Denver very near Boulder.

What are the "all other Expenses" you speak of?

If you mean:
Mortgage (PI)
Expenses (Taxes, Insurance, management fees, a percentage for maintenance, a percentage for vacancy, money for future capex, money for advertising)

I'd consider the deal if in a solid neighborhood with good schools, low number of rentals and everyone carefully maintaining their properties.

When I mention all Expenses I mean Taxes, Insurance, management fees, a percentage for maintenance, a percentage for vacancy, money for future capex, money for advertising, etc.

So do you have Cash Flow after all Expenses?

Are you OK getting no Cash Flow, negative Cash Flow, or just a little Cash Flow?

What is your estimated guess for Appreciation for future years?

Just trying to see how Investors think for expensive cities.
« Last Edit: February 25, 2017, 01:31:31 PM by andysandp »

havregryn

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I can't answer about those cities but I can tell you that here in Luxembourg people do rental investments that can't even cover the mortgage and expenses (i.e. where there is essentially a negative cash flow and they know it before even making the purchase) and it is surprisingly common. And the interest rate you can expect to get here is 1.5% and interest is tax deductible. But it's quite a complex situation that probably doesn't compare well to any examples in the US. Still, trying to illustrate that as long as the tenant is making some repayments on your principal there are people who will consider it the best investment.
They are basing that on appreciation and the prestige of actually owning something in a place this expensive. There is also a strong cultural love of investing in brick and mortar and the situation that the country is 50% natives and 50% expats. Pretty much all of the natives own real estate inherited from family so have essentially zero housing costs and they use the cash that inevitably gets freed up that way to make those "investments".
It is a terribly difficult decision whether to rent or buy here because it very much depends on your long term plans and how much of an inconvenience is in a place where you will probably have to move often as staying in the same place for more than x number of years gives you more legal rights than usual so most landlords will want you out.
We felt coerced into buying after we got ripped off big time by our landlord and realized it is common stuff here and no real legal recourse and I sometimes feel frustrated by that but unless we assume a huge depreciation of our place (and the prices here never went down, not even in 2009 so I wouldn't be placing my bets on that) it is hard not to come out ahead like this. Even without planning for these "investors" to be effectively stealing from you to be able to pay their mortgages.

havregryn

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Also, one more reason why people do this here is that it is the only way you can "invest" if you don't actually have any money but based entirely on leverage. These super low interest rates are obviously fueling this to the extreme. The bank lends you the money to buy a place and you pay off 20% of it while the tenant pays off 80%. It's ridiculous from a Mustachian point of view but in all honesty, you would have to be quite lucky to be able to grow those 20% to the level your rental investment will be on once paid off in the current economic climate here. So most of these people end up with more net worth than the would have otherwise. For most who don't really consider early retirement that's more than good enough. I mean, even if we made no savings at all in 15 years when we pay off our mortgage the rental income it could generate would let us retire early if we had another paid off place to live in (and most here do).
But as said, this is an example from Europe and from following these forums it seems quite obvious it's a different planet compared to the US when it comes to pretty much all things Mustachian.

Genevieve

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I'm considering investing in NJ like one of the couples mentioned on this show:
https://www.youtube.com/watch?v=TFaGdvJ-4WY

Edited to add:
Here's a link to the case study with numbers.
http://www.famvestor.com/metalhorseproperties/
Put around $500k in and would be grossing ~$76k a year if he didn't live there. Has a healthy cash flow too.
« Last Edit: February 26, 2017, 07:54:36 AM by Genevieve »

waltworks

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In general they are subscribing to the "they don't make any more land" and "buy now or be priced out forever" theories.

So yes, they are gambling on appreciation.

If you get in and out at the right time, you do awesome. I bought lots of mediocre RE in 2009-2012 because the prices were crazy depressed. I would never buy property in any of the markets you mention now, simply too risky. Leverage can be a real bitch if things go south.

-W


badassprof

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We live in a HCOL area (SF bay) and what we've done is bought a house that has an apartment on the first floor (house was raised in the 80s and a legal rental put in). I'm not sure if the rental would "pay off" if it was freestanding, but it does pay about 2/3rds of our mortgage and allows us to live in a historic neighborhood. Helps that the neighborhood has good schools and rentals go quickly. Given our property taxes (almost 15000) it is doubtful we'll stay here when we pull the trigger on ER, but for now, it has enabled us to own a cool house in a historic neighborhood and to work in an area where we can pocket some high earnings before retiring.

waltworks

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Yes, but that's house hacking, or at the least buying a house to live in.

