Author Topic: what doesn't anyone talk about location?  (Read 7049 times)

clarkfan1979

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what doesn't anyone talk about location?
« on: April 21, 2015, 09:17:16 PM »
This forum is riddled with rules about percentages, but very few people talk about location. What happens when you buy in a good location and get lots of appreciation through rents or selling? How does that fit into equations?

When I was a junior in college in 2001 I lived in a 5 bedroom house for $2800.month in San Diego. The backyard had 2 studio apartments for $600/month each. His total rent was 4k. The landlord purchased for 280K in 1988. His rent when he first bought was probably around $1500 for the house and $400 for each studio. This would put him at $2400/month for a property that cost 280K, a little shy of the 1% rule. However, today, the total rent would be around 6K. Does this mean that he should have bought in Ohio if he had a better chance of getting the 1% rule? Does this mean that his current expenses are 3K a month based on 6K/month in rent?

waltworks

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Re: what doesn't anyone talk about location?
« Reply #1 on: April 21, 2015, 11:05:26 PM »
What are you asking, exactly? You can't predict what locations will appreciate or depreciate in advance, so there's really no point in trying. But if you buy properties that cash flow well, you'll probably do well no matter what, barring some terrible economy-wide catastrophe.

Your landlord could probably have bought a dozen cash flowing rentals in the midwest in the 80s and used the cashflow to buy more - or stocks, or whatever. I am not going to sit down and do a bunch of number crunching on the various hypotheticals, but yes, properties that cash flow are better than properties that do not, generally speaking, regardless of what you think about the prospects for appreciation. And yes, 50% rule still applies in most cases, because all your costs will increase right along with your rents.

-W

clifp

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Re: what doesn't anyone talk about location?
« Reply #2 on: April 21, 2015, 11:50:00 PM »
Figuring out which markets are going to appreciate is sort of like trying to figure out which growth stock will be the next Facebook/Tesla/Netflix and which will be the next Pets.com and Zynga..
Virtually everybody place I've lived LA, SF Bay Area, and Honolulu prices have looked crazy expensive and when I looked at rentals the cashflow was between negative to barely positive.
Yet prices continued to appreciate at a very rapid rate. In hindsight I should have bought rentals and not just my own home.

I'm pretty sure if you put say 25% (rental) down in a area with a negative cash flow but the property appreciates at 10%+ a year you come out much better than the midwest/lost cost place where the cash flow is positive but appreciation is basically inflation.

The one huge take away that every real estate investor/potential should take away for the 2007 real estate crash is there is no law that housing price only go up.  Losing 50% in the stock market was painful, but if you held on you more than recovered.   The same isn't true for real estate investor in places like Vegas, Florida, or the Island Empire (LA) prices were declined by 50-75%.  Because almost all RE investor use leverage and the recent properties were at negative cash flow, declining values and rents resulted in financial ruin. Ruined credit and bankruptcy were more common than not among investor in those markets.

Investor in more sane markets with a 1% rule, were still cash flow positive and while prices decline nationwide, and in many market rents modestly decline,  they weren't forced to sell in a bad market. So yes fortunes were made by investing in real estate in California, New York, Wash DC. Hawaii and other places. But at some point I think they are all do for a serious correction, but I've been wrong for 30 years...

sol

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Re: what doesn't anyone talk about location?
« Reply #3 on: April 22, 2015, 12:34:58 AM »
What happens when you buy in a good location and get lots of appreciation through rents or selling? How does that fit into equations?

If your question is "What happens if you have a magical crystal ball that can predict the future" then the answer is "You can make a lot of money."

