Author Topic: when rents don't match home sales?  (Read 19379 times)

Roland of Gilead

  • Handlebar Stache
  • *****
  • Posts: 2291
when rents don't match home sales?
« on: March 30, 2021, 10:22:11 AM »
I was browsing through our local real estate listings and noticed some strange things like a house listing for $148,000 while in the description they were touting that it was currently rented for $750 a month.

Isn't that absolutely horrible?   That is less than 0.5% and would not even meet the mortgage payment on a 4% loan after you figure in property taxes and upkeep.

Are rents just absurdly low now?  It does cost a shit ton of money to build a house, with just hookup fees and permits totaling $20,000 to $25,000 on that size house.

I have to wonder why there are any landlords at all in our area at those price levels.

mozar

  • Magnum Stache
  • ******
  • Posts: 3462
Re: when rents don't match home sales?
« Reply #1 on: March 30, 2021, 10:37:28 AM »
I wonder about that too. I have never heard of the one percent rule happening anywhere. For example a 300k house renting for 3000 a month seems absurd to me.  Maybe a very small number of landlords are able to find properties like that, and the rest are suckas?

JLee

  • Walrus Stache
  • *******
  • Posts: 6430
Re: when rents don't match home sales?
« Reply #2 on: March 30, 2021, 10:40:37 AM »
Housing prices have skyrocketed in the last few years.  My Phoenix house was bought in 2011 for $30k by a flipper and sold for $110k. I paid $140k in 2013, sold for $250k in 2018, and Zillow shows it at ~$340k now.

I wouldn't be surprised if that house that's presently rented for $750 was originally sold for ~$80k.

chemistk

  • Pencil Stache
  • ****
  • Posts: 858
  • Location: Mid-Atlantic
Re: when rents don't match home sales?
« Reply #3 on: March 30, 2021, 11:04:18 AM »
Housing prices have skyrocketed in the last few years.  My Phoenix house was bought in 2011 for $30k by a flipper and sold for $110k. I paid $140k in 2013, sold for $250k in 2018, and Zillow shows it at ~$340k now.

I wouldn't be surprised if that house that's presently rented for $750 was originally sold for ~$80k.

Definitely this. Our rent is $1275, but 3 houses in our neighborhood with similar layouts to ours all sold within the last 3 months for between $180k-$200k. Ours would likely be at or above the $200k mark based on the updates that have been done to it.

Malcat

  • Walrus Stache
  • *******
  • Posts: 5864
Re: when rents don't match home sales?
« Reply #4 on: March 30, 2021, 12:31:32 PM »
Ha!

There's an older high end rental apartment building a few blocks from my place where a two bedroom apartment rents for $2400/mo. There's a comparable condo apartment building next door where a two bedroom apartment sells for 900K +$1000/mo in condo fees.

In some markets at some times, buying a rental property makes sense, in other markets and times, it doesn't.

Paper Chaser

  • Pencil Stache
  • ****
  • Posts: 624
Re: when rents don't match home sales?
« Reply #5 on: March 30, 2021, 12:38:16 PM »
Another thing, is that rents are tied pretty closely to the bottom of the wage scale (at least in my location). If most of the renters in an area are lower wage workers, and those lower wages are pretty stagnant, then you really can't raise the rent. Can't get blood from a turnip.

I've watched some local landlords sell off a lot of their properties (usually between 6-10 properties) in the last 2 years or so because they'd fetch more return being sold on the open market than they'd generate in monthly rent. These people typically bought when houses were cheap 2009-12ish, rented out to generate cash flow for a few years, and are now reaping the gains in appreciation. Lots of wealth being built for those who were in the right place at the right time and had the understanding and capital to take advantage of the opportunity. That's the way extended market gains work.


ysette9

  • Walrus Stache
  • *******
  • Posts: 7470
  • Location: Bay Area, CA
    • The Best Is Yet To Come
Re: when rents don't match home sales?
« Reply #6 on: March 30, 2021, 01:31:53 PM »
Coming from a HCOL area properties that meet the 1% rule feel like woolly mammoths or something. Like they must exist somewhere in space and time but they donít play a part of my reality.

JLee

  • Walrus Stache
  • *******
  • Posts: 6430
Re: when rents don't match home sales?
« Reply #7 on: March 30, 2021, 04:29:18 PM »
Coming from a HCOL area properties that meet the 1% rule feel like woolly mammoths or something. Like they must exist somewhere in space and time but they donít play a part of my reality.

lol yeah, and then add property tax on top of it to the tune of $1k/mo (or more) and it makes the general 1% rule seem like a fantasy land.

Jon Bon

  • Handlebar Stache
  • *****
  • Posts: 1290
  • Location: Midwest
Re: when rents don't match home sales?
« Reply #8 on: March 30, 2021, 04:51:37 PM »
This might have something to do with it....


tawyer

  • Stubble
  • **
  • Posts: 232
  • Location: SF Bay Area
  • JFDI
Re: when rents don't match home sales?
« Reply #9 on: March 31, 2021, 06:08:15 PM »
I often wonder how many people who invest in real estate actually run the numbers on their investment, particularly in the handful of markets I have explored, where monthly rent is about 0.3-0.5% of property value. Naturally, in a boom, there is more money and credit going around than financial sense, so that rent:buy ratio will keep dropping. Notwithstanding exceptions (looking at you CA prop 13 holding property tax constant for 30 years), I fail to see how real estate investors (on average) are getting the best return on their capital as compared to index funds.

Most of the time I hear people talking about their rental properties, the noises are "the rent covers the mortgage". So what about taxes, insurance, vacancies, management fees (money, or time if you do it yourself), maintenance, and opportunity cost (from your capital and possibly time)? Crickets.

I understand that some areas have appreciated dramatically, so the leverage on an average $1MM Bay Area home produces amazing returns when you eventually sell it, but that's a form of market timing, given the historical trend that real estate only appreciates at the rate of inflation. Furthermore, if you're getting into residential real estate, isn't the idea to buy and hold, making gains from a sale immaterial to your balance sheet?

So, assuming an average real estate investor buys a property to rent at the 0.5% level, how are they expecting to beat VTSAX, for example?

Wintergreen78

  • Bristles
  • ***
  • Posts: 402
Re: when rents don't match home sales?
« Reply #10 on: March 31, 2021, 08:20:00 PM »
I was renting a studio for $1640/month. I just had to move out because someone bought the house for $1.2 million. They plan to live in the studio and rent out the main 3 bedroom house. Iím guessing they will rent it out for around $3,000/month.

I really appreciated my landlords, but Iím shocked they didnít sell the place years ago. I have no idea what the new buyer is thinking.

Malcat

  • Walrus Stache
  • *******
  • Posts: 5864
Re: when rents don't match home sales?
« Reply #11 on: April 01, 2021, 04:25:26 AM »
I was renting a studio for $1640/month. I just had to move out because someone bought the house for $1.2 million. They plan to live in the studio and rent out the main 3 bedroom house. Iím guessing they will rent it out for around $3,000/month.