OP is interested in RE investing.

-W

Genevieve

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IMO, house hacking is a type of RE investing. Besides, the #s would have worked as a straight up investment property too.

If the numbers don't work, the buyers probably have other strategies for buying the RE.
1) Bought the property long time ago and haven't sold
2) Have enough money that they want to park their money in RE and are OK w/ long-term appreciation as the bet. Anything else is bonus.
3) The IRR calculation shows a return that's acceptable to them, even if it doesn't meet the 2% and 50% heuristics.
4) Foreign investor parking their money in overseas assets to diversify
5) Buying a multifamily to offset the price of their primary residence but ok w/ paying closer to retail prices to buy the home they want
Also possible 6) Made a bad investment

waltworks

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Um, that is a LOW cost of living area, though. Not HCOL, which was what the OP was interested in.

He is asking if buying an $800k property in the Bay area that rents for $2500 a month is a good idea, basically, and if it isn't, why do people do it. The answer is speculation/stupidity.

Just to be clear, my original reply was to Badassprof (house in the Bay area with an apartment downstairs). I like that strategy too (our entire mortgage and then some is paid by our nightly rental in the basement) but I don't consider it "real estate investing" (mostly because it doesn't really scale), I consider it a way of lowering living expenses.

-W

IMO, house hacking is a type of RE investing. Besides, the #s would have worked as a straight up investment property too.

If the numbers don't work, the buyers probably have other strategies for buying the RE.
1) Bought the property long time ago and haven't sold
2) Have enough money that they want to park their money in RE and are OK w/ long-term appreciation as the bet. Anything else is bonus.
3) The IRR calculation shows a return that's acceptable to them, even if it doesn't meet the 2% and 50% heuristics.
4) Foreign investor parking their money in overseas assets to diversify
5) Buying a multifamily to offset the price of their primary residence but ok w/ paying closer to retail prices to buy the home they want
Also possible 6) Made a bad investment
« Last Edit: February 26, 2017, 11:09:05 AM by waltworks »

Genevieve

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Ah yes, maybe that's the difference. If the numbers work once you leave it's RE investing. If it just supplements then it's not.

badassprof

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I think I understand what you're saying, waltworks, about it not being an investment. Honestly, our after tax income is 250,000+ and we probably wouldn't buy a house in this area if it didn't have the apartment. Yes, its current value is double what we paid for it originally, but like all things, that value doesn't mean a hill of beans until we sell.

Even if the numbers worked differently for the OP, the taxes issue has to be taken into account too. they are insane in the membrane in a lot of high-cost areas.

waltworks

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Yeah, for me, an "investment" has to be:
1: Scalable at least to some extent (I can always buy more stock, or more rental properties - I can't put 20 apartments in my basement).
2: Passive or at least optionally passive (apartment in my basement isn't a lot of work, but it's not passive).
3: Compounding. My basement apartment will presumably provide a little more (nominal) income over time with inflation, but I can't use the income to reinvest in the apartment and boost returns further, so there's no magic compounding power like with stocks.

So while I love househacking/mixed use/roommates/etc, I don't consider them investments. That said, if you have a steady $1k/month income stream from your own house, that's $250k less you need in your stache to be FI, right? That's a pretty big deal. Alternately you can reasonably live somewhere stupid expensive without having your housing costs go nuts.

Wow, we're really off topic!

-W

Slow2FIRE

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I have one property in a city that is the next step down in pricing:  Denver very near Boulder.

What are the "all other Expenses" you speak of?

If you mean:
Mortgage (PI)
Expenses (Taxes, Insurance, management fees, a percentage for maintenance, a percentage for vacancy, money for future capex, money for advertising)

I'd consider the deal if in a solid neighborhood with good schools, low number of rentals and everyone carefully maintaining their properties.

When I mention all Expenses I mean Taxes, Insurance, management fees, a percentage for maintenance, a percentage for vacancy, money for future capex, money for advertising, etc.

So do you have Cash Flow after all Expenses?

Are you OK getting no Cash Flow, negative Cash Flow, or just a little Cash Flow?

What is your estimated guess for Appreciation for future years?

Just trying to see how Investors think for expensive cities.

I am currently getting just a little Cash Flow and I am highly leveraged (almost 40% cash on cash returns if considering principal build up).  However, with our incomes, we can easily carry the mortgage and our own living expenses and still max all retirement accounts at work.  I don't count what I have in a savings account as reserves in my cashflow calculation.

