recession? r.e. bubble? what does it all mean??

[gravesend]

i am starting to worry.

i am in contract to buy 2 condo apartments within commuting distance to NYC and i had planned on renting them out. But based on my calculations of projected rental income, the ROI is roughly 4%. What happens in a recession? Will rents drop because people won't be able to afford as much? In that case, should i just ride the speculation frenzy and fix and flip again as I have been doing?

 

[brewer12345]

Has anything materially changed in the rental market since you entered into the contracts? I doubt it. If you were confident then, keep plugging and don't let the demons of doubt eat away at you.

Personally, I wouldn't be happy with a 4% yield, but depending on the market, maybe you will be able to raise rents faster than costs. Where are the rentals? Are they being financed? Adjustable or fixed rate?

 

[GTM]

I don't think rents will drop, rents are currently low in comparison to condo prices.
I think the value of the condo's may drop which may not effect your cash flow but would not be good if you plan on selling.

What you may want to consider is the amount of funds that you are investing in the apartments which can generate income and appreciation from other sources.

 

[retire@40]

I don't think rents will drop...

Rents have already dropped by about 25% in Massachusetts from the peak a year or two ago. I know some people already that bought rental property thinking they were going to get $X rent and now they are getting .75X and they don't think they can sell the "investment" property for what they bought it for plus the improvements.

Just like the stock market, real estate is great when it's going up, but when it goes down, it may be worse since it's not as liquid.

 

[maddythebeagle]

I think that you hit the nail on the head. Speculators dont have any piece of mind because you have to be lucky. Nobody knows what is going to happen. The housing market goes in cycles. That is about anybody knows.

 

[tryan]

4% return is good. I am averaging ~5% on my 6 units. But based on todays prices (especially commuting distance to NYC!) I question if your really getting 4%. Did you account for:

1. Vacancy - 5% of rents if your optimistic.
2. maintenance - 15%; incurred largely during #1 above.
3. insurance - 3 % need liability insurance in this business (I've been sued 4 times)
4. property taxes - 12%
5. water/sewage - 2%.

Much of this is probably covered in the condo fee ... so this should be easy. As a rule, if you can not pay the mortgage with half the rents your looking for trouble IMHO (based on the expences above).

 

[Mr._johngalt]

4% return is good.  I am averaging ~5% on my 6 units.  But based on todays prices (especially commuting distance to NYC!) I question if your really getting 4%.  Did you account for:

1. Vacancy - 5% of rents if your optimistic.
2. maintenance - 15%; incurred largely during #1 above.
3. insurance - 3 % need liability insurance in this business (I've been sued 4 times)
4. property taxes - 12%
5. water/sewage - 2%.

Much of this is probably covered in the condo fee ... so this should be easy.  As a rule, if you can not pay the mortgage with half the rents your looking for trouble IMHO (based on the expences above).

Good post. I agree! There are lots of "rules of thumb". Most of them are true

JG

 

[Mr._johngalt]

Good post.  I agree!  There are lots of "rules of thumb".  Most of them are true 

JG

Or how about this............."Life is a thousand cliches' and I believe
every one of them!"

JG

 

[Nords]

3. insurance - 3 % need liability insurance in this business (I've been sued 4 times)

I agree with the rest of your numbers, but I'm surprised that tenants actually get organized to pay a lawyer, file a lawsuit, and ride herd on the details.

Can you tell us more about the four cases? What percentage of your tenants/years of landlording does this reflect?

 

[gravesend]

you're right. i did not take vacancy into account. with that, the # is lower.
i'm usually cautious about making sure the rent at least covers the expenses (it's hard to find such a thing in NYC area unless you put a big down payment) hopefully, i'm ok with this one. i am wondering if being in a recession would negatively affect rents and by how much... based on historical facts.

thanks.