I really appreciated my landlords, but Iím shocked they didnít sell the place years ago. I have no idea what the new buyer is thinking.

Maybe they're planning to live in the main 3 bedroom house? If they can charge $3000 for the studio, that offsets their mortgage payment to less than you were paying for a studio apartment.

Seems like a reasonable move to me if they want to own a 3 bedroom house in an expensive market. It doesn't sound like the studio unit would be theoretically worth more than 300K on its own, so that seems pretty in line with the 1% rule as a rental.

Am I missing something? It's very early in the morning and I haven't had my coffee, so perhaps I'm just not understanding.

Wintergreen78

  • Bristles
  • ***
  • Posts: 402
Re: when rents don't match home sales?
« Reply #12 on: April 01, 2021, 07:48:17 AM »
I was renting a studio for $1640/month. I just had to move out because someone bought the house for $1.2 million. They plan to live in the studio and rent out the main 3 bedroom house. Iím guessing they will rent it out for around $3,000/month.

I really appreciated my landlords, but Iím shocked they didnít sell the place years ago. I have no idea what the new buyer is thinking.

Maybe they're planning to live in the main 3 bedroom house? If they can charge $3000 for the studio, that offsets their mortgage payment to less than you were paying for a studio apartment.

Seems like a reasonable move to me if they want to own a 3 bedroom house in an expensive market. It doesn't sound like the studio unit would be theoretically worth more than 300K on its own, so that seems pretty in line with the 1% rule as a rental.

Am I missing something? It's very early in the morning and I haven't had my coffee, so perhaps I'm just not understanding.

No, they are renting the main house and living in the studio. Iíd guess that they are renting the main house for less than the market rate. Iíd also guess that market rent for the studio would be around $2,500.

One bedroom condos in this area start at $600,000 (if you can find one for sale) with typically $400/month association fees.

Malcat

  • Walrus Stache
  • *******
  • Posts: 5864
Re: when rents don't match home sales?
« Reply #13 on: April 01, 2021, 08:14:31 AM »
I was renting a studio for $1640/month. I just had to move out because someone bought the house for $1.2 million. They plan to live in the studio and rent out the main 3 bedroom house. Iím guessing they will rent it out for around $3,000/month.

I really appreciated my landlords, but Iím shocked they didnít sell the place years ago. I have no idea what the new buyer is thinking.

Maybe they're planning to live in the main 3 bedroom house? If they can charge $3000 for the studio, that offsets their mortgage payment to less than you were paying for a studio apartment.

Seems like a reasonable move to me if they want to own a 3 bedroom house in an expensive market. It doesn't sound like the studio unit would be theoretically worth more than 300K on its own, so that seems pretty in line with the 1% rule as a rental.

Am I missing something? It's very early in the morning and I haven't had my coffee, so perhaps I'm just not understanding.

No, they are renting the main house and living in the studio. Iíd guess that they are renting the main house for less than the market rate. Iíd also guess that market rent for the studio would be around $2,500.

One bedroom condos in this area start at $600,000 (if you can find one for sale) with typically $400/month association fees.

Lol, I completely misread your initial post. I do that a lot, especially first thing in the morning.
For some reason I read it that they were renting out the studio for $3000, which sounded like a great idea.

Jon Bon

  • Handlebar Stache
  • *****
  • Posts: 1290
  • Location: Midwest
Re: when rents don't match home sales?
« Reply #14 on: April 01, 2021, 12:22:12 PM »
I often wonder how many people who invest in real estate actually run the numbers on their investment, particularly in the handful of markets I have explored, where monthly rent is about 0.3-0.5% of property value. Naturally, in a boom, there is more money and credit going around than financial sense, so that rent:buy ratio will keep dropping. Notwithstanding exceptions (looking at you CA prop 13 holding property tax constant for 30 years), I fail to see how real estate investors (on average) are getting the best return on their capital as compared to index funds.

Most of the time I hear people talking about their rental properties, the noises are "the rent covers the mortgage". So what about taxes, insurance, vacancies, management fees (money, or time if you do it yourself), maintenance, and opportunity cost (from your capital and possibly time)? Crickets.

I understand that some areas have appreciated dramatically, so the leverage on an average $1MM Bay Area home produces amazing returns when you eventually sell it, but that's a form of market timing, given the historical trend that real estate only appreciates at the rate of inflation. Furthermore, if you're getting into residential real estate, isn't the idea to buy and hold, making gains from a sale immaterial to your balance sheet?

So, assuming an average real estate investor buys a property to rent at the 0.5% level, how are they expecting to beat VTSAX, for example?

On this website there are quite a few people who call BS on those terrible rentals you mentioned above. I get its a housing market unseen in history, but real RE investors are not buying houses at .5% rent per month. Lol, I guess anything is possible. but if there are buying RE at .3 to .5% they wont be RE investors for long...

What you see a lot of, and always have is folks who move and consider renting out their previous primary home. This is of course almost always a terrible idea because revenues barely cover costs, or 'only the mortgage'. They also ignore the massive opportunity cost of having a asset with 100k's of equity with a terrible return, not to mention the tax free capital gains you are allowed to cash in on.

So yes everything is insane right now. I've been able to refinance all my houses to get expenses lower and monthly CF up which has been nice. But yes I've probably moved from 1% rule to .8% or worse. The prices have jumped 20% in the past year obviously rents have not.  At the same time a RE transaction is not easy or cheap to do. We all have heard about the K shaped recovery and I think we are seeing part of it here. Rents can't increase that quickly because renters still have to pay them. However with everyone wanting a bigger home, new building at a standstill for a few months, and the cheapest money in history creates the perfect storm.

My current theory is that in the big cities out west basically have the "Sydney Syndrome" The NIMBYs have slowed/stopped building enough paired with with increasing demand. Throw in a bunch of rich people wanting houses and there is really no upper limit on housing prices.


bacchi

  • Walrus Stache
  • *******
  • Posts: 5600
Re: when rents don't match home sales?
« Reply #15 on: April 01, 2021, 01:12:23 PM »
My current theory is that in the big cities out west basically have the "Sydney Syndrome" The NIMBYs have slowed/stopped building enough paired with with increasing demand. Throw in a bunch of rich people wanting houses and there is really no upper limit on housing prices.

Construction is also crazy expensive right now.

FINate

  • Handlebar Stache
  • *****
  • Posts: 2103
Re: when rents don't match home sales?
« Reply #16 on: April 01, 2021, 01:45:53 PM »
I've watched some local landlords sell off a lot of their properties (usually between 6-10 properties) in the last 2 years or so because they'd fetch more return being sold on the open market than they'd generate in monthly rent. These people typically bought when houses were cheap 2009-12ish, rented out to generate cash flow for a few years, and are now reaping the gains in appreciation. Lots of wealth being built for those who were in the right place at the right time and had the understanding and capital to take advantage of the opportunity. That's the way extended market gains work.