I am not okay getting negative Cash Flow and I probably wouldn't go for no cashflow, but I'd really have to think about it (what are my returns with principal and how much did I put down and lastly, if I needed to, do I mind just moving into the house myself as a personal home).

Appreciation for future years:  I don't have a percentage, but I see how the Boulder market is currently, the legislation controlling the market and the growth in the area (historical and planned by govts plus the businesses moving into the area who probably have done their homework for market growth as well).  The multi-million dollar homes in Boulder & Niwot will continue to push people into Longmont, Erie, Lafayette and Louisville (and Louisville is not much cheaper than Boulder).  I've already had 25% appreciation in 24 months on the property so I'm doing decent so far.

waltworks

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As an intellectual exercise, imagine what 10-15% annual appreciation would mean for home prices (anywhere) in 10 or 20 or 30 years. Rule of 70 it if you don't want to do the math the long way.

There is a reason that overall, US housing prices rise about in line with inflation.

Everyone that bought a house in the last 8 years feels like a genius right now. Good timing isn't the same as good planning, though. Sometimes I wonder whether some of the folks who post here actually lived through (and owned RE during) the housing crash.

-W

Abe

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With the way housing prices fluctuated so dramatically in the last two decades, I wouldn't consider it a safe investment unless we were geographically diversified across multiple cities and had a net positive return on most, if not all. Counting on appreciation alone is a gamble. We kept a house in a desireable neighborhood at net even for 4 years just because we had bought right before the crash and needed to move a bit after. That converted a potential $50k loss to an even $0 after mortgage, taxes, insurance and depreciation deductions. Took 3 years, though and was a bit of stress even though our renters were nice people.

CanuckStache

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I just got a small condo in a high priced market. I'm not sure what to expect from it in terms of appreciation (because values here skyrocketed last year, I think if anything it might go down short term). The reason I got it is according to my math, after all expenses factored in, I'll get a 10% ROI on the cashflow each year. It's not crazy money, but I look at it as an investment account that somebody else is paying for.

PizzaSteve

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Buy at the right times and dont if the numbers dont work, is my recommendation. Another option is renting rooms/VRBO type deals where you might cashflow a decent percentage of capital invested.

Have a HCOL area home bought at short sale price in 2012 that now has monthly rent equal to about 1% of the purchase price, with no unoccupied time.  The specific market is very rental short, due to appreciation and nature of local work.  Price appreciation was crazy those 3 years, which helped us keep it rented.  We dont plan to sell, so dont worry about price gains (other than taxes will keep rising), though selling remains an option.

PS. Our rule of thumb is to compare the house returns to other expected asset returns and at least match 10-30 yr bonds on cash flow, without appreciation. We don't use leverage.
« Last Edit: February 26, 2017, 09:31:34 PM by PizzaSteve »
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FamVestor

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I'm considering investing in NJ like one of the couples mentioned on this show:
https://www.youtube.com/watch?v=TFaGdvJ-4WY

Edited to add:
Here's a link to the case study with numbers.
http://www.famvestor.com/metalhorseproperties/
Put around $500k in and would be grossing ~$76k a year if he didn't live there. Has a healthy cash flow too.

Genevieve, Thanks for the shoutout.

We are currently looking for our next triplex or quad to househack in the same NYC area and my criteria is that I want the other units I don't live in to cover all costs(Mortgage, Insurances, Taxes, Main, Utilities, Vacancy) so that I will be able to live for free; and then when I move out cashflow whatever market rent that unit will go for.
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Slow2FIRE

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As an intellectual exercise, imagine what 10-15% annual appreciation would mean for home prices (anywhere) in 10 or 20 or 30 years. Rule of 70 it if you don't want to do the math the long way.

There is a reason that overall, US housing prices rise about in line with inflation.

Everyone that bought a house in the last 8 years feels like a genius right now. Good timing isn't the same as good planning, though. Sometimes I wonder whether some of the folks who post here actually lived through (and owned RE during) the housing crash.

-W

While you weren't specifically talking to me, I'd like to discuss my "emergency plan"
1.  If the market turns sour we can lower the rent price by up to 7% and "break-even" by removing only the cashflow portion.
2.  If the market gets even worse we can lower the rent price by 17% by removing the cashflow portion and our property management.
3.  In a near worst case scenario, I lower the rent price by 23% and remove cashflow, prop mgmt, and start doing maintenance myself (brand new construction so maintenance and mgmt aren't too difficult, but not something I need to do today to maximize returns).
4.  Finally, we can just move into the house and stop paying rent at our current home.  We have recession resistant jobs and have built up a bit of a nest egg.

waltworks

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As an intellectual exercise, imagine what 10-15% annual appreciation would mean for home prices (anywhere) in 10 or 20 or 30 years. Rule of 70 it if you don't want to do the math the long way.

