Secret to Real Estate investing

[Arif]

Here's a very good article on real estate investing.

http://money.cnn.com/2006/01/03/real_estate/profiting_down_market/index.htm

 

[Nords]

Great article.

Unfortunately its presence means that the boom isn't over yet. We won't hit bottom until we start seeing articles like "Real estate is dead-- sell everything now before it's foreclosed!!"

 

[Spanky]

Here is another article about the SF housing bubble.
http://patrick.net/housing/crash.html

Stroll down to the section Housing Bubble News Links for more links.

 

[Arif]

We won't hit bottom until we start seeing articles like "Real estate is dead-- sell everything now before it's foreclosed!!"

Oh man when that happens I'm screaming "Merry Christmas" and going blue light special shopping. Are we there yet? Are we there yet? Sorry, got a little excited at the thought.

 

[Spanky]

It might take some time before the bust. Some predict it might happen in 2009. If it ever burst, I wonder how many people will the money or gut to buy.

 

[macdaddy]

I am not sure that we will ever see "cash flow positive from day 1" properties in most US markets again... a lot of people argue that it really is "different this time" because there is so much more liquidity for potential borrowers (much easier to qualify for a home loan, even if they tighten it up, versus 20 years ago) and because there is much more education (e.g. books on real estate, the internet) now versus 20 years ago. My grandparents invested in properties in the midwest and I remember about 2/3 of them would not be cash flow positive until a few years in (and they would celebrate when each one was). Nowadays my grandmother complains the cap rate is 4% on her properties and rents haven't moved in 5 years. The money wasn't made from rents. Rents allowed them to hang on to the properties by covering the carrying costs and appreciation (read INFLATION) was what made them money over time. The one market where they tell me you can still make an 8% or 10% cap rate is section 8 housing and trailer parks. The nastier the tenants the better the return (common sense maybe).

I think it still makes sense to own rental property for one big reason - the same reason people own gold - inflation! When I can afford it, I plan to put enough down on some rental properties (20%-30%) to make them cash neutral and then never pay down the mortgage for the rest. Just let them sit there and pray for inflation.

Say you do that with a 200k duplex rental property. You put down 20% (40k) and it is cash neutral. You have a loan at 6% for the rest (160k). Inflation is 4%/year... which means you make 4% on the property (200k * 4% = 8k) plus you "make" 4% (also 8k) on the fixed-rate loan balance (because it's cheaper to pay off). So you have made 16k/year in theory on a 40k investment, which is a return of 40%. Even if the effects from inflation are more moderate you might see 20%/year. And eventually when they need to turn up inflation even more to help with the debt, you'd be in a great position to benefit. You win twice (double up your bet) because fixed-rate debt and real estate are both inflation hedges. Since there will "never" be deflation you can't lose.

Is my logic correct? I think part of the problem with the bubble is that some folks may have figured this out and be pricing it into their properties.

 

[tryan]

"They sell when everyone else is buying and buy when others are selling."

This is true ... always said you need to walk the unbeaten path to be successful.

My guess is it'll take 1/2 as long to hit the bottom as it took to get to the top. So 5 years and counting (~ 2011).

... a lot of people argue that it really is "different this time" because there is so much more liquidity for potential borrowers (much easier to qualify for a home loan, even if they tighten it up, versus 20 years ago) and because there is much more education (e.g. books on real estate, the internet) now versus 20 years ago.

Are you talking about the NASDAQ? When will we ever learn?

As far as hoping for inflation .... the problem is, inflation affects how far the $$ goes (as well as how easy it is made). It's a wash.

 

[macdaddy]

Oh yeah I suppose inflation would directly attack your return too so

"So you have made 16k/year in theory on a 40k investment, which is a return of 40%. Even if the effects from inflation are more moderate you might see 20%/year."

would actually be 20% and 10% returns, still not bad if they are compounded. I think mostly this strategy would count on the Government being forced into 5% 6% 7% inflation 5+ years out to start to monetize debt (that there is no way to pay back in real terms). That's why I am tempted to sit on low 30 year fixed rate mortgages now even if I foresee a slight decline in value in the future.

 

[Nords]

Nowadays my grandmother complains the cap rate is 4% on her properties and rents haven't moved in 5 years.  The money wasn't made from rents.  Rents allowed them to hang on to the properties by covering the carrying costs and appreciation (read INFLATION) was what made them money over time. 
I think it still makes sense to own rental property for one big reason - the same reason people own gold - inflation!
Is my logic correct?  I think part of the problem with the bubble is that some folks may have figured this out and be pricing it into their properties.

You'll have to ask your folks how easy it was to get a mortgage when they were buying their first properties. I bet loan ratios over 28% were uncommon and spouse's income wasn't counted. And perhaps not even more than an 85% rent rate (two months' vacancy per year).