We did this. The numbers on some properties made sense back in those days. We ran the numbers again after a big run-up and decided the equity could be put to better use elsewhere. That, and it an anti-landlord sentiment was taking root at the local level, which made owning a rental even more undesirable. We ended up coming out ahead by selling even after cap gains, depreciation recapture, and transaction fees. I can see owning a less-than-optional property for diversification reasons, but not at any of the valuations I see nowadays.

norajean

  • Pencil Stache
  • ****
  • Posts: 517
Re: when rents don't match home sales?
« Reply #17 on: April 01, 2021, 02:30:05 PM »
Great time to rent!

marty998

  • Walrus Stache
  • *******
  • Posts: 7221
  • Location: Sydney, Oz
Re: when rents don't match home sales?
« Reply #18 on: April 01, 2021, 07:40:16 PM »
I often wonder how many people who invest in real estate actually run the numbers on their investment, particularly in the handful of markets I have explored, where monthly rent is about 0.3-0.5% of property value. Naturally, in a boom, there is more money and credit going around than financial sense, so that rent:buy ratio will keep dropping. Notwithstanding exceptions (looking at you CA prop 13 holding property tax constant for 30 years), I fail to see how real estate investors (on average) are getting the best return on their capital as compared to index funds.

Most of the time I hear people talking about their rental properties, the noises are "the rent covers the mortgage". So what about taxes, insurance, vacancies, management fees (money, or time if you do it yourself), maintenance, and opportunity cost (from your capital and possibly time)? Crickets.

I understand that some areas have appreciated dramatically, so the leverage on an average $1MM Bay Area home produces amazing returns when you eventually sell it, but that's a form of market timing, given the historical trend that real estate only appreciates at the rate of inflation. Furthermore, if you're getting into residential real estate, isn't the idea to buy and hold, making gains from a sale immaterial to your balance sheet?

So, assuming an average real estate investor buys a property to rent at the 0.5% level, how are they expecting to beat VTSAX, for example?

Hello! I on track to clear about $15,000 cash profit after tax this financial year from my two rentals worth $1,600,000* (net equity ~$600,000). And that's the best year I've had in terms of cash flow for 7 years of RE investing. But I don't care because I don't really want cash profits taxed at marginal rates.

In the same respect that sharemarket investors don't really want dividends if they're onto a good growth stock, I'm happy to keep booking outsized capital gains on my properties. The additional equity gives me the capacity to borrow more to buy more assets.

So notwithstanding the old trope of property increasing at the rate of inflation, it's the power of lower-risk leverage that allows you to consistently beat not only inflation, but compete well with index funds too on an after tax basis.

* The way the Sydney market is going, by the time I finish writing this post they'll probably be worth $1.7m

Jon Bon

  • Handlebar Stache
  • *****
  • Posts: 1290
  • Location: Midwest
Re: when rents don't match home sales?
« Reply #19 on: April 02, 2021, 06:03:33 AM »
Hello! I on track to clear about $15,000 cash profit after tax this financial year from my two rentals worth $1,600,000* (net equity ~$600,000). And that's the best year I've had in terms of cash flow for 7 years of RE investing. But I don't care because I don't really want cash profits taxed at marginal rates.

In the same respect that sharemarket investors don't really want dividends if they're onto a good growth stock, I'm happy to keep booking outsized capital gains on my properties. The additional equity gives me the capacity to borrow more to buy more assets.

So notwithstanding the old trope of property increasing at the rate of inflation, it's the power of lower-risk leverage that allows you to consistently beat not only inflation, but compete well with index funds too on an after tax basis.

* The way the Sydney market is going, by the time I finish writing this post they'll probably be worth $1.7m

That sounds like a nice place to be in, good work!

However IMO you are a real estate speculator and not a real estate investor. The point of investing is to get a return. If you hold your investment long term it eventually pays for itself.

You know that growth stocks all eventually become a dividend stock right? (or at least they are suppose too). I would also advocate speculating on growth stocks is completely different from speculating on RE due to liquidity issues and transactions costs. Speculation is most of the time ok, but you run into the greater fool theory at some point. I am in no way saying this is where you are, but look up the south seas company or tulip mania.

Now Sydney is a strange place that I almost know nothing about. I assume you will keep doing well because I have heard that Sydney is making it hard to build more houses and thus constrict supply. But my thoughts would be your doing terrible on the investing side (15/600 = 2.5% return) but spectacular on the speculation side.

Good luck out there.

Sugaree

  • Handlebar Stache
  • *****
  • Posts: 1067
Re: when rents don't match home sales?
« Reply #20 on: April 02, 2021, 06:23:52 AM »
Coming from a HCOL area properties that meet the 1% rule feel like woolly mammoths or something. Like they must exist somewhere in space and time but they donít play a part of my reality.

I'm in a super low COLA and I'm not seeing a whole lot right now either. 

waltworks

  • Magnum Stache
  • ******
  • Posts: 4929
Re: when rents don't match home sales?
« Reply #21 on: April 02, 2021, 07:58:38 AM »
We need a separate everything bubble forum, at this point.

You can have the same conversation about stocks, bonds, RE, trading cards, NFTs, etc, etc.

No, there mostly aren't any good RE investing opportunities out there, but you might get lucky and the party keeps going another few years. Same with any other investment you can name.

-W

clarkfan1979

  • Handlebar Stache
  • *****
  • Posts: 2310
  • Age: 41
  • Location: Pueblo West, CO
Re: when rents don't match home sales?
« Reply #22 on: April 03, 2021, 06:52:16 AM »
Part of the reason why rents are lagging is because of rules that currently do not allow rent increases by landlords. One of my tenants is vacating. I'm raising the rent from 2900/month to 3200/month. I got about 40 emails during the first week it was listed. I can only raise the rent because someone is vacating.

I've done well buying a house as a primary and then renting it out after we move. However, I always bought the house knowing that it will probably be a rental at some point. I never fell in love with a house, except for the numbers when I saw a deal.

My wife and I have averaged 80K/year of total income at our W-2 jobs over the past 10 years. Right now our W-2 income is 65K/year. If we focused on index funds alone, we would be limited with building our net worth.

Because we have 3 rentals (4 doors) we went from zero to 1 million in about 10 years. Our first 3 homes required about 6 months of rehab (250 hours). In addition, self-management of the rentals are about 100 hours/year, unless I personally decide to take on a major project. Many people know that I installed some flooring at one of my rentals in 2020. I agree that it's not 100% passive, but for us the juice is worth the squeeze. 