In broad scale, property appreciation is tied to local economic prosperity.  Cities that succeed see their real estate values rise.  But predicting which markets will appreciate at above-average rates isn't so easy.  In the 1950s greater Detroit had over 2 million people and a radical success story of capitalizing on the country's most profitable business.  In the 1880s Tacoma was the west coast terminus for the Northern Pacific Railroad and was a thriving boomtown, until the gold rush to Alaska made Seattle the regional economic hub and Tacoma became a gritty also-ran.  Look up the economic histories of places like Cleveland, Fresno, the Eerie Canal, Centralia PA, New Orleans, Buffalo, or Atlantic City.  For every gleaming Silicon Valley or DFW success story, there are ten parallel tragedies of beautiful places with bright futures that were somehow derailed.

People don't talk about location because it's hard to predict.  California was the destination for all of America's westward migration for over a hundred years, but these days it's got terrible schools, oppressive taxes, and no water.  I'm guessing the next century won't be so kind to it.

Property appreciation is a great bonus for real estate investors.  It's also averaged about the rate of inflation, nationwide, for over 200 years.  If you think you can pick the winners over the next decade or three, I'd like a free subscription to your newsletter full of these and other hot tips.

ShoulderThingThatGoesUp

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Re: what doesn't anyone talk about location?
« Reply #4 on: April 22, 2015, 06:15:44 AM »
If you bought in (most of) Houston in 2010 you are rich. If you bought in 2014 you are scared.

marty998

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Re: what doesn't anyone talk about location?
« Reply #5 on: April 22, 2015, 06:25:12 AM »
I am not going to sit down and do a bunch of number crunching on the various hypotheticals, but yes, properties that cash flow are better than properties that do not, generally speaking, regardless of what you think about the prospects for appreciation. And yes, 50% rule still applies in most cases, because all your costs will increase right along with your rents.

-W

I disagree with that premise. But you knew that already :)

Regarding the last sentence, the biggest cost is generally mortgage interest. This can only ever really go flat or down if you're on a fixed interest rate.

Other costs should go up with inflation on average (rates etc).

Rents are a function of supply and demand.

All 3 of those are independent of each other, so no, costs can't go up in line with income, except by coincidence.

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Re: what doesn't anyone talk about location?
« Reply #6 on: April 22, 2015, 06:55:15 AM »
This forum is riddled with rules about percentages, but very few people talk about location. What happens when you buy in a good location and get lots of appreciation through rents or selling? How does that fit into equations?

When I was a junior in college in 2001 I lived in a 5 bedroom house for $2800.month in San Diego. The backyard had 2 studio apartments for $600/month each. His total rent was 4k. The landlord purchased for 280K in 1988. His rent when he first bought was probably around $1500 for the house and $400 for each studio. This would put him at $2400/month for a property that cost 280K, a little shy of the 1% rule. However, today, the total rent would be around 6K. Does this mean that he should have bought in Ohio if he had a better chance of getting the 1% rule? Does this mean that his current expenses are 3K a month based on 6K/month in rent?
Investing for cash flow makes appreciation almost irrelevant. It is an added bonus if/when you dispose of property but it's not a good retirement income source.
Appreciation is also highly unpredictable and can reverse course in a heartbeat. It doesn't send you checks - you have to dispose of property to get it, or refinance and increase your debt service payments.
Just... no.

Just my $.02... I'm a Realtor and own several rentals both personally and inside a small partnership, and if the cash doesn't flow from day 1, we don't even look. Buying for appreciation has made many people rich, but it's essentially speculation. It's a different game entirely.
« Last Edit: April 22, 2015, 10:45:26 AM by zephyr911 »

waltworks

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Re: what doesn't anyone talk about location?
« Reply #7 on: April 22, 2015, 07:20:33 AM »
Ok, just leave the mortgage out entirely and assume a cash purchase if that makes you happy. 50% rule has nothing to do with your mortgage costs anyway.

Rents tend to rise about the same as inflation. So do all of your costs. Please tell me how your legal fees, or maintenance costs or insurance, or property management or vacancy (costs directly tied to rent) don't go up over time... or are you saying you can hire a roofer for the same price today that you could in 1988?

