Rental prices lead housing prices?

Also in the Real Estate decline of 1987 the true speculators
(people who bought apartment buildings in which the value was
based on their condo value) suffered serious losses.Many of them had their properties foreclosed on when the condo market crashed.
People who bought buildings in which the sale price was based on present rental income survived much better.In many cases the rental income did not change.Many existing tenants were paying below market rent so a decrease in the market rent
would have to be substantial to make them move.
Many investors in rental property are concerned with income 1st and price appreciation is just gravy.


Sort of a parallel to buying a handful of IBM,GE,MSFT
vs. a small cap biotech or tech stock.

and buying a 1 family house that requires 50% down to break even or a beach house with #'s even worse.

Even know in the beach house or 1 family, chances are they will have much greater appreciation,but the constant monthly income and and ability to keep a property which turns a profit is a huge benefit.

Plus to pyramid properties how many could be done if each one loses money?

 
Great thread. As someone who wants to make real estate a big anchor point of wealth building I would be very interested on any real estate books dealing with crashes. I live in Miami and I remember a lot of developers and condo owners losing their shirts when the condo market crashed in the late 80's. Would definitely love to read about this if anyone knows any good books as I was only 12 at the time.

My 1br condo I purchased in Sept 02 for 90k is now selling for 115K that's 28% growth in 1 year. That's probably a sign of an impending bust. These condos in 2000 where selling for 55-65K. My plan was to buy something we could easily afford and then move out and up in a year and rent it. The problem has been is that rents are so far from where PTI is that if you do an NPV analysis of any future cashflow it's almost equal to a cashout now assuming appreciation at 5%. Still I would like to keep it as investment and utilize that equity to purchase other properties for income flow not appreciation but the market is so frothy I just don't see any good deals. Everyone I know is jut flipping contracts on new construction or buying mega homes with low down payments (and getting into 0 down car leases) and talking about how they are building huge equity. Feels like 2000 but with houses. Instead of Tech geeks on the covers and people saying they are building a website it's so and so real estate guru and everyone is getting their real estate license. Just hording my cash and waiting for the crash and burn to pick up cheap stuff.
 
Quote from lrm21:

Great thread. As someone who wants to make real estate a big anchor point of wealth building I would be very interested on any real estate books dealing with crashes. I live in Miami and I remember a lot of developers and condo owners losing their shirts when the condo market crashed in the late 80's. Would definitely love to read about this if anyone knows any good books as I was only 12 at the time.
More...

Just thought I would point out that in 1986 I believe, the tax law changed. Specifically, the change had to do with how depreciation was handled. Up until that point, many in real estate were buying as a tax shelter, using accelerated depreciation to write off more than their investment against ordinary income. Therefore, many made investments based only on their tax consequences rather than their cashflow. When the tax law was changed, real estate crashed because the deals made no sense.

After that, deals were done based on the numbers. But understand that a 1BR condo, or a single family house are for living in, not for renting, unless you are capable of buying them cheap enough. There's no way to buy them cheap enough most of the time unless you have a very motivated seller, and in all probability, a property that needs considerable work.

Sometime what people forget is the long term power of real estate. Here's what I mean: you pay your mortgage for 30 years, and then you own the property free and clear. That's some real power when you think of it. Imagine yourself 30 years from now with a number of properties with no mortgage, all cranking rent out.

Does it make any difference what the value of the property is? If you are renting the property long term, I would say no. What it amounts to is that if you were successful in acquiring properties which through cash flow paid the taxes, insurance, and repairs, along with the mortgage, the renter bought your property for you.

If you bought the 100K property in a crash for let's say 70K, a $30K discount, that amounts to $1K per year over 30 years. In other words, the discount becomes less important than the cashflow over time.

Just a few thoughts. There's a number of good real estate site on the internet. Do a search.

OldTrader
 
"If you bought the 100K property in a crash for let's say 70K, a $30K discount, that amounts to $1K per year over 30 years. "

no it does not, interest rates have a coumpounding effect on bad investments (ie $1kyear + interest)....
 