Once a couple is earning 150K/year or higher, the strategy of rental real estate might not be worth it. It might be better to focus on index funds and your careers. 

mozar

  • Magnum Stache
  • ******
  • Posts: 3462
Re: when rents don't match home sales?
« Reply #23 on: April 03, 2021, 10:52:56 AM »
Quote
Drop the price by another $30K and we'll talk.

Makes sense, but you can't do that where I live. It's been a sellers market for 12 years straight.

Papa bear

  • Handlebar Stache
  • *****
  • Posts: 1709
  • Location: Ohio
Re: when rents don't match home sales?
« Reply #24 on: April 03, 2021, 12:58:36 PM »
I was just sent an off market, portfolio sale for 22 doors. 

275k sale price for 22 doors, sfh - 4 unit residential.  Gross rents 10,500/month.  Thatís 3.8% gross rent to sale price.

This stuff exists.  But it is a depressed and still declining area.  And 1% rule properties in B neighborhoods were still readily available through 2018.  It will all return back someday.

In general, what jonbon says is spot on.   Rents canít raise as quickly as home sales prices can. Rents are limited by income and that hasnít seen the insane asset price increases over the past year. 

This market is bonkers.   Speculate at your own risk. 


Sent from my iPhone using Tapatalk

marty998

  • Walrus Stache
  • *******
  • Posts: 7221
  • Location: Sydney, Oz
Re: when rents don't match home sales?
« Reply #25 on: April 03, 2021, 06:29:51 PM »
Hello! I on track to clear about $15,000 cash profit after tax this financial year from my two rentals worth $1,600,000* (net equity ~$600,000). And that's the best year I've had in terms of cash flow for 7 years of RE investing. But I don't care because I don't really want cash profits taxed at marginal rates.

In the same respect that sharemarket investors don't really want dividends if they're onto a good growth stock, I'm happy to keep booking outsized capital gains on my properties. The additional equity gives me the capacity to borrow more to buy more assets.

So notwithstanding the old trope of property increasing at the rate of inflation, it's the power of lower-risk leverage that allows you to consistently beat not only inflation, but compete well with index funds too on an after tax basis.

* The way the Sydney market is going, by the time I finish writing this post they'll probably be worth $1.7m

That sounds like a nice place to be in, good work!

However IMO you are a real estate speculator and not a real estate investor. The point of investing is to get a return. If you hold your investment long term it eventually pays for itself.

You know that growth stocks all eventually become a dividend stock right? (or at least they are suppose too). I would also advocate speculating on growth stocks is completely different from speculating on RE due to liquidity issues and transactions costs. Speculation is most of the time ok, but you run into the greater fool theory at some point. I am in no way saying this is where you are, but look up the south seas company or tulip mania.

Now Sydney is a strange place that I almost know nothing about. I assume you will keep doing well because I have heard that Sydney is making it hard to build more houses and thus constrict supply. But my thoughts would be your doing terrible on the investing side (15/600 = 2.5% return) but spectacular on the speculation side.

Good luck out there.

I take issue with a lot of this. If you hold a property for 10 years, you can hardly call it speculation. If the party were going to end it would have done so 25 years ago. At the end of the day you said yourself if the point of investing is to get a return, then absolutely I am getting a good one. Even if largely from capital gains. You think Tesla and Amazon shareholders would have preferred $1 per year dividends instead of $100 a year capital gains?

Supply is not an issue here, the city is absolutely deluged with hundreds of thousands of apartments. The people are screaming for it to stop but the governments are in the pockets of developers. So thereís more than enough dwellings for everyone, but everyone wants a certain type of dwelling.

Since you canít exactly make more land, prices rise to what the market will bear.

The city has an auction clearance rate of 96% for the past week. Basically you could list a dog kennel and get over a million for it.

Everyone keeps repeating the usual tropes on this forum about the market staying irrational longer than you can stay solvent and all that shit about market timing (see top is in thread), but apparently this only applies to stocks, and somehow property is different where you have to wait for a crash or things are priced too high and you shouldnít buy (isnít this market timing???)

Sounds incredibly hypocritical to me.

Now that doesnít mean I go out and throw stupid money at stupid prices. Iíve only bought when the cash yield is reasonable enough (on Sydney standards, which usually means rent covers interest, and youíre on your own to cover all other bills plus mortgage repayments from your pocket).

But I think a lot of you guys miss out by focusing on that $1 of dividends instead of $100 of capital gains. DYOR, buy in a place that everyone wants to be, and be patient. Thatís kinda the definition of investing.

Jon Bon

  • Handlebar Stache
  • *****
  • Posts: 1290
  • Location: Midwest
Re: when rents don't match home sales?
« Reply #26 on: April 04, 2021, 01:16:46 PM »
Hello! I on track to clear about $15,000 cash profit after tax this financial year from my two rentals worth $1,600,000* (net equity ~$600,000). And that's the best year I've had in terms of cash flow for 7 years of RE investing. But I don't care because I don't really want cash profits taxed at marginal rates.

In the same respect that sharemarket investors don't really want dividends if they're onto a good growth stock, I'm happy to keep booking outsized capital gains on my properties. The additional equity gives me the capacity to borrow more to buy more assets.

So notwithstanding the old trope of property increasing at the rate of inflation, it's the power of lower-risk leverage that allows you to consistently beat not only inflation, but compete well with index funds too on an after tax basis.

* The way the Sydney market is going, by the time I finish writing this post they'll probably be worth $1.7m

That sounds like a nice place to be in, good work!

However IMO you are a real estate speculator and not a real estate investor. The point of investing is to get a return. If you hold your investment long term it eventually pays for itself.

You know that growth stocks all eventually become a dividend stock right? (or at least they are suppose too). I would also advocate speculating on growth stocks is completely different from speculating on RE due to liquidity issues and transactions costs. Speculation is most of the time ok, but you run into the greater fool theory at some point. I am in no way saying this is where you are, but look up the south seas company or tulip mania.

Now Sydney is a strange place that I almost know nothing about. I assume you will keep doing well because I have heard that Sydney is making it hard to build more houses and thus constrict supply. But my thoughts would be your doing terrible on the investing side (15/600 = 2.5% return) but spectacular on the speculation side.

Good luck out there.

I take issue with a lot of this. If you hold a property for 10 years, you can hardly call it speculation. If the party were going to end it would have done so 25 years ago. At the end of the day you said yourself if the point of investing is to get a return, then absolutely I am getting a good one. Even if largely from capital gains. You think Tesla and Amazon shareholders would have preferred $1 per year dividends instead of $100 a year capital gains?

Supply is not an issue here, the city is absolutely deluged with hundreds of thousands of apartments. The people are screaming for it to stop but the governments are in the pockets of developers. So thereís more than enough dwellings for everyone, but everyone wants a certain type of dwelling.

Since you canít exactly make more land, prices rise to what the market will bear.

The city has an auction clearance rate of 96% for the past week. Basically you could list a dog kennel and get over a million for it.