People seem to have this idea that houses can magically appreciate faster than the general economy over the whole country (or most of it) over long periods of time. 5 minutes with a spreadsheet will show you how this doesn't work - after a short period of time, the *entire* economy is housing with no money left over for anything but outbidding each other on pricier and pricier houses.

Appreciation is great. But it's not guaranteed and a house is an illiquid, risky asset.

-W

I am not going to sit down and do a bunch of number crunching on the various hypotheticals, but yes, properties that cash flow are better than properties that do not, generally speaking, regardless of what you think about the prospects for appreciation. And yes, 50% rule still applies in most cases, because all your costs will increase right along with your rents.

-W

I disagree with that premise. But you knew that already :)

Regarding the last sentence, the biggest cost is generally mortgage interest. This can only ever really go flat or down if you're on a fixed interest rate.

Other costs should go up with inflation on average (rates etc).

Rents are a function of supply and demand.

All 3 of those are independent of each other, so no, costs can't go up in line with income, except by coincidence.
« Last Edit: April 22, 2015, 07:38:40 AM by waltworks »

zephyr911

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Re: what doesn't anyone talk about location?
« Reply #8 on: April 22, 2015, 10:52:40 AM »
And yes, 50% rule still applies in most cases, because all your costs will increase right along with your rents.

-W
We're currently renovating half of a duplex in a transitional neighborhood, and expect it to rent for 50% over what the other side is leased for.

Same size, same layout, same location, same cost of supplies. Will costs increase by 50%?

/devilsadvocate

arebelspy

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Re: what doesn't anyone talk about location?
« Reply #9 on: April 22, 2015, 11:05:40 AM »
And yes, 50% rule still applies in most cases, because all your costs will increase right along with your rents.

-W
We're currently renovating half of a duplex in a transitional neighborhood, and expect it to rent for 50% over what the other side is leased for.

Same size, same layout, same location, same cost of supplies. Will costs increase by 50%?

/devilsadvocate

Over time, yes.  Property tax will increase.  Vacancy, even staying the same in terms of time lost, will increase due to being a percentage of the rent.  Cost of redoing the carpets, painting, etc.  The other side is probably well over 50% when you have to do that maintenance.. over a long enough time span, they'll both clock in right around there.
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Poorman

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Re: what doesn't anyone talk about location?
« Reply #10 on: April 22, 2015, 01:18:15 PM »
This forum is riddled with rules about percentages, but very few people talk about location. What happens when you buy in a good location and get lots of appreciation through rents or selling? How does that fit into equations?

The ratios you see quoted here don't apply to appreciation markets.  You want to focus on income growth, job growth in highly paid professions, and locations with limited available land to build on.  Another thing to look for is strong interest from overseas buyers.

Appreciation is not tied to inflation as many people seem to believe.  It's tied to incomes.  If incomes rise at the rate of inflation, you will see real estate that likewise rises at the rate of inflation.   If you instead focus on areas with the fastest income growth and job growth in highly paid professions, that will naturally translate into rents and property values that rise faster than inflation.  Foreign buyers will view these markets favorably and will contribute to that price momentum by injecting their overseas cash into the market.  To them, San Francisco, LA, Honolulu, and New York are the Midwest markets.  They view them as cheap housing and a great value.

Predicting appreciation isn't generally what makes appreciation investors successful.  They are focused on supply/demand dynamics and buy properties based on solid long-term fundamentals, not just the initial numbers.  Cash flow investors are looking for instant gratification based on a 1-2% rent ratio and double digit cash-on-cash return, whereas appreciation investors are looking at potential returns over the life of the investment.  If you can buy a property that breaks even monthly in an appreciation market, that's generally considered a good deal because time is on your side as rents continue their inexorable march upward.  If you can buy one that actually cash flows as was possible from 2009-2012, then that's hitting it out of the park.  Cash flow is the frosting on the appreciation cake.

