Author Topic: Time the Market for real estate?  (Read 2920 times)

teltic

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Time the Market for real estate?
« on: June 20, 2018, 05:09:47 PM »
Hello.

I understand timing the market for stocks is a losers game.  Do you consider timing the market for real estate?  Or is that another losers game where I should punch myself in the face and pay current market prices?

I've casually looked at housing since 2015 (hint sight, I should have just pulled the trigger then).  Real estate has out appreciated stocks (yes, real estate isn't passive), and I want in, but I'm scared I'm buying at the top.  I would buy in Utah, where there seems to be a big inflow of new companies (tech from Cali, looking for cheaper labor I suppose).

Thoughts? Stick with stocks & rent or make the jump?

mozar

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Re: Time the Market for real estate?
« Reply #1 on: June 20, 2018, 05:46:12 PM »
What is your time horizon? You can certainly wait for the next recession or downturn but it could be tomorrow or 30 years from now. If you can wait 0-30 years go for it. I timed the real estate market. I bought in 2013 because I realized real estate was starting to go up again. I had so many people tell me I was crazy, real estate will never appreciate again, it was too risky etc. When people are saying that it's time to buy. I know quite a few people who jumped on the opportunity to buy property in the last recession. Most of the were wealthy though, and recognized a possibly once in a generation opportunity.

samsonator54321

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Re: Time the Market for real estate?
« Reply #2 on: June 20, 2018, 06:07:31 PM »
Are you taking out a mortgage? I think the big differnce between timing the stock market vs real estate is that if you are investing in the market you already have the money (in most cases).  So if you donít do anything, the money will depreciate from inflation and no investment gains. Where as if you donít take a mortgage you could be missing out on appreciation but itís not like you have the money laying around to put to use somewhere else.

Also, how long are you planning on staying in the house? If you are pretty confident you will be in it long term then do you care if it drops for a few years then rebounds?

Also area really matters. I bought in 2012 and sold in 2014 in an area that was HOT in 2014 and moved to an area that was just warming up in 2014.  What Iím getting at is there might be places in Utah that are a lot closer to the ďtopĒ.

I like to think about the price of a house without the lot. If you put a 200k house on a 100k lot vs a 200k house on a 600k lot, then a crash could affect you a lot more.

With that all said, id wait. It seems like the top to me too :)  but really nobody knows.

teltic

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Re: Time the Market for real estate?
« Reply #3 on: June 20, 2018, 08:57:59 PM »
Thanks for the replies. 

Yes I'd get a mortgage.

A quote from warren buffet keeps popping in my head "Be Fearful When Others Are Greedy and Greedy When Others Are Fearful".   It's just so damn hard to resist, since all of my friends are buying houses right now.

As for whether I'd stay long term or not... I think it would be a long term rental after I moved out (I bet I'd stay 2-5 years).  I would get roommates for sure... Basically nothing more than reducing my rent expenses.

BASICALLY IM HOUSE HUNGRY :|  I'd love to buy a duplex or a piece of shit fixer upper.

ChpBstrd

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Re: Time the Market for real estate?
« Reply #4 on: June 20, 2018, 09:39:30 PM »
The timing of a house purchase is the wrong question.

Is housing a good deal for you? is a better question. For example, if houses cost $400,000 in your market, but rent for $1000 (making up numbers), then you'd get a face punch if you buy. Go to the real estate section of this blog and run the property through the real estate investment calculator (see pinned post). Would you buy this unit to rent to other people? If not, WHY THE HELL would you buy it to rent to yourself? Is the ROI better than you could get in the markets? If not, why take such a risk un-diversifying your portfolio?

Second, once you are a millionaire in liquid asset terms, you do not need to live near high-paying jobs. The midwest, south, and other places are full of charming cities with spacious houses that can be bought for $100-150k, have an imputed rent ROI above 5% or cheaper mortgage payments than rent, and can be moved right into. If the rent/buy calculation favors renting, why not leverage your HCOL salary and let a landlord enjoy their 1-3% cash ROI, boosted by depreciation which you can't do as a live-in homeowner. There is a case for growing your assets in a liquid format, retiring in a few years, and moving wherever housing is more reasonable. After all, you earn the same ROI in the markets regardless of your housing costs.

Third, I'm sure you're worried about rising interest rates. But what happens to the value of that house you bought when mortgage rates rise, say from 5% to 7%? The payment increases by 20%. Who pays the 20% difference upon sale, the seller or the buyer. Unless everyone's income increases or everyone is willing to spend a greater percentage of their income on housing, the value of the house has to fall 20%. Houses do not become more upscale just because interest rates change - you'd be selling to the same demographic then as you are now.