Everyone keeps repeating the usual tropes on this forum about the market staying irrational longer than you can stay solvent and all that shit about market timing (see top is in thread), but apparently this only applies to stocks, and somehow property is different where you have to wait for a crash or things are priced too high and you shouldnít buy (isnít this market timing???)

Sounds incredibly hypocritical to me.

Now that doesnít mean I go out and throw stupid money at stupid prices. Iíve only bought when the cash yield is reasonable enough (on Sydney standards, which usually means rent covers interest, and youíre on your own to cover all other bills plus mortgage repayments from your pocket).

But I think a lot of you guys miss out by focusing on that $1 of dividends instead of $100 of capital gains. DYOR, buy in a place that everyone wants to be, and be patient. Thatís kinda the definition of investing.

If I buy a piece of land and hold it for 10 years, doing nothing to it, and gain no income from it, that is absolutely speculation. I think it would be safe to call this strategy "Land Speculation" Another example would be buying and holding Bitcoin/currency/precious metals. They do nothing, and earn nothing. One is simply hoping that you can sell them for more than you paid. 

Growth stocks, Amazon/Telsa etc that you mention are only worth anything because of the future expectations of cashflow. Sure they go up and down but everyone expects them one day to start paying a dividend. Or else what is the stock even worth? If you can only get paid by finding a greater fool than you?

in∑vest∑ment
/inˈves(t)mənt/
noun
1.the action or process of investing money for profit or material result.

By your own admission you have made almost no profit on your properties. When factoring in the opportunity cost of holding the property you likely lost money.

Unrealized capital gains is not profit. Maybe we refer to stuff differently up here in terms of P/L, finance lingo ect. but you have currently made almost nothing from your RE holdings.  Now can you sell them, and book a massive profit, sounds like you absolutely can, and that is awesome. 

It sounds like Sydney is absolutely bonkers, and no way I would get into that market because I would have no idea what I am doing. All I am saying is I invest to get a (monthly/yearly) profit. If there is not cash coming in from my investments there is no profit. Sounds like your doing great on the appreciation side, good for you.





 

clarkfan1979

  • Handlebar Stache
  • *****
  • Posts: 2310
  • Age: 41
  • Location: Pueblo West, CO
Re: when rents don't match home sales?
« Reply #27 on: April 05, 2021, 07:04:10 AM »
Hello! I on track to clear about $15,000 cash profit after tax this financial year from my two rentals worth $1,600,000* (net equity ~$600,000). And that's the best year I've had in terms of cash flow for 7 years of RE investing. But I don't care because I don't really want cash profits taxed at marginal rates.

In the same respect that sharemarket investors don't really want dividends if they're onto a good growth stock, I'm happy to keep booking outsized capital gains on my properties. The additional equity gives me the capacity to borrow more to buy more assets.

So notwithstanding the old trope of property increasing at the rate of inflation, it's the power of lower-risk leverage that allows you to consistently beat not only inflation, but compete well with index funds too on an after tax basis.

* The way the Sydney market is going, by the time I finish writing this post they'll probably be worth $1.7m

That sounds like a nice place to be in, good work!

However IMO you are a real estate speculator and not a real estate investor. The point of investing is to get a return. If you hold your investment long term it eventually pays for itself.

You know that growth stocks all eventually become a dividend stock right? (or at least they are suppose too). I would also advocate speculating on growth stocks is completely different from speculating on RE due to liquidity issues and transactions costs. Speculation is most of the time ok, but you run into the greater fool theory at some point. I am in no way saying this is where you are, but look up the south seas company or tulip mania.

Now Sydney is a strange place that I almost know nothing about. I assume you will keep doing well because I have heard that Sydney is making it hard to build more houses and thus constrict supply. But my thoughts would be your doing terrible on the investing side (15/600 = 2.5% return) but spectacular on the speculation side.

Good luck out there.

I take issue with a lot of this. If you hold a property for 10 years, you can hardly call it speculation. If the party were going to end it would have done so 25 years ago. At the end of the day you said yourself if the point of investing is to get a return, then absolutely I am getting a good one. Even if largely from capital gains. You think Tesla and Amazon shareholders would have preferred $1 per year dividends instead of $100 a year capital gains?

Supply is not an issue here, the city is absolutely deluged with hundreds of thousands of apartments. The people are screaming for it to stop but the governments are in the pockets of developers. So thereís more than enough dwellings for everyone, but everyone wants a certain type of dwelling.

Since you canít exactly make more land, prices rise to what the market will bear.

The city has an auction clearance rate of 96% for the past week. Basically you could list a dog kennel and get over a million for it.

Everyone keeps repeating the usual tropes on this forum about the market staying irrational longer than you can stay solvent and all that shit about market timing (see top is in thread), but apparently this only applies to stocks, and somehow property is different where you have to wait for a crash or things are priced too high and you shouldnít buy (isnít this market timing???)

Sounds incredibly hypocritical to me.

Now that doesnít mean I go out and throw stupid money at stupid prices. Iíve only bought when the cash yield is reasonable enough (on Sydney standards, which usually means rent covers interest, and youíre on your own to cover all other bills plus mortgage repayments from your pocket).

But I think a lot of you guys miss out by focusing on that $1 of dividends instead of $100 of capital gains. DYOR, buy in a place that everyone wants to be, and be patient. Thatís kinda the definition of investing.

I have some of your same concerns. It seems like cash flow on 1% deals dominates the forum. You can make money in real estate many different ways. I'm not sure why all the other strategies are incorrect.

I haven't sold any properties, but I've made money from rents and cash-out refinances. I've used the money to buy more rentals and index funds.

FINate

  • Handlebar Stache
  • *****
  • Posts: 2103
Re: when rents don't match home sales?
« Reply #28 on: April 05, 2021, 08:00:40 AM »
I take issue with a lot of this. If you hold a property for 10 years, you can hardly call it speculation. If the party were going to end it would have done so 25 years ago. At the end of the day you said yourself if the point of investing is to get a return, then absolutely I am getting a good one. Even if largely from capital gains. You think Tesla and Amazon shareholders would have preferred $1 per year dividends instead of $100 a year capital gains?

Supply is not an issue here, the city is absolutely deluged with hundreds of thousands of apartments. The people are screaming for it to stop but the governments are in the pockets of developers. So thereís more than enough dwellings for everyone, but everyone wants a certain type of dwelling.

Since you canít exactly make more land, prices rise to what the market will bear.

The city has an auction clearance rate of 96% for the past week. Basically you could list a dog kennel and get over a million for it.

Everyone keeps repeating the usual tropes on this forum about the market staying irrational longer than you can stay solvent and all that shit about market timing (see top is in thread), but apparently this only applies to stocks, and somehow property is different where you have to wait for a crash or things are priced too high and you shouldnít buy (isnít this market timing???)

Sounds incredibly hypocritical to me.