One other thing concerning the 50% rule is that it generally only applies to cash flow markets.  Appreciation markets (at least in California) are going to be closer to 40% because property taxes are fixed based on your initial purchase price, insurance is cheaper due to fewer natural disasters, and maintenance items such as water heaters cost the same whether you live in a $40k Midwest crap shack or a $800,000 tract home on the West coast.  The moderate weather also extends the life of the structure so less exterior maintenance is required.  Roofs don't take the same kind of beating, etc.

zephyr911

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Re: what doesn't anyone talk about location?
« Reply #11 on: April 23, 2015, 10:34:58 AM »
Over time, yes.  Property tax will increase.  Vacancy, even staying the same in terms of time lost, will increase due to being a percentage of the rent.  Cost of redoing the carpets, painting, etc.  The other side is probably well over 50% when you have to do that maintenance.. over a long enough time span, they'll both clock in right around there.
True. And the disparity is just a symptom of the overall upward trend in the area that will increase other costs as well. There's a downside to everything. It's still exciting to ride the wave up.

clarkfan1979

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Re: what doesn't anyone talk about location?
« Reply #12 on: April 24, 2015, 05:05:27 AM »
This forum is riddled with rules about percentages, but very few people talk about location. What happens when you buy in a good location and get lots of appreciation through rents or selling? How does that fit into equations?

The ratios you see quoted here don't apply to appreciation markets.  You want to focus on income growth, job growth in highly paid professions, and locations with limited available land to build on.  Another thing to look for is strong interest from overseas buyers.

Appreciation is not tied to inflation as many people seem to believe.  It's tied to incomes.  If incomes rise at the rate of inflation, you will see real estate that likewise rises at the rate of inflation.   If you instead focus on areas with the fastest income growth and job growth in highly paid professions, that will naturally translate into rents and property values that rise faster than inflation.  Foreign buyers will view these markets favorably and will contribute to that price momentum by injecting their overseas cash into the market.  To them, San Francisco, LA, Honolulu, and New York are the Midwest markets.  They view them as cheap housing and a great value.

Predicting appreciation isn't generally what makes appreciation investors successful.  They are focused on supply/demand dynamics and buy properties based on solid long-term fundamentals, not just the initial numbers.  Cash flow investors are looking for instant gratification based on a 1-2% rent ratio and double digit cash-on-cash return, whereas appreciation investors are looking at potential returns over the life of the investment.  If you can buy a property that breaks even monthly in an appreciation market, that's generally considered a good deal because time is on your side as rents continue their inexorable march upward.  If you can buy one that actually cash flows as was possible from 2009-2012, then that's hitting it out of the park.  Cash flow is the frosting on the appreciation cake.

One other thing concerning the 50% rule is that it generally only applies to cash flow markets.  Appreciation markets (at least in California) are going to be closer to 40% because property taxes are fixed based on your initial purchase price, insurance is cheaper due to fewer natural disasters, and maintenance items such as water heaters cost the same whether you live in a $40k Midwest crap shack or a $800,000 tract home on the West coast.  The moderate weather also extends the life of the structure so less exterior maintenance is required.  Roofs don't take the same kind of beating, etc.

Many great points. Thank you. I also have a maco-economic philosophy about rentals. The goal is to have the house forever, so what is the long-term projections of the neighborhood. Is there a fortune 500 company moving their world headquarters into town? If so, that could provide some room for optimism.

waltworks

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Re: what doesn't anyone talk about location?
« Reply #13 on: April 24, 2015, 07:23:56 AM »
Good luck. Predicting housing prices 30 years out is a fool's game.

-W

sol

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Re: what doesn't anyone talk about location?
« Reply #14 on: April 24, 2015, 10:20:28 AM »
Predicting housing prices 30 years out is a fool's game.

So is not predicting them.

The only reason I continue to engage in these forecasting exercises is that I find bad answers to be better than no answers.  I don't expect to be right, I just want to have considered probable outcomes.

arebelspy

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Re: what doesn't anyone talk about location?
« Reply #15 on: April 24, 2015, 10:24:48 AM »
Predicting housing prices 30 years out is a fool's game.