I think the RE bubble is fueled by cheap loans. If we do see 4% inflation continue or even rise, we'll see the bubble deflate fast enough over the next decade.

 

[Marshac]

I think the RE bubble is fueled by cheap loans.  If we do see 4% inflation continue or even rise, we'll see the bubble deflate fast enough over the next decade.

I suspect you're 100% correct on this, but IMO, it's not just the cheap rates, it's the type of loan packages being offered in addition to the low rates- IO loans, Neg Am loans, etc. These packages allow the sellers to do what car salesmen do; sell the payment, not the price.

 

[macdaddy]

I think the RE bubble is fueled by cheap loans. If we do see 4% inflation continue or even rise, we'll see the bubble deflate fast enough over the next decade.

Don't you think that the Government will start to creep inflation up to help monetize the debt as more people retire? If the demographics in europe hit them as hard as they predict then the euro is not going to be a very attractive threat to the dollar as reserve currency. I think China et al will still put their money into US debt at 6%+ with inflation at 5%+ because 1) without our spending, their economy crashes, 2) there aren't really many other safe places to keep that much money, and 3) combined with #2 they are still getting a real rate of return. I think our being able to borrow money at that real rate of 1% might be a premium that we earn for maintaining the world's safe reserve currency.

I suspect you're 100% correct on this, but IMO, it's not just the cheap rates, it's the type of loan packages being offered in addition to the low rates- IO loans, Neg Am loans, etc. These packages allow the sellers to do what car salesmen do; sell the payment, not the price.

Yes - dead on - this is the new trend. And it won't hit these people until 20-30 years from now when they realize they only own 50% of their home (after all inflation and everything else) and can't afford to retire. Traditional mortgage payments are forced retirement savings that a lot of people wouldn't otherwise make.

 

[Nords]

Don't you think that the Government will start to creep inflation up to help monetize the debt as more people retire?

I think you're ascribing far too much foresight & intelligence to a large taxpayer-funded bureaucracy.

If it's just demographics then maybe someday we'll all be saying "I, for one, welcome our new overlord currency, the yuan."

Yes - dead on - this is the new trend. And it won't hit these people until 20-30 years from now when they realize they only own 50% of their home (after all inflation and everything else) and can't afford to retire. Traditional mortgage payments are forced retirement savings that a lot of people wouldn't otherwise make.

Perhaps most of them would realize that they still qualified for a reverse mortgage which would just defer the home ownership question to the probate process.

 

[macdaddy]

Foresight & intelligence has nothing to do with it (unfortunately)... when unfunded liabilities start to come due, the only choice the Goverment will have is inflation to help ease the pain. Why "do the right thing" for $2 trillion worth of Asian-held US fixed rate debt? Let's pay them back 50 cents on the dollar. Unfortunately those 30 year notes that grandma bought her grandkids for their birthdays are going to get caught in the slaughter.

 

[HFWR]

Coming up in Dallas: a "seminar" with Trump, Robbins, and Kiyosaki...

 

[Howard]

macdaddy, you are wrong, the Chinese intention is to replace the US purchasing with domestic purchasing.

China will soon no longer need the US as a market, and another fact, many Chinese are now returning as their skills and opportunities are in demand back in their home country.

The US economy is a basket case, the defecit gets wider, personal debt grows exponentially, and the people still flock to see the Gladiators fight while Nero fiddles as Rome burns.

Real estate is not a good investment right now, Sell when they are Buying, Buy when they are Selling, returns will be obliterated by high rates.

Today's rates are a once in a lifetime gift to become debt free, most Americans are doing the reverse and are refinancing at higher levels.

 

[usc_et]

It might take some time before the bust. Some predict it might happen in 2009. If it ever burst, I wonder how many people will the money or gut to buy.

It may take until 2009 to see the bottom, but the "bust" has already begun in many areas. Take a look at prices of new homes in San Diego, Florida, Boston, DC. Prices have been reduces substantially in these areas. As much as 100k in some reports. It is entirely logical that new home prices will lead the way down. After all, they led the way up. Many talk about "sticky" R/E prices. They are much more sticky for existing homes. A home seller generally has only one home to sell. They want to get the best deal possible. If they see prices dropping, or they are not getting their hoped for price, they may hold out hoping for prices to rise again. Large developers do not have that luxury. They must unload their inventory, as it costs them far too much to hold it. Also, they have nice profits built in, and are likely still profitable with a 100k discount from a 600k 2br, 1100sf condo.

Prices typically take 3-5 years to bottom out for real estate. 2009 to 2010 sounds about right.

 

[Howard]

The fundamentals are that the younger buyers are much less in numbers than the Boomer Sellers, and that the younger group do not have the cash resources available to buy what the sellers are demanding.

Immigrants only add potential buyers in certain regions, and may of these are not cash rich.

Demand<Supply= - Price

Demand>Supply=Price +

Economics 101.