There is a reason that overall, US housing prices rise about in line with inflation.

Everyone that bought a house in the last 8 years feels like a genius right now. Good timing isn't the same as good planning, though. Sometimes I wonder whether some of the folks who post here actually lived through (and owned RE during) the housing crash.

-W

While you weren't specifically talking to me, I'd like to discuss my "emergency plan"
1.  If the market turns sour we can lower the rent price by up to 7% and "break-even" by removing only the cashflow portion.
2.  If the market gets even worse we can lower the rent price by 17% by removing the cashflow portion and our property management.
3.  In a near worst case scenario, I lower the rent price by 23% and remove cashflow, prop mgmt, and start doing maintenance myself (brand new construction so maintenance and mgmt aren't too difficult, but not something I need to do today to maximize returns).
4.  Finally, we can just move into the house and stop paying rent at our current home.  We have recession resistant jobs and have built up a bit of a nest egg.

Those are great plans, but none of them have anything to do with whether the house is a good investment *compared to other options*.

"I have a way not to lose my entire investment" is not the same as "this will provide excellent returns".

-W

Genevieve

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We are currently looking for our next triplex or quad to househack in the same NYC area and my criteria is that I want the other units I don't live in to cover all costs(Mortgage, Insurances, Taxes, Main, Utilities, Vacancy) so that I will be able to live for free; and then when I move out cashflow whatever market rent that unit will go for.

Thanks for stopping by FamVestor! Pretty cool deal you got there. How long of a commute into NYC is for you?

I'm hoping to do something like this somewhere with a good commute to Soho.

If you're in the city often, perhaps I can buy you a fancy coffee somewhere and hear more about how you did it.

Slow2FIRE

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Well, in that case -
I just rechecked my spreadsheets and based on total capital invested I am getting a 38% rate of return (principal + total cashflow - (actual expenses + capex over 10 years)).  This is based on the original purchase price of the property.

I'd have to re-adjust to base my return on the comps in the area and take out transaction costs (which would result in a higher rate of return that I don't consider to be real until I actually do sell the property).

I have not found comparable investment options that would match this performance, yet.

waltworks

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Yes, you got really lucky. I doubled my money on a condo in Boulder in 5 years, but that doesn't mean I was smart. It means I bought a place somewhere that got hot. You can have the opposite happen, it's just that you've never experienced it if you've only been doing RE for 10 or fewer years.

Say CO elects a Trump-equivalent governor and CU has to go private and ends up with 1/3 the enrollment/employment it has now. At the same time NCAR and NIST basically shut down because of funding cuts. Boom, housing crash (especially for rents) in Boulder.

You could easily get a 38% return in the stock market if you used similar leverage, FYI.

-W

Slow2FIRE

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Difference between stock market with leverage and a house with leverage is that we were living in the house. If the rental market crashes, we move back in.  If the stock market crashes we may have a margin call - no such thing on this loan (it is not a business real estate loan).

After chatting at real estate investor meetups and interviewing a few reputable property managers in the area we found we could make the numbers work, so we elected to move out and now rent a much more modest home in Arizona while someone else pays off the house and gives us some spending cash.  Luck?  Yes, of course - but we weren't gambling in the first place because we bought it as a home before we decided to try to emulate the "mustachians" and reduce our expenses to accelerate FI.

BTW - those factors you list out could occur anywhere (not in the exact same fashion, but confounding factors that are devastating to your RE investment), even if you are playing the cashflow game in a LCOL area with 1.5% rent to price ratios except you are left with fewer options.  How are investors from Flint and Detroit doing that had great rent to price ratios?

Frankly, I'm not sure what your point is...are you trying to say all real estate is bad because bad things can happen?

waltworks

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I am saying that RE that does not cash flow is a huge risk and for most people a terrible idea. Many, many people (10's of millions!) did this in 2004-2007 and literally bankrupted themselves. The OP wanted to know why people buy my hypothetical $800k house that rents for $3k a month (those literally exist where I live, and are sometimes advertised on the MLS as "investment opportunities") - and it's because people are dumb/uninformed and/or believe they are going to make a ton on appreciation.

Of course bad things can happen with RE. But you are more likely to run into problems with a leveraged, illiquid investment that consistently loses money (including expected capex/maintenance of course) than an investment that consistently cashflows.