So is not predicting them.

The only reason I continue to engage in these forecasting exercises is that I find bad answers to be better than no answers.  I don't expect to be right, I just want to have considered probable outcomes.

Too many people plan on them for their return though.

It leaves you in a bad spot if you're wrong.

If you aren't dependent on those returns though, you're okay if they don't happen, and even better off if they do.
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sol

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Re: what doesn't anyone talk about location?
« Reply #16 on: April 24, 2015, 10:57:24 AM »
Too many people plan on them for their return though.

It leaves you in a bad spot if you're wrong.

And that makes more sense wrt real estate appreciation, but my comment was intended to be a little more general.  People on this forum, myself included, spend a great deal of time and energy trying to forecast dollars decades down the road without any real idea about what will actually happen.  Whether it's RE or stocks makes little difference, we're just guessing in both cases.

How many significant figures do you really believe on a FIRE spreadsheet that goes out to 2077, like mine does?  How about one that only goes out to 2025?

By contrast, how many significant figures do you believe in that come from somebody without a spreadsheet that goes out that far?

arebelspy

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Re: what doesn't anyone talk about location?
« Reply #17 on: April 24, 2015, 11:00:48 AM »
Too many people plan on them for their return though.

It leaves you in a bad spot if you're wrong.

And that makes more sense wrt real estate appreciation, but my comment was intended to be a little more general.

Fair enough.  In the context of this thread, it's important to note that relying on those unpredictable things can be unwise.
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waltworks

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Re: what doesn't anyone talk about location?
« Reply #18 on: April 24, 2015, 11:29:05 AM »
Ok, Sol, that's a great point. I guess, to be more accurate, I should say:
-We know that historically equity prices rise at about 7 percent after inflation. Any particular company or stock can do much better or much worse, of course, but that's very hard to predict in advance. Going forward, you can plan using that number, or a lower number, or whatever you want, but that's the evidence we have.
-We know that historically house prices rise at about the same rate as inflation. Any particular house or area can do much better (SF area right now, Detroit in 1960, Yukon in 1898) or much worse (Detroit right now) but that's very hard to predict in advance.

Making long term bets on stock market appreciation can fail, of course. But the evidence says that at least it's a good bet. Long term bets on housing appreciation are much riskier because there's no rising tide of increased value in the whole market, at least relative to inflation.

-W

sol

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Re: what doesn't anyone talk about location?
« Reply #19 on: April 24, 2015, 11:44:31 AM »
Thanks for your contributions Walt.  I'm not trying to disagree with you.

But to get a little deeper into the weeds on this topic, I think it's probably notable that real estate has been such a successful path to wealth for so long, compared to stocks.  That hard to explain if the returns are so low.

My theory on that is real estate has historically been less volatile than stocks, and has been easier to invest in with deep leverage due to the widespread use of mortgages.  Those two things together have really amplified the long term returns of the asset class.

I think rebs is right that banking on appreciation is risky. And Walt is right that RE has appreciated much closed to the inflation rate than has the stock market.  And yet this unpredictable slow appreciation has provided financial stability to millions more families than has the stock market, so I don't think you can just discount it either.

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Re: what doesn't anyone talk about location?
« Reply #20 on: April 24, 2015, 11:50:18 AM »
I think the reason for that effect (and I agree - lots of people have achieved some form of financial success/stability with RE) is that owning a house(s) acts as an enforced saving mechanism for many people. As you note, the leverage doesn't hurt either(except when it does, 2007, cough, cough).

I think for mustachians, though, enforced savings isn't necessary. So you should look at your needs, and at your goals, and invest accordingly. Yes, people who bought houses and held onto them ended up wealthy. But they probably would have been wealthier by far investing in other things.