For more of this contrarian view, also see:  https://www.millennial-revolution.com/all-posts/

rubybeth

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Re: Time the Market for real estate?
« Reply #5 on: June 21, 2018, 11:09:36 AM »
I'm confused by this. Are you buying as investment, or to live in? Or both?

affordablehousing

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Re: Time the Market for real estate?
« Reply #6 on: June 21, 2018, 11:43:10 AM »
buy a house when you need a house. buy an investment when you need an investment. in either case, pick the best house or investment available. Your friend bought a house is not a good reason for you to buy a house.

Telecaster

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Re: Time the Market for real estate?
« Reply #7 on: June 21, 2018, 12:00:26 PM »
Hello.

I understand timing the market for stocks is a losers game.  Do you consider timing the market for real estate?  Or is that another losers game where I should punch myself in the face and pay current market prices?

I've casually looked at housing since 2015 (hint sight, I should have just pulled the trigger then).  Real estate has out appreciated stocks (yes, real estate isn't passive), and I want in, but I'm scared I'm buying at the top.  I would buy in Utah, where there seems to be a big inflow of new companies (tech from Cali, looking for cheaper labor I suppose).

Thoughts? Stick with stocks & rent or make the jump?

Are you talking about buying an investment property or a place to live? 

Either way, the timing  analogy doesn't work very well when you stretch it too far.  If you are looking for a place to live, then you should view housing as an expense to be minimized.  It might be cheaper to buy, or it might be cheaper to rent.

That said, real estate can be an investment as well.  However, your future returns are dictated by the price you pay at purchase.   Instead of timing the market, it might be more useful to think in terms of valuing the market.  If the market values are high, then you won't make much money going forward. 

Scortius

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Re: Time the Market for real estate?
« Reply #8 on: June 21, 2018, 12:05:50 PM »
If you are looking for a place to live, use the NYTimes Rent vs. Buy calculator and leave it at that.

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Again, if this is a place for you to live, you should not consider it an investment! Buying a house, just like renting one, is one way to pay for a place to live.

http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

https://www.thesimpledollar.com/sorry-but-your-home-isnt-a-good-investment/

teltic

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Re: Time the Market for real estate?
« Reply #9 on: June 21, 2018, 02:40:57 PM »
Thank you for your responses!  To clarify, this would be an investment, but purchased as a primary residence to capitalize on lower rates (FHA for a du/tri/quadplex).





Interesting find.
https://www.redfin.com/UT/Vineyard/197-E-700-N-84058/home/145680728
http://media.wix.com/ugd/a769f3_bdb906ece59e470293a9626650758707.pdf

I will be looking for a new job soon, and this is the area I'd like to be around (Lehi area is being dubbed as "Silicon Slopes", as lots of tech companies from Cali are coming over).

9.2% cash on cash return according to the proforma (purchase price in proforma is lower as well)...



https://www.redfin.com/UT/Salt-Lake-City/164-1000-W-84116/home/91709465

$180k, duplex.  I could rent each side for $800 (checking rents on rentler.com).

Using FHA @ 3.5% down: $6300
Using Conventional @ 20% down (to not get PMI insurance): $36000

I always read 50% of rents go to expenses....

(800 * 12 * 50%) = $9600 profit

9600 / 6300 = 152.4% ROI cash on cash
9600 / 36000 = 26.6% ROI cash on cash.


... I must be doing something wrong.  Do returns simply go up due to more leverage (lower down payments?)?



Basically, I do feel left out while everyone is buying property. So I want to buy it.  If I bought a SFH, it would be a fixer upper that I'll sell in 2 years after fixing myself (to get tax free gains).  I'd most likely do an FHA to buy a quadplex.

https://www.redfin.com/UT/Salt-Lake-City/173-N-St-E-84103/home/145296017

Last one.

Rent: $1200 per unit.  x 4 = $4800 rent.  50% goes to expenses... $2400 * 12 = $28,800 profits.

$28,800 / $26,250 (FHA 3.5% down pmt) = 109.7% ROI cash of cash returns?

Face punching welcomed. 

affordablehousing

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Re: Time the Market for real estate?
« Reply #10 on: June 21, 2018, 02:47:48 PM »
uh yes, leverage increases IRRs because your cash investment is less. those look good. go buy them!

Cwadda

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Re: Time the Market for real estate?
« Reply #11 on: June 21, 2018, 03:05:03 PM »
I bought an owner occupied investment property last year for $350k. It's one of the highest priced multi family buildings in the town. There are still profitable properties out there. They might not appreciate forever, and could drop down to 75% of their value.

The trick is investing for cash flow. That's what matters. Appreciation is nice but is not predictable. Cash flow can be controlled.

ChpBstrd

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Re: Time the Market for real estate?
« Reply #12 on: June 21, 2018, 07:20:11 PM »
The mistake is multiplying rent by 12 months.