Quote from vak:

"If you bought the 100K property in a crash for let's say 70K, a $30K discount, that amounts to $1K per year over 30 years. "

no it does not, interest rates have a coumpounding effect on bad investments (ie $1kyear + interest)....
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I guess you and I look at this differently. If I were successful today in buying a property at a large discount....I reduce the value of my discount by holding the property for 30 years....is this not true? Therefore, the value of buying at signficant discounts becomes less important (not unimportant) if your goal is to hold the property 30 years.

I mention this because today none of can know whether we will be able to buy a property at a 30% discount to today's prices precipitated by a crash. And perhaps, again, it becomes less important depending on what your plan is.

What becomes more important in a 30 year plan is the cashflow that the property throws off. Appreciation is just one component of return.

Now do me this favor....figure your return on property assuming that no crash takes place, and that buying a property at a 30% discount never presents itself. See my point?

If you know for certain that you can buy at a discount then you should. I'm just fascinated at how anyone 'knows' this with certainty.

OldTrader
 
Oldtrader,

I respect you and your posts about trading.

I was leading to the cash flow issue earlier....isn't this what I was saying?

Appreciation, discount and equity building really have nothing to do with it. They are factors in the worksheet....but positive cash flow is hard to come by if you figure your costs correctly. ALL THE COSTS.

After prop taxes, cost of money, maintenence, property management, HO/fire ins, vacancy, down time, taxes on the rent you receive and reserve for major repairs.....there is not much positive cash flow in single family dwellings.

Too much management for too little money....plus I do not like fixer uppers and home depot.....and if you need to hire you help...well that comes off the bottom line of the rehab project.

The only people that I know in the fixer upper biz and most successful are contractors...and these guys just turn the property as fast as they can...they would NEVER rent it out.

Michael B.



Quote from OldTrader:




I guess you and I look at this differently. If I were successful today in buying a property at a large discount....I reduce the value of my discount by holding the property for 30 years....is this not true? Therefore, the value of buying at signficant discounts becomes less important (not unimportant) if your goal is to hold the property 30 years.

I mention this because today none of can know whether we will be able to buy a property at a 30% discount to today's prices precipitated by a crash. And perhaps, again, it becomes less important depending on what your plan is.

What becomes more important in a 30 year plan is the cashflow that the property throws off. Appreciation is just one component of return.

Now do me this favor....figure your return on property assuming that no crash takes place, and that buying a property at a 30% discount never presents itself. See my point?

If you know for certain that you can buy at a discount then you should. I'm just fascinated at how anyone 'knows' this with certainty.

OldTrader
More...
 
I kind a look at it like this:

Daytrading=rehab turnover for the pro contractor

Long term Investing=rent out the old house you grew up in and buy another.....get lucky with some appreciation and buy another...then call Mr. Market....and tell him how Huge you are...:)

But then you are 80 years old....better off trading at that age...

Michael B.
 
Quote from ElectricSavant:

Oldtrader,

I respect you and your posts about trading.

I was leading to the cash flow issue earlier....isn't this what I was saying?

Appreciation, discount and equity building really have nothing to do with it. They are factors in the worksheet....but positive cash flow is hard to come by if you figure your costs correctly. ALL THE COSTS.

After prop taxes, cost of money, maintenence, property management, HO/fire ins, vacancy, down time, taxes on the rent you receive and reserve for major repairs.....there is not much positive cash flow in single family dwellings.

Too much management for too little money....plus I do not like fixer uppers and home depot.....and if you need to hire you help...well that comes off the bottom line of the rehab project.

The only people that I know in the fixer upper biz and most successful are contractors...and these guys just turn the property as fast as they can...they would NEVER rent it out.

Michael B.
More...

I think you're exactly right....if you're going to hold the property long term as a rental, then it's all about cashflow. Where you and I disagree is whether acceptable cashflow is achievable. In my area (the Midwest) it is.

What most people do not realize about real estate is that it is a very inefficient market. For instance, if you have plenty of time to sell your house, you might get $100K. If you need to sell it this week though, what do you think you can get? I can tell you if you need to sell in one week, your buyer in all likelihood has to be someone who does not need to get the conventional mortgage. That means someone with $100K cash, or immediate access to it. The problem is that a guy with $100K cash won't utilize it unless the rate of return is large...and therein comes the discount. If you want to sell a house in one week, you will not get $100K, you will like get a very sharp discount...like perhaps $70K.