Betting on RE appreciation is probably not optimal - if you want to take risks, just go 100% equities and apply a little leverage if you really want to get jiggy.

-W

Thanks for your contributions Walt.  I'm not trying to disagree with you.

But to get a little deeper into the weeds on this topic, I think it's probably notable that real estate has been such a successful path to wealth for so long, compared to stocks.  That hard to explain if the returns are so low.

My theory on that is real estate has historically been less volatile than stocks, and has been easier to invest in with deep leverage due to the widespread use of mortgages.  Those two things together have really amplified the long term returns of the asset class.

I think rebs is right that banking on appreciation is risky. And Walt is right that RE has appreciated much closed to the inflation rate than has the stock market.  And yet this unpredictable slow appreciation has provided financial stability to millions more families than has the stock market, so I don't think you can just discount it either.

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Re: what doesn't anyone talk about location?
« Reply #21 on: April 24, 2015, 12:06:04 PM »
I think you guys are still missing the point.  Appreciation investors don't typically plug forecasts into a spreadsheet.  They focus on buying a quality asset in a high demand area, where the rents are likely to increase over time thanks to a shortage of supply.  The values will track the rents over the long term and if values get too far detached, then a correction will occur.  The good investors learn how to play the market cycle, while the weaker hands get caught up in the mania and eventually get flushed out.  Learning the market cycle isn't difficult.  It's just another skill set like calculating the cash returns on 2% deal.  You buy when the numbers make sense and you sit out the market when deals are no longer compelling.

If you find yourself in a Detroit situation where the fundamentals are going down the tubes, then sell and relocate.  It's not like stocks where crashes happen over a matter of weeks.  Real estate is a slow moving tanker and it's fairly easy to adjust to changes in the market if you are paying attention.  Usually you will have a lead time of years to sell before real estate values are impacted.

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Re: what doesn't anyone talk about location?
« Reply #22 on: April 24, 2015, 12:26:58 PM »
Yeah, if things are just dirt cheap, it's worth it. I am just selling some properties that were very mediocre rentals but were appreciation plays and made a tidy profit, just because the whole freaking country was on sale 5 years ago.

I don't expect that kind of opportunity to come along very often, though. Housing is historically not very volatile. And I bet you anything Arebelspy and I started out with similar amounts of $ at a similar time (ie 2009 or so) and he is going to end up with a LOT more because he focused on cash flow.

-W

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Re: what doesn't anyone talk about location?
« Reply #23 on: April 24, 2015, 12:52:31 PM »
Often times this debate is framed as an either/or when in reality it's possible to pursue both.  I'm definitely not against cash flow investing and that's what I'm actively focused on at present time, having just purchased a couple of 1.9%-2% properties over the past six months.  When the appreciation markets get overpriced based on rents (later in the cycle) then it makes more sense to focus on cash flow markets.  When prices have corrected in the appreciation markets, it's a better value with much higher potential returns to be buying for appreciation.  Usually you can snag some marginal cash flow too, which will only grow as rents increase. 

My basic strategy is to buy in the inland markets of California that don't fluctuate as much and offer compelling cash flow while I wait for the next correction in the coastal markets.  I'm using the equity gain from my coastal primary residence purchased in 2010 to fund these cash flow properties.  When coastal California experiences its next correction, as it tends to do every dozen years or so, I will use the savings built up from cash flow along with the income stream to qualify for more appreciation plays near the coast.  Both investment styles offer excellent returns and both can be complementary at different points in the market cycle.

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Re: what doesn't anyone talk about location?
« Reply #24 on: April 24, 2015, 01:53:09 PM »
Sol makes a very good point.  For the average family, home ownership in the middle and high appreciation areas have been a path to wealth.  Yes, the compounded rate of appreciation may be 4 to 7 percent, but that's not the point.  Most folks bought a house with 3 to 20 percent down, and if they lived in it until the mortgage was mostly paid down or paid off, they have a mostly or completely free and clear asset.  They did not trade in and out of the house, they didn't lever it up, they refinanced when the rate or terms made sense, they didn't dump the house when the value went down, they just held on to it.  They likely benefitted from the leverage over time.