IRL your tenant clears out at the end of their lease, you spend a week on cleanup and repairs, post it for another couple weeks, and best case scenario you find somebody who wants to move in at the first of the month (one week later) instead of the first of the next month. You scramble with background checks, credit checks, and switching the utilities back and forth. Expect this at least every year. People often rent because they want to move every year.

Also, you forgot to multiply by 50% on the $9600 profit line.

Assuming the 50% expenses and assuming 11 months of revenue per year we get 800*11*.5= $4400, a 4.9% NET ROI on the half of the property you aren't living in which you paid $90k for. Re: expenses, be sure to factor in property taxes, a new $10k roof every 25 years, a new $7k HVAC unit every 20 years, and a $20k heavy remod every 25 years for each unit, and a $3k light remod every 5 years, per unit.


Notch

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Re: Time the Market for real estate?
« Reply #13 on: June 21, 2018, 08:46:37 PM »
Lol.

Expenses don't always equal ~50% of rent.

Your calculation needs to look more like:

Cashflow = rent*(1-vacancy rate) - rental agent commission - interest - taxes - insurance - maintenance

Net yield = cashflow / deposit

the_fixer

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Re: Time the Market for real estate?
« Reply #14 on: June 21, 2018, 09:38:15 PM »
I think it is easier to look at the real estate market and make an informed decision since it moves slower than the stock market and is less erratic from day to day. You can take your time, study and learn the area.

However I think that the opportunity that myself and others experienced in post 2008 time frame up to now is a once or twice in a lifetime opportunity.

I wish I had purchased 5 houses in 2012 when we purchased.

I watched the area for a year or two and went from seeing no houses sell to seeing houses start to move again and often with 100% cash deals.  But to be honest it scared the hell out of me even though I could tell the market was heating up and people with money we're starting to buy.

we stayed in the house for 2 years and 3 days and sold it for ~100k profit, moved to another part of the market that had not fully recovered but I knew that a new exit off a major toll road was coming and the light rail we purchased and stayed in it for just over 2 years and sold it for a $80k profit.

Honestly I think if you know your market and stay up on what is happening in the area you can eek out some money but nothing like it was when prices dropped so low.

Our current place has seen less appreciation, we are coming up on 2 years in it and looking at about $45k but should have been more as the light rail has been delayed and the market slowed.




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« Last Edit: June 21, 2018, 09:43:24 PM by the_fixer »

chasesfish

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Re: Time the Market for real estate?
« Reply #15 on: June 22, 2018, 05:28:23 AM »
Listen to the others who've already posted.  Personally, I'm awful at my timing on buying real estate.  I never had the courage to buy rental property or overanalyze it, then have done poorly on two of my three primary residences.

wageslave23

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Re: Time the Market for real estate?
« Reply #16 on: June 22, 2018, 08:30:14 AM »
Lol.

Expenses don't always equal ~50% of rent.

Your calculation needs to look more like:

Cashflow = rent*(1-vacancy rate) - rental agent commission - interest - taxes - insurance - maintenance

Net yield = cashflow / deposit

This is correct.  And the FHA route is almost never going to be a good idea.  If you calculate the difference in total interest paid each year to the difference in down payment, you are paying a very high interest rate on the down payment savings (~10%?).  If you are buying for an investment, I would hold off unless you have very intimate knowledge of a local market that you know for sure is going to be increasing in value.  Otherwise you are probably looking at 10-15% ROI, a lot of headaches, and 25% depreciation recapture when you go to sell.  When financing a property, I wouldn't buy unless I'm estimating >20% ROI.  Because the transaction costs are high and the ROI will only go down on financed properties as your leverage decreases.

FINate

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Re: Time the Market for real estate?
« Reply #17 on: June 22, 2018, 09:41:01 AM »
Trying to time any market is a fool's errand. It assumes you're smarter than others, have secret knowledge/special insight that most others don't that somehow allows you to predict the future. On average people are...average, which is another way of saying they have no idea what the future holds. Including you, OP.

That said, many of the axioms of buy and hold passive investing don't apply to RE. Unless you're buying a REIT fund, your RE holdings are invested in a specific local market, neighborhood, and individual property. Styles come and go, structures depreciate... many many factors make each home a unique investment.

Buying RE is more similar to picking an individual stock than investing in the total stock market. So instead of trying to time the market (predict the future) think in terms of value investing. Do your homework. Price to rent and price to income ratios for the area, expected cash flow, ROI, etc.

Plan on holding each property for 10 years or longer. Each is a long-term investment. If you're not comfortable with the length of time your capital may be tied up in a property then you have no business buying it.