I'm not trying to attack anyone - if you bought a house to live in, and it appreciated a ton, that's awesome. Your experience is NOT typical, however, unless we're limiting ourselves to the last decade or so in the US in certain locations. And it's not the case that anyone should expect that going forward. If you are buying a house to live in, there are a ton of financial and non-financial factors to consider. If you are buying an *investment* the old 1%/2%/50% rules of thumb are well worth heeding.

-W

Difference between stock market with leverage and a house with leverage is that we were living in the house. If the rental market crashes, we move back in.  If the stock market crashes we may have a margin call - no such thing on this loan (it is not a business real estate loan).

After chatting at real estate investor meetups and interviewing a few reputable property managers in the area we found we could make the numbers work, so we elected to move out and now rent a much more modest home in Arizona while someone else pays off the house and gives us some spending cash.  Luck?  Yes, of course - but we weren't gambling in the first place because we bought it as a home before we decided to try to emulate the "mustachians" and reduce our expenses to accelerate FI.

BTW - those factors you list out could occur anywhere (not in the exact same fashion, but confounding factors that are devastating to your RE investment), even if you are playing the cashflow game in a LCOL area with 1.5% rent to price ratios except you are left with fewer options.  How are investors from Flint and Detroit doing that had great rent to price ratios?

Frankly, I'm not sure what your point is...are you trying to say all real estate is bad because bad things can happen?

FamVestor

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We are currently looking for our next triplex or quad to househack in the same NYC area and my criteria is that I want the other units I don't live in to cover all costs(Mortgage, Insurances, Taxes, Main, Utilities, Vacancy) so that I will be able to live for free; and then when I move out cashflow whatever market rent that unit will go for.

Thanks for stopping by FamVestor! Pretty cool deal you got there. How long of a commute into NYC is for you?

I'm hoping to do something like this somewhere with a good commute to Soho.

If you're in the city often, perhaps I can buy you a fancy coffee somewhere and hear more about how you did it.

It's about 25 minutes by car. 40 minutes by bus(stop 2 blocks away). There's a train a mile away but I've never taken it.

I don't go to the city too often, too much hustle and bustle for me. But sometimes... yea I am always happy to talk real estate or finance in general, but I do not drink coffee. Perhaps some bubble tea or for a real treat I do enjoy those green tea fraps Starbucks makes.

Anyway good luck with the search. We are back on the hunt again; so far nothing, but I'm playing with the idea of writing letters to owners of quads in my local area that look mismanaged.
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Johnny Aloha

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PS. Our rule of thumb is to compare the house returns to other expected asset returns and at least match 10-30 yr bonds on cash flow, without appreciation. We don't use leverage.

If that works for you that's great, but I'd be hesitant to peg any investment against the 30 yr bond.  In the past long term bonds have been a good, and relatively low risk, way to asses opportunity cost - but if projections are even close to accurate, long term bonds are in a perfect position to get crushed...

Johnny Aloha

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I have not found comparable investment options that would match this performance, yet.

I've experienced the same, mostly due to luck.  Bought a property (actually several) in a HCOL that very few people on this board would have looked at.  It's been the best investment I ever made (to date).  I would not buy at today's prices, and in fact I am thinking very hard about trading up for different assets.

I'll answer the OP.  In my investing area, I'm exposed to a few smart and wealthy people.  One of them continues to be interested in one of my properties and I just might sell it to him.  These people tend to have the following characteristics:

1) they have made a good amount of money from starting businesses or other investment properties;
2) they do not have much (if any) in the stock market and generally don't like stocks;
3) they view this type of investment as wealth preservation just as much as an actual investment in which you expect the value to increase;
4) they use little leverage, or they have enough capital to weather the storm if it comes up;
5) they understand the local market very well, including the "NIMBY" attitudes towards new development and the geographic constraints that cause housing prices to be so high in the first place.

totoro

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You could easily get a 38% return in the stock market if you used similar leverage, FYI.

Which no reasonably well-informed person would recommend, and certainly not to the degree that is commonly used to purchase a home.

In my view a family home is the primary investment many people will have.  And it is an investment by the dictionary definition and I've always approached it that way.  In our case we bought a triplex and have zero out of pocket costs after taxes.  The rents from the other two units pay our mortgage and expenses.  It has increased 35% since we purchased it in 2012 - about 70k a year.  We live in a HCOL area.   