But what about all those negative cash flows in the interim for the mortgage payments, taxes, insurance, maintenance and that new roof?  These folks needed a place to live anyway, and the difference between the rent and the cost of owning is what the house really cost them to acquire over the years.  The important point is that value and net worth are snapshots at points in time.  How they got to free and clear ownership of the appreciated property no longer matters once they get there.

Until mutual funds, Charles Schwab and the 401k/IRA accounts came along, very few people participated in the stock and bond markets.  That was not a path to wealth for most folks.  Real estate was something anyone with the down payment and some knowledge of how to manage property could participate in.  Many people got very good at this, and the tax laws subsidized rental ownership.

With regard to Poorman's comments, I agree, except for his point about inland California markets not fluctuating.  Those Inland Empire suburbs took a much bigger percentage hit in 2009-2012 than did San Diego or coastal Orange County.  For the long term hold, you were probably better off in the areas that did not take as big of a hit.  But you could buy more of the cheaper properties, sell them when the market recovered, and sock that cash away for the next drop in the high value, high appreciation areas.

mooreprop

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Re: what doesn't anyone talk about location?
« Reply #25 on: April 24, 2015, 02:14:03 PM »
I think another factor to consider when forecasting possible appreciation is demographics.   Right now, the children of the baby boomers are slow to purchase homes due to fear from the recent volatility and student loan debt.  When they start buying houses in force, they are a huge demographic group that will presumably be buying entry level houses. This is already causing upward price pressure since there has been very little new construction.

 In my market, there are very few buyers for the larger houses at this time due to the current demographics.  Baby boomers are downsizing into smaller one-story houses and their children are also buying these houses.  I predict further appreciation in these smaller houses due to the large and increasing demand.  Ten years from now, the trend may be toward larger houses again as they outgrow their beginner houses. 

As far as the outsized returns due to large increases in prices in California, I would be very careful.  California has traditionally had 7 year cycles when the prices can go up very quickly, but also down very quickly.  I prefer the smaller price swings of the Midwest, but you could make much bigger profits due to appreciation where there are bigger price changes.  Just remember, that you can also lose much more if (when) the trend reverses.

clarkfan1979

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Re: what doesn't anyone talk about location?
« Reply #26 on: April 27, 2015, 05:57:06 AM »
My original point was appreciation in rent. I was just curious about people's thoughts.


zephyr911

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Re: what doesn't anyone talk about location?
« Reply #27 on: April 27, 2015, 10:52:57 AM »
My original point was appreciation in rent. I was just curious about people's thoughts.
Yes, if there is reason to believe that rents will rise, that makes a property more attractive. But it is no more predictable than appreciation in property value, being driven largely by the same factors.
Certain neighborhoods near downtown Huntsville have been experiencing a revitalization over the past decade-plus, and job market fundamentals seem to support the continuation of that. My partnership chose to focus on one specific area that seems to be benefitting from that trend more than most - where we can increase our returns by buying "lagging" properties and updating them. Our latest duplex was pulling $400 (A) and $450 (B) at closing, and we bumped B up to $600 after it went vacant, with only a few $K in upgrades. If we can get A up to $700 next year, that's a 53% increase in rent (for less than 20% additional cost), just by catching the right point in time and doing the right work. So yes, these are considerations. But we still have to vet each property based on today's conditions. If it doesn't cash flow now, we can't afford to upgrade next year without paying more in, and this is supposed to be a self-sustaining snowball. As is, each of our investments earns money from day one so we can keep buying and upgrading.
By all means, do consider job growth and market trends in your analysis - even if you're not investing for appreciation. And if you get appreciation, more power to you. Just be very careful about factoring it into your projections, and don't set yourself up for disappointment.