Now, imagine a house that needs a roof, new plumbing, new wiring, and various cosmetics. If you have a 'retail buyer' who needs a mortgage, the problem becomes that the mortgage lender will not finance a house in poor condition. So again, we're back to the guy with cash, or access to it.

I'm simply illustrating some situations that occur all the time that create 'discounts' in what is really a very inefficient market. Depending on the size of the discounts, and the rental market itself, some of these situations can result in a very healthy cash flow.

Believe me, I don't work on houses. I hire people. I also know how to figure my cash flow after taxes, insurances, repairs, and deferred maintenance....I've been investing in real estate for most of my adult life.

And yes, it's true that most contractors turn the property over...that's because they buy a 'job' rather than an 'investment'. But it may interest you to note that the largest single expense when you rehab and sell a property is the taxes you pay on the profit.

I'm not suggesting that someone buy just 'any' property and then rent it out. I'm suggesting that if you spend the time and effort to find a deal, they are out there, and that these deals look different in terms of cashflow than what you are used to.

I like the rental real estate because it is more 'solid' than trading. If I want to quit trading, I have other income. I don't want to quit...but who knows, perhaps the day will come.

My cashflow as a % of my cost basis on real estate is very large. But I'm very discriminating in what I will buy.

OldTrader
 
Homes were never meant to be an "investment". They are a place to live. In the 50's, 60's and early 70's people just wanted to "burn the mortgage" and hope the house was worth what they paid for it. The vast majority of people buy a house for emotional reasons. They like the neighborhood, schools, etc.

The government (Fed, State Local) all promote homeownership as this builds a solid foundation for the infrastructure that government has to build and maintain. Streets, utilities etc. This is why the government gives such large tax breaks to real estate, especially residential. But as rates decrease it actually hurts the apartment owners as the best qualified tenants move out and buy a house for the same or less as their rental payment. But the OWN their own HOME. A lifelong dream of most people.

In recent years I would bet that the majority of new home ownership especially of "starter" homes has been from newcomers to the US. In most countries home ownership is totally out of the question for these people.

Now, an increase in mortgage rates will affect this market but only in new construction, not in the value of the existing homes. The builders should slow down as the higher rates will eliminate some people from qualifying for the loan.


Also, only in certain areas, both coast and some other large cities has the real estate gone up in any meaningful amount. In most of the country you can buy a nice home for $100,000, more or less. I live in Houston and we have an abundance of buildable land so the median price is still around $125,000. You can buy a new home for this or less.

Commercial real estate is different. It moves with the economy, demand, location, interest rates etc. Not for the "amateur".

I think Greenspan has doubts about rates going up anytime soon. Rates stayed at a fixed amount for decades before the 70"s brought inflation.

SteveD
 
"I guess you and I look at this differently. If I were successful today in buying a property at a large discount....I reduce the value of my discount by holding the property for 30 years....is this not true? Therefore, the value of buying at signficant discounts becomes less important (not unimportant) if your goal is to hold the property 30 years.

I mention this because today none of can know whether we will be able to buy a property at a 30% discount to today's prices precipitated by a crash. And perhaps, again, it becomes less important depending on what your plan is.

What becomes more important in a 30 year plan is the cashflow that the property throws off. Appreciation is just one component of return.

Now do me this favor....figure your return on property assuming that no crash takes place, and that buying a property at a 30% discount never presents itself. See my point?

If you know for certain that you can buy at a discount then you should. I'm just fascinated at how anyone 'knows' this with certainty.

OldTrader"


oldtrader i was getting your point,

my point is that you have to compare every investments you make with the yield diferential it offers over treasuries bonds

hence the present value your house is given by
what it yields/what the bond market yields = housing prices depends on treasury yield,

=>$tnx is a different affair from the housing market in as much as we're talking of a quoted instrument here (not some sentiment gauging at a bbq party)
and unless you are of the view that march's low on $tnx are to be tested again in the forseenable future (whish again is different from top picking given the size of the move since then)
then you have to considere that we're at or very close of a cyclical top in the housing market

now this, of course, does affect your investments profitability differently depending on whetever your inveting with locked rates or floating a one

personnaly i never considered housing to be an investment
(too much taxes and too cyclical in nature and too leveraged)
 
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