Luck?  Meh.  Just part of the cycle.  Our place we bought in 2009 did nothing for seven years - no appreciation - and then up 35%.  The historical long-term average rate of appreciation in our city for the last 50 years has been 7%.   Been up times, flat times and down times. I'm not sure, but this is likely similar to desirable areas of the US like Hawaii, San Francisco and LA. Our ROI far exceeds stock market returns.
 
Can leverage work against you?  Yes, if you have to sell.  Controlling that risk is really important.  Buy and be prepared to hold - just like with stocks.   Rental income helps mitigate this risk on a primary residence.   In our case, we will sell one of our HCOL houses shortly to lock in gains.   Being a landlord is not a lot of work, but other investments are truly passive and that is where we'll go next.

I would agree buying for cash flow without leverage is lower risk.  These types of deals are usually not available in HCOL areas though - highly desirable areas tend to appreciate, but have terrible cash flow.   That is why if you are living in one it might make sense for you to buy for a place to live plus rental income, but as a pure investment it would be too high of a risk for me given the recent appreciation and the fact that we are FI now and don't want to take these types of risks.

Landlady

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I bought two properties in Seattle because I was able to buy well built houses in core neighborhoods that had positive rental numbers. It did take a few years to really see the rental income surge, but now I'm netting $50,000 a year after mortgage, taxes, fixes etc. are taken out.
I've also seen the value of the land raise significantly due to the zoning in the area which likely would not have happened in a smaller city. One property has doubled it's value (per Zillow) in 4 years $373k to $800k. The other property did take a big hit during the recession, but has now bounced back by $300k. I will likely enjoy selling of one of the houses during retirement in a few years.

I do agree that the timing and numbers are not always beneficial to buy in an expensive market, but if you are smart and lucky I can recommend it.

jeromedawg

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  • Posts: 2185
  • Location: Orange County, CA
Great thread. Looking at getting into REI myself so this is a helpful question to see asked along with the answers and perspectives. I've been checking out BiggerPockets as of late and one thing Brandon repeatedly says is to look up to 2 or so hours outside any given city considered a "HCOL" area and you should, in most cases, be able to find lower-priced RE that could actually yield a decent cash flow. Even then, finding a deal is tough. One of my friends just bought a place out in 29P near Joshua Tree because the market is exploding out there for Airbnb rentals - I'm not sure though if a big part of his decision was based on speculation (that the RE prices will go up majorly and also that he'll be able to rent his place out at the price he wants and also as many days of the year that he's hoping to rent it out). I'm still researching possible areas to start narrowing my search down to - it's hard here in SoCal.

PizzaSteve

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You could easily get a 38% return in the stock market if you used similar leverage, FYI.

Which no reasonably well-informed person would recommend, and certainly not to the degree that is commonly used to purchase a home.

In my view a family home is the primary investment many people will have.  And it is an investment by the dictionary definition and I've always approached it that way.  In our case we bought a triplex and have zero out of pocket costs after taxes.  The rents from the other two units pay our mortgage and expenses.  It has increased 35% since we purchased it in 2012 - about 70k a year.  We live in a HCOL area.   

Luck?  Meh.  Just part of the cycle.  Our place we bought in 2009 did nothing for seven years - no appreciation - and then up 35%.  The historical long-term average rate of appreciation in our city for the last 50 years has been 7%.   Been up times, flat times and down times. I'm not sure, but this is likely similar to desirable areas of the US like Hawaii, San Francisco and LA. Our ROI far exceeds stock market returns.
 
Can leverage work against you?  Yes, if you have to sell.  Controlling that risk is really important.  Buy and be prepared to hold - just like with stocks.   Rental income helps mitigate this risk on a primary residence.   In our case, we will sell one of our HCOL houses shortly to lock in gains.   Being a landlord is not a lot of work, but other investments are truly passive and that is where we'll go next.

I would agree buying for cash flow without leverage is lower risk.  These types of deals are usually not available in HCOL areas though - highly desirable areas tend to appreciate, but have terrible cash flow.   That is why if you are living in one it might make sense for you to buy for a place to live plus rental income, but as a pure investment it would be too high of a risk for me given the recent appreciation and the fact that we are FI now and don't want to take these types of risks.

Excellent points.  Younger investors should understand markets can turn.

What would you do if:
* market changes made your property unattractive and rentable only to very risky tenants
* local govt desperate for revenue raise taxes by questionable assessment practices
* drop in rental attractiveness also causes managers and real estate agents to not have interest in listing/managing properties

So you own a depreciated, negative cash flow asset that is illiquid.  What do you do?  This happens folks.
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