Now that doesnít mean I go out and throw stupid money at stupid prices. Iíve only bought when the cash yield is reasonable enough (on Sydney standards, which usually means rent covers interest, and youíre on your own to cover all other bills plus mortgage repayments from your pocket).

But I think a lot of you guys miss out by focusing on that $1 of dividends instead of $100 of capital gains. DYOR, buy in a place that everyone wants to be, and be patient. Thatís kinda the definition of investing.

When most people around here talk about "market timing" of stocks the implicit assumption is a broadly diversified portfolio of index funds/ETFs. The overall market is immensely complex, anyone that thinks they know where it's headed is delusional. So don't try to time it.

Buying an investment property is more analogous to buying a single stock. If you're going to drop $500k on TSLA (or whatever) you're well advised to do your due diligence to determine if it's a good return on risk. If the price is too rich it's better to move along to something else. This isn't market timing.

Furthermore, if you weren't just buying TSLA but instead borrowing $500k to buy it... I don't care how long you plan to hold it, that's a lot of risk on top of risk, especially for RE. Because although stocks and RE both generate revenue and (hopefully) profits, the analogy falls apart in the nuts and bolts of how corporations are valued: branding, intellectual property, market share, human capital, supply chains, etc. Whereas a building is an inanimate object that's mostly at the mercy of market forces.

So the key differences are diversification, leverage, and potential upside.

When I mention current RE valuations I'm not referring to a broad RE index, but rather actual wood and brick houses. Where I'm looking I cannot find any real properties that make sense as long term investments. Not saying they don't exist, I'm sure there are some out there, but I'm not seeing them.

dougules

  • Handlebar Stache
  • *****
  • Posts: 2297
Re: when rents don't match home sales?
« Reply #29 on: April 05, 2021, 11:16:24 AM »
I take issue with a lot of this. If you hold a property for 10 years, you can hardly call it speculation. If the party were going to end it would have done so 25 years ago. At the end of the day you said yourself if the point of investing is to get a return, then absolutely I am getting a good one. Even if largely from capital gains. You think Tesla and Amazon shareholders would have preferred $1 per year dividends instead of $100 a year capital gains?

Supply is not an issue here, the city is absolutely deluged with hundreds of thousands of apartments. The people are screaming for it to stop but the governments are in the pockets of developers. So thereís more than enough dwellings for everyone, but everyone wants a certain type of dwelling.

Since you canít exactly make more land, prices rise to what the market will bear.

The city has an auction clearance rate of 96% for the past week. Basically you could list a dog kennel and get over a million for it.

Everyone keeps repeating the usual tropes on this forum about the market staying irrational longer than you can stay solvent and all that shit about market timing (see top is in thread), but apparently this only applies to stocks, and somehow property is different where you have to wait for a crash or things are priced too high and you shouldnít buy (isnít this market timing???)

Sounds incredibly hypocritical to me.

Now that doesnít mean I go out and throw stupid money at stupid prices. Iíve only bought when the cash yield is reasonable enough (on Sydney standards, which usually means rent covers interest, and youíre on your own to cover all other bills plus mortgage repayments from your pocket).

But I think a lot of you guys miss out by focusing on that $1 of dividends instead of $100 of capital gains. DYOR, buy in a place that everyone wants to be, and be patient. Thatís kinda the definition of investing.

If I buy a piece of land and hold it for 10 years, doing nothing to it, and gain no income from it, that is absolutely speculation. I think it would be safe to call this strategy "Land Speculation" Another example would be buying and holding Bitcoin/currency/precious metals. They do nothing, and earn nothing. One is simply hoping that you can sell them for more than you paid. 

Growth stocks, Amazon/Telsa etc that you mention are only worth anything because of the future expectations of cashflow. Sure they go up and down but everyone expects them one day to start paying a dividend. Or else what is the stock even worth? If you can only get paid by finding a greater fool than you?

in∑vest∑ment
/inˈves(t)mənt/
noun
1.the action or process of investing money for profit or material result.

By your own admission you have made almost no profit on your properties. When factoring in the opportunity cost of holding the property you likely lost money.

Unrealized capital gains is not profit. Maybe we refer to stuff differently up here in terms of P/L, finance lingo ect. but you have currently made almost nothing from your RE holdings.  Now can you sell them, and book a massive profit, sounds like you absolutely can, and that is awesome. 

It sounds like Sydney is absolutely bonkers, and no way I would get into that market because I would have no idea what I am doing. All I am saying is I invest to get a (monthly/yearly) profit. If there is not cash coming in from my investments there is no profit. Sounds like your doing great on the appreciation side, good for you.

Real estate speculation (ie. holding. not renting or flipping) might even be worse than currency or precious metals because you have to pay property tax. 

ysette9

  • Walrus Stache
  • *******
  • Posts: 7470
  • Location: Bay Area, CA
    • The Best Is Yet To Come
Re: when rents don't match home sales?
« Reply #30 on: April 06, 2021, 04:21:39 PM »
I take issue with a lot of this. If you hold a property for 10 years, you can hardly call it speculation. If the party were going to end it would have done so 25 years ago. At the end of the day you said yourself if the point of investing is to get a return, then absolutely I am getting a good one. Even if largely from capital gains. You think Tesla and Amazon shareholders would have preferred $1 per year dividends instead of $100 a year capital gains?

Supply is not an issue here, the city is absolutely deluged with hundreds of thousands of apartments. The people are screaming for it to stop but the governments are in the pockets of developers. So thereís more than enough dwellings for everyone, but everyone wants a certain type of dwelling.

Since you canít exactly make more land, prices rise to what the market will bear.

The city has an auction clearance rate of 96% for the past week. Basically you could list a dog kennel and get over a million for it.

Everyone keeps repeating the usual tropes on this forum about the market staying irrational longer than you can stay solvent and all that shit about market timing (see top is in thread), but apparently this only applies to stocks, and somehow property is different where you have to wait for a crash or things are priced too high and you shouldnít buy (isnít this market timing???)

Sounds incredibly hypocritical to me.

Now that doesnít mean I go out and throw stupid money at stupid prices. Iíve only bought when the cash yield is reasonable enough (on Sydney standards, which usually means rent covers interest, and youíre on your own to cover all other bills plus mortgage repayments from your pocket).

But I think a lot of you guys miss out by focusing on that $1 of dividends instead of $100 of capital gains. DYOR, buy in a place that everyone wants to be, and be patient. Thatís kinda the definition of investing.

If I buy a piece of land and hold it for 10 years, doing nothing to it, and gain no income from it, that is absolutely speculation. I think it would be safe to call this strategy "Land Speculation" Another example would be buying and holding Bitcoin/currency/precious metals. They do nothing, and earn nothing. One is simply hoping that you can sell them for more than you paid. 

