actually, there are three factors: rocation, rocation and rocation.
Two Factors In Buying a House
- Thread starter OldTrader
- Start date
Quote from kubilai:
I know that I can't rent for the rest of my life. I haven't lived long enough to know if that ratio could ever become 1. Hoped an old-timer can tell me thatThough I've heard of people that made fortunes by buying up property, renting it out, wait for appreciation, taking a loan out to buy more property and renting that out too, rinse and repeat. Doesn't that business plan require the own to rent ratio to be below 1?
No - you make a downpayment sufficiently large to make cashflow neutral or positive. Or sustain negative cashflow for a few years until rents rise to breakeven. Or buy at a discount (e.g. from a motivated seller - unlikely in today's market) or add value (e.g. refurb) so you get your property cheap enough to be self-financing. One option is to buy a bigger place than you need to live in, then live in it and rent out rooms to others (rental yields on additional rooms are sometimes better than on whole houses or apts).
Different areas have different rental/ownership cashflow characteristics. Usually, the more glamorous or desireable places to live (e.g. California vs Alabama or Missouri; penthouses or beachfront villas vs starter homes or apt blocks) have lower rental yields on a permanent basis. Thus you cannot assess value purely by absolute rent/own ratios - instead, you should compile data for historical rent/own ratios. E.g. SF might be 2:1 now, but in 1995 (when SF and CA in general was cheap) what was it? If it was 1.5-1, then you know you should consider buying when it approaches that historically cheap level.
Also, remember you can always rent in a low yield area, and invest in a high yield area. If you can get 10% yields in the mid-west, and pay 3% yields to rent in SF, then why not buy a 500k apt building in the Mid-West, rent it for 50k a year, then use the positive cashflow to pay for your rents in SF. That way you still benefit from long-term real-estate cashflow & appreciation, you buy in a much more reasonably valued area, and you get to live in a nice place without risking a big hit if prices fall 20-30% as they have in the past. If the economy booms and rents rise, then your mid-west apt block will go up and rents will rise there too. Obviously you have management costs and distance problems etc, but it's an option worth considering.
Cutten:
When I made my statement I also said that the median prices had not declined NATIOWIDE in the last 50 years. To me what that means is that there are poor odds to a forecast of 30% down nationwide. Doesn't mean it can't happen....anything can happen.
So that it's clear, in my area price peaked last year. So far the area is muddling along....flat. This is what I expect for most of the US....flat to down somewhat.
I'm not expecting down 30%, down 80%, or the next Great Depression.
By the way, I play both sides of the markets, I cut my teeth on the short side. I just don't see the percentage in making a forecast that has no basis for it.
If prices are done for now on the upside in real estate, does that mean they must "crash"? I don't think so...and in fact, that is the history of real estate prices. Mostly they don't crash UNLESS there is an employment problem, in which case they come down 30%. That's history here in the US, with the exception of the Great Depression.
By the way, I've watched guys my entire career predict the next Great Depression. Prechter has been predicting it for the last 20 years.
But here's the one thing that seems to generally work out: When I tune into CNBC daily, and hear 10 times a day about the RE Bubble, and hear daily warnings, I don't figure a major top is at hand. Tops tend to come when people least expect them, not when they are publicized on TV a dozen times daily. Let alone the major publications in this country.
For the last several years I've had the good fortune of being warned daily right here on Elite Trader about the RE crash. Not only have these predictions been wrong....they were completely opposite of what happened.
OldTrader
trade-ya1,
That's right. This got me started thinking...
So, what one need to figure out is as follows:
1) The interest rate differential between now and 2 years down the road. This difference could be positive or negative depending on the direction of rates.
2) The cost/savings of rent vs paying the mortgage between now and 2 years from now with the 2years scenario having the same IR differential assumptions.
3) Assume the rate of appreciation/depreciation of your house if you buy it today. It could still go up for 2 more years before topping out. Or it could stay flat for 2 years. Or it could decline the next 2 years.
4) The opportunity cost(which is a lot harder to compute) between not buying now and 2 years down the road.
5) Then last you gotta figure out the PV(Present Value of all the above) by discounting at some appropriate discount rate that include the risk premium(could be a opportunity cost figure etc.)
And then you can compare the two scenarios. Have I forgotten anything? Please add to the model! It can be fun!
Question:
While knowing that Interest Rates cycle, answer this:
Would you like to pay a higher price for a Single Family Residence during a low interest rate cycle?...
or....
Would you like to pay a lower price for a Single Family Residence during a high interest rate cycle?...
Michael B.
P.S. Remember you can refinance...
While knowing that Interest Rates cycle, answer this:
Would you like to pay a higher price for a Single Family Residence during a low interest rate cycle?...
or....
Would you like to pay a lower price for a Single Family Residence during a high interest rate cycle?...
Michael B.
P.S. Remember you can refinance...
One factor that no one seems to take into consideration in all these scenarios is the fact that once "sentiment" changes, no one would touch majority of the properties out there with a ten foot pole!
No one would be able to determine how far things could go in the "other" direction and you would think twice before committing your money regardless if the price is 10% lower or 40% lower than the peak period...
McCloud,
Agreed. Appreciation, is the only thing attractive to investing in Single Family Residences after its all said and done...
Agreed. Appreciation, is the only thing attractive to investing in Single Family Residences after its all said and done...
You guys need a new game:
http://www.hedgestreet.com/
http://www.hedgestreet.com/
"Appreciation" is the one element I never made a real estate investment for.
What if you could buy a property so cheap, that when you fixed it up, and considering you costs of holding and selling, that you could resell it for a satisfactory profit. Would you buy it?
Now, what if you could buy a property so cheap, that when you fixed it up, and considering the type of financing you could place on the property after the fixup, that you would have very little to no money left in the property, and the property would rent for more than all of your costs to operate the property, to include repayment of the loan. Would you buy it?
Notice that neither of these has a thing to do with appreciation.
Finally, when you get right down to it, when you buy the residence that you live in it does not meet the criteria of an investment. It falls much more in the category of consumption.
The truth is that the pros in the real estate business don't buy property based on what they believe the appreciation will be. That is much too uncertain. They buy property when and if the conditions are such that a profit is certain. In my case I have never bought a property based on what the appreciation might be. I have bought property based on the factors metioned above. Appreciation as it happened has occurred. But that was not my motivation.
OldTrader