There's nothing magical about RE. Be principled in your investments and only pull the trigger if the hard numbers indicate a good value. This may mean sitting on the sideline while others are bragging about how much their RE has appreciated, and it may mean buying when everyone is negative on RE (like the last recession). This isn't timing the market, not being contrarian, it's simply buying property when it's a good value.

Never, EVER, count on capital appreciation to make the math work -  this is the fast track to losing money with RE. An investment property has to be justified solely based on the strength of the income it generates. If you get some capital appreciation along the way then it's icing on the cake.

About that piece of shit fixer upper: Do you have a realistic understanding of how much it will cost to fix it up? I cannot overemphasis how much of a bottomless pit RE can be. One POS property may have mostly cosmetic issues, whereas another will drive you into bankruptcy (e.g. if you need to hire a civil engineer to stabilize the property, or replace the foundation, and so on). If you've not factored actual estimated fix up costs into your calculations then I'd bet dollars to donuts that you're banking on future capital appreciation to bail you out. <-- Don't do this! It works out sometimes, but know of lots of people who lost large amounts this way.

Finally, don't  be "HOUSE HUNGRY." Instead, be hungry for sound long term investments :)

Mother Fussbudget

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Re: Time the Market for real estate?
« Reply #18 on: June 22, 2018, 01:40:53 PM »
OP would do well to read something like "The Millionaire Real Estate Investor" or other such real estate investment books that discuss the mindset, and strategies involved in REI. 

teltic

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Re: Time the Market for real estate?
« Reply #19 on: June 22, 2018, 05:43:46 PM »
THANK YOU ALL.


Thanks Mother Fussbudget, I'll check that book out at the library this weekend.  I've always been fascinated by RE, and want to learn more about it all.


For now, I'll continue renting in as affordable places as possible (and close to work).  Maybe by the time I understand the market, there will be a market correction..

For now, I'll keep on with the 50-60% savings rate and investing in boring index funds :)

Again, thanks for your input!

tralfamadorian

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Re: Time the Market for real estate?
« Reply #20 on: June 22, 2018, 06:20:33 PM »
I'd most likely do an FHA to buy a quadplex.

I love the idea of quads. There's a great way to catapult your FIRE savings by nearly or completely eliminating your housing costs.

However, FHA does a thing that is irritating when you're looking at 3-4 unit properties but in the end is for your own good. It's called the self-sufficiency test. What it basically requires is that the fair market rent of all the units (including the one you plan to occupy) minus a FHA chosen vacancy deduction is equal to or greater than your mortgage.

Let's use your last property as an example. ($1,200/unit x 4 units)(85%) = $4,080 in
Basic FHA mortgage calculator for 3.5% down payment = $5,586.52 out
This property would fail the self sufficiency test (badly).

It gets a little more complicated. Some parts of the country are 75% instead of 85% and current leases are taken as market rent even if they are very low from legacy tenants so the self-sufficiency test can be a difficult barrier to cross. If you find a property that meets the self-sufficiency test with a single digit down payment, you probably have a winner unless there is a crazy amount of deferred maintenance and/or owner paid utilities.

Regarding when to look and timing the market. I remember reading about one successful lifelong real estate investor. He set his standard ($/% profit per door) and never stopped analyzing properties. When the market was up, he made less offers and rarely won. When the market started to turn, he knew before there was market correction chatter because there were more properties meeting his criteria and more of his offers being accepted. Be the bellwether.

The Millionaire Real Estate Investor is a good one! And almost always floating around youtube.

Mother Fussbudget

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Re: Time the Market for real estate?
« Reply #21 on: June 23, 2018, 08:07:11 PM »

Maybe by the time I understand the market, there will be a market correction..

Nooooooo!!!  That's the WRONG WAY to think about the current market/economy, IMHO.  As has been famously said [paraphrasing],
   "Economists have correctly predicted 11 of the last 4 recessions".

My thinking is WE ALL need to maintain a mix of investments.  I think I can get better results in REAL ESTATE now that I understand how folks are doing it.  However, one can get good results doing NOTHING by investing in the Total Stock Market Index Fund (wherever you invest - Vanguard, Fidelity, etc) and in REIT's for real-estate.   

Investors have gone back and forth regarding how to slice-and-dice the percentages of your portfolio to attempt some sort of 'balance' (or to NOT put all your eggs in the same basket).  Some think it should be 60% Stocks, 20% Bonds, 20% Real Estate.  Others are okay with 100% stocks (See JHCollinsNH's stock series, and http://jlcollinsnh.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth/). 

No one can tell you what YOUR comfort level is.  What we CAN do is make you aware of some of the different ways to invest your nest egg, different TAX STRATEGIES available, and hope we'll ALL do our own due diligence, and invest in a way that makes us "Able To Sleep Through The Night".  All the best!
« Last Edit: June 23, 2018, 08:10:04 PM by Mother Fussbudget »