Growth stocks, Amazon/Telsa etc that you mention are only worth anything because of the future expectations of cashflow. Sure they go up and down but everyone expects them one day to start paying a dividend. Or else what is the stock even worth? If you can only get paid by finding a greater fool than you?

in∑vest∑ment
/inˈves(t)mənt/
noun
1.the action or process of investing money for profit or material result.

By your own admission you have made almost no profit on your properties. When factoring in the opportunity cost of holding the property you likely lost money.

Unrealized capital gains is not profit. Maybe we refer to stuff differently up here in terms of P/L, finance lingo ect. but you have currently made almost nothing from your RE holdings.  Now can you sell them, and book a massive profit, sounds like you absolutely can, and that is awesome. 

It sounds like Sydney is absolutely bonkers, and no way I would get into that market because I would have no idea what I am doing. All I am saying is I invest to get a (monthly/yearly) profit. If there is not cash coming in from my investments there is no profit. Sounds like your doing great on the appreciation side, good for you.

Real estate speculation (ie. holding. not renting or flipping) might even be worse than currency or precious metals because you have to pay property tax.
And insurance and maintenance and and and

ChpBstrd

  • Magnum Stache
  • ******
  • Posts: 2964
Re: when rents don't match home sales?
« Reply #31 on: April 07, 2021, 08:43:56 PM »
1% rule deals are still out there. In my Deep South LCOL city, I ran the numbers on a duplex in a fair/nice area for $140k where each side rents for $700. The spreadsheet posted in the sticky said my ROI with 25% down, a 4% mortgage, a 10% management take, and a few thousand in repairs per year would be over 8% in the first year and grow from there.

I passed it up because setting up an LLC and doing the taxes is a lot of work to only be able to invest $35k. I own REITs paying 7% and I can sell calls to earn even more just by clicking buttons versus spending a few hours a week on the part-time job I bought.

So yes, 1% deals are still out there. Just not in major cities or anywhere near the East or West coasts.

The thing driving property prices is interest rates.
The thing driving rents is wages / unemployment.
This alone explains the discrepancy between prices and rents.
The phenomenon of investors in HCOL areas being willing to accept near-zero best-case returns is explained by the huge payouts if their properties appreciate and the small amount of work required to leverage very large sums of money. I.e. dealing with a single renter and mortgage in San Francisco leverages the same amount of real estate as dealing with a dozen in Memphis or Baton Rouge.

SndcxxJ

  • Stubble
  • **
  • Posts: 114
Re: when rents don't match home sales?
« Reply #32 on: April 07, 2021, 10:53:08 PM »
The 1% rule is dumb.  Real estate is a business, an investment, and speculation all rolled into one.  If you only focus on one of those things the others are going to suffer.  If you NEED 1% to make any money you haven't focused on the business side of the equation enough.  You can do many, many things to help control costs and improve income.  MMMers are well suited for this exact task, because we aren't afraid of rolling up our sleeves and digging in to save some money and have some fun at the same time.
I operate in a HCOL area and real estate is just as crazy as it ever is.  I think there is a misconception on how some real estate investors work.  I buy with other people's money, so it's not like I can just invest in an index fund with those funds.  I don't have an opportunity cost associated with cash, but I do with my time.  Real estate is not a passive investment.  I make a full time, 7 days a week job out of it.  It's fun, rewarding, and profitable, but not passive.  I start making money at about .4% of rents, so at .6% of rents I'm rolling in it.  Any investors I work with are weighing their options and either diversifying away from indexes a bit, or don't trust stocks and are fully invested in real estate.  They, as passive investors, are making a decent return and are somewhat sheltered from the ups and downs of the real estate market.


waltworks

  • Magnum Stache
  • ******
  • Posts: 4929
Re: when rents don't match home sales?
« Reply #33 on: April 07, 2021, 11:43:23 PM »
MMMers are well suited for this exact task, because we aren't afraid of rolling up our sleeves and digging in to save some money and have some fun at the same time.

I generally agree with your post, but this part bothers me, because "rolling up your sleeves and digging in" is how I describe *work*, not an investment.

If you think taking a week to paint a rental house is fun, great. Have at it. You can come paint my house for free too, I'll supply the beer. If, on the other hand, that sounds like a *job* to you, then you should at least consider the 1% rule as a guideline when buying an *investment* property.

-W

Paper Chaser

  • Pencil Stache
  • ****
  • Posts: 624
Re: when rents don't match home sales?
« Reply #34 on: April 08, 2021, 04:18:27 AM »
I buy with other people's money, so it's not like I can just invest in an index fund with those funds.

You can take a loan, a mortgage, or a cash out refi and invest other people's money (OPM) into the stock market just as easily (or more easily) than buying real estate with OPM. Leverage isn't uniquely available to real estate investment and real estate alone.

former player

  • Walrus Stache
  • *******
  • Posts: 6349
  • Location: Avalon
Re: when rents don't match home sales?
« Reply #35 on: April 08, 2021, 04:31:27 AM »
I buy with other people's money, so it's not like I can just invest in an index fund with those funds.

You can take a loan, a mortgage, or a cash out refi and invest other people's money (OPM) into the stock market just as easily (or more easily) than buying real estate with OPM. Leverage isn't uniquely available to real estate investment and real estate alone.
My understanding is that borrowing to invest in the stock market is one of the things that had people falling off tall buildings in 1929.  If it's real estate you can live in it for almost nothing or have someone else pay even a little to live in it.  Having a row of cheap rentals (later demolished as unfit to live in) kept my grandparents solvent while raising 4 daughters in the Great Depression.

Paper Chaser

  • Pencil Stache
  • ****
  • Posts: 624
Re: when rents don't match home sales?
« Reply #36 on: April 08, 2021, 04:46:49 AM »
I buy with other people's money, so it's not like I can just invest in an index fund with those funds.

You can take a loan, a mortgage, or a cash out refi and invest other people's money (OPM) into the stock market just as easily (or more easily) than buying real estate with OPM. Leverage isn't uniquely available to real estate investment and real estate alone.
My understanding is that borrowing to invest in the stock market is one of the things that had people falling off tall buildings in 1929.  If it's real estate you can live in it for almost nothing or have someone else pay even a little to live in it.  Having a row of cheap rentals (later demolished as unfit to live in) kept my grandparents solvent while raising 4 daughters in the Great Depression.

We have stock market options now that didn't exist in the Depression. It's true that while Real Estate is unlikely to ever drop to 0 value, investing in an individual stock can. That's why people lost everything in the depression. But now thanks to index investing, the odds of a properly diversified stock investment reaching 0 value are probably the same as a real estate investment hitting that low point. People were killing themselves during the Great Recession because they were over leveraged and underwater on their personal homes and investment properties too. Leverage/debt/investing with OPM is a tool. Those who use it responsibly can see outsized benefit while those who misuse it can be hurt very badly. It's a risk/reward thing that's very individual.  Leverage cuts both ways regardless of the asset that it's used to purchase.

ChpBstrd

  • Magnum Stache
  • ******
  • Posts: 2964
Re: when rents don't match home sales?
« Reply #37 on: April 08, 2021, 07:10:18 AM »
I buy with other people's money, so it's not like I can just invest in an index fund with those funds.

You can take a loan, a mortgage, or a cash out refi and invest other people's money (OPM) into the stock market just as easily (or more easily) than buying real estate with OPM. Leverage isn't uniquely available to real estate investment and real estate alone.

Looks like the annual cost of 100k in margin is 2.57% today.
https://www.interactivebrokers.com/en/index.php?f=46376&p=m
Preferred stocks are yielding 5%.

Papa bear

  • Handlebar Stache
  • *****
  • Posts: 1709
  • Location: Ohio
Re: when rents don't match home sales?
« Reply #38 on: April 08, 2021, 10:57:02 AM »
The 1% rule is dumb.  Real estate is a business, an investment, and speculation all rolled into one.  If you only focus on one of those things the others are going to suffer.  If you NEED 1% to make any money you haven't focused on the business side of the equation enough.  You can do many, many things to help control costs and improve income.  MMMers are well suited for this exact task, because we aren't afraid of rolling up our sleeves and digging in to save some money and have some fun at the same time.
I operate in a HCOL area and real estate is just as crazy as it ever is.  I think there is a misconception on how some real estate investors work.  I buy with other people's money, so it's not like I can just invest in an index fund with those funds.  I don't have an opportunity cost associated with cash, but I do with my time.  Real estate is not a passive investment.  I make a full time, 7 days a week job out of it.  It's fun, rewarding, and profitable, but not passive.  I start making money at about .4% of rents, so at .6% of rents I'm rolling in it.  Any investors I work with are weighing their options and either diversifying away from indexes a bit, or don't trust stocks and are fully invested in real estate.  They, as passive investors, are making a decent return and are somewhat sheltered from the ups and downs of the real estate market.
So your investment donít make money unless you provide full time labor?  Thatís buying yourself a job. 

I would make more money if I went back to work 7 days a week too.   You make a compelling argument for continuing to invest in 1% ďruleĒ properties. 


Sent from my iPhone using Tapatalk

SndcxxJ

  • Stubble
  • **
  • Posts: 114
Re: when rents don't match home sales?
« Reply #39 on: April 11, 2021, 09:05:16 AM »
Waltworks and Papa bear,
I guess that is one of my points, real estate is a business and shouldn't be considered to be passive.  Trying to make real estate a passive investment leads folks to try to hunt out comparable returns to other passive investments like stocks/bonds, which leads people to seek out the lowest cost to gross rents possible.  However, in my opinion, this isn't advisable.  Much like how many people wouldn't recommend seeking out penny stocks or junk bonds even though on paper the return looks better than an index fund.
When a person accepts the fact that real estate will eat up some of your time, you don't have to go for the bottom of the barrel real estate investments.  A person can spend that time either doing the work themselves or creating a system of doing what needs to be done, much like any other business.  The returns are less risky, and potentially higher depending on how good you are.

waltworks

  • Magnum Stache
  • ******
  • Posts: 4929
Re: when rents don't match home sales?
« Reply #40 on: April 11, 2021, 09:58:53 AM »
Real estate CAN be a great passive investment, just not any time any place. Right now in the US it's so stupid expensive that the only way to make money is by betting on appreciation or "treating it as a business" and doing all the labor yourself.

It's perfectly fair to compare to either a passive investment like stocks if your plan is to buy properties and hire out management. Yes, you'll always have to put in *some* time, but if you set it up right, not much.

It's also perfectly fair to treat it like a business and figure out what your time is worth, then make managing your RE your job. For most posters here, that's not a great option as they already have a high-paying job of some kind, but it might be a great idea for some folks.

-W

Papa bear

  • Handlebar Stache
  • *****
  • Posts: 1709
  • Location: Ohio
Re: when rents don't match home sales?
« Reply #41 on: April 11, 2021, 11:08:47 AM »
Waltworks and Papa bear,
I guess that is one of my points, real estate is a business and shouldn't be considered to be passive.  Trying to make real estate a passive investment leads folks to try to hunt out comparable returns to other passive investments like stocks/bonds, which leads people to seek out the lowest cost to gross rents possible.  However, in my opinion, this isn't advisable.  Much like how many people wouldn't recommend seeking out penny stocks or junk bonds even though on paper the return looks better than an index fund.
When a person accepts the fact that real estate will eat up some of your time, you don't have to go for the bottom of the barrel real estate investments.  A person can spend that time either doing the work themselves or creating a system of doing what needs to be done, much like any other business.  The returns are less risky, and potentially higher depending on how good you are.
I donít disagree at all with this statement.  Chasing yield doesnít make sense, as per the crazy portfolio sale I mentioned up thread.   And you can still treat your real estate like a business even when you do find properly priced rentals. In my business I like to:

Get paid for capital.
Get paid for risk.
Get paid for management.
Get paid for maintenance.
Get paid for capital improvement labor.

At any point, I can outsource management, maintenance, and capital improvements and the business still makes good money.  Thatís the point of all this, right?  Otherwise I may as well just go back to W2 work and keep pounding everything into VTI. 


Sent from my iPhone using Tapatalk

caleb

  • Bristles
  • ***
  • Posts: 392
Re: when rents don't match home sales?
« Reply #42 on: April 13, 2021, 09:44:59 AM »
Quote from: SndcxxJ I buy with other people's money, so it's not like I can just invest in an index fund with those funds. 
[/quote

This ^ might be the most succinct explanation for why housing prices diverge from rents in growing markets consistently.

Residential real estate has uniquely low barriers to entry and leverage.

ChpBstrd

  • Magnum Stache
  • ******
  • Posts: 2964
Re: when rents don't match home sales?
« Reply #43 on: April 13, 2021, 10:22:03 AM »
Starting on 2/2, I started buying XLE, an ETF of energy companies, selling covered calls at the 0.1 delta against $41,358 in long stock purchases, and reinvesting the proceeds from the calls. Since then, I earned the following:

4.46% options gains
11.73% unrealized capital gains
1.18% dividend
-------------
17.37% total return ($7182.42) in <2.5 months, in a tax-deferred account
and 25 more shares than I started with...

I did this without paying any commission, doing any property inspections, setting up an LLC, planning a depreciation schedule, shopping for insurance, selecting and hiring contractors, painting, driving, researching rents or repair costs, dealing with tenants, hiring a manager, doing legal research, setting up a PO Box, setting up a checking account, or doing anything other than clicking buttons on a screen while sitting in a chair earning money another way. The investment I got into could be exited within seconds at the click of a button, and have limited downside.

Things like this that make it hard for me to invest the same money in a down payment and closing costs on a duplex / job, particularly in a high-priced RE market where mortgage rates could rise a lot.