4% return is good.  I am averaging ~5% on my 6 units.  But based on todays prices (especially commuting distance to NYC!) I question if your really getting 4%.  Did you account for:

1. Vacancy - 5% of rents if your optimistic.
2. maintenance - 15%; incurred largely during #1 above.
3. insurance - 3 % need liability insurance in this business (I've been sued 4 times)
4. property taxes - 12%
5. water/sewage - 2%.

Much of this is probably covered in the condo fee ... so this should be easy.  As a rule, if you can not pay the mortgage with half the rents your looking for trouble IMHO (based on the expences above).

 

[Mr._johngalt]

you're right.  i did not take vacancy into account.  with that, the # is lower.
i'm usually cautious about making sure the rent at least covers the expenses (it's hard to find such a thing in NYC area unless you put a big down payment) hopefully, i'm ok with this one.  i am wondering if being in a recession would negatively affect rents and by how much... based on historical facts.

thanks.

Oh man, you gotta put in for vacancies. At the end what I did was assume the
worst, i.e. 1/3 vacant all year. High maintenance/big projects,
all unforseen, high crime, tornadoes and locusts. If it still cashflowed,
I tried to buy. Couldn't buy many as I lowballed every offer. But you
don't want every property anyway, and using my system, when you do buy
it's a no-brainer. The downside is it takes a lot of leg work to find them.
BTW...........I also tried for no money down deals (100% leverage).
Don't know anything about NYC, but you can do these all day long out here
in the boonies.

JG

 

[tryan]

Can you tell us more about the four cases?  What percentage of your tenants/years of landlording does this reflect?

Percentage is relatively low.  Exact numbers would be hard since tenants - and units - come and go.  At my peak I had 23 units tappered down to the 6 I still carry over 17 years (and counting).  Fair to say 4 law suits are across 100-120 tenants.

Here's the skinny:

2 Proverial fall down the stairs.  Paid the hospital bill on one; the second was handed off to my liability carrier.  Never heard how/if the second was settled.

1 "my agent" (contractor) "assaulted" (pushed) the nieghbor.  This was thrown out (even the contractor walked clean).

1 lead paint suit in the de-leaded unit.  Settled for 4 months rent (lawyers fees exceeded this cost).

So 2 of the 4 costs me "real" $$.  A third might have been paid by liability (But my guess is this was also dropped).

 

[tryan]

i am wondering if being in a recession would negatively affect rents and by how much... based on historical facts.

If the next down turn is any thing like '91-'94 rents will fall proportional property prices. Problem becomes 2 fold: 1) too many vacancies competing for fewer good/working tenants; 2) your neighbor can rent for less because he bought for less. I cut my rents by 20-30% for every vancancy in the recession; even lowered the rent for a couple informed current tenants (to keep them).

But some people did continue to pay above market rent; never complained; didn't want to move.

 

[Mr._johngalt]

Percentage is relatively low.  Exact numbers would be hard since tenants - and units - come and go.  At my peak I had 23 units tappered down to the 6 I still carry over 17 years (and counting).  Fair to say 4 law suits are across 100-120 tenants.

Here's the skinny:

2 Proverial fall down the stairs.  Paid the hospital bill on one; the second was handed off to my liability carrier.  Never heard how/if the second was settled.

1 "my agent" (contractor) "assaulted" (pushed) the nieghbor.  This was thrown out (even the contractor walked clean).

1 lead paint suit in the de-leaded unit.  Settled for 4 months rent (lawyers fees exceeded this cost).

So 2 of the 4 costs me "real" $$.  A third might have been paid by liability (But my guess is this was also dropped).

I never had that many units. The only time I was in court over a tenant
was just small claims court when someone moved owing me money.
All my other troubles were business disputes, or related to male/female
relationships.

JG

 

[Danny]

Oh man, you gotta put in for vacancies. At the end what I did was assume the
worst, i.e. 1/3 vacant all year. High maintenance/big projects,
all unforseen, high crime, tornadoes and locusts. If it still cashflowed,
I tried to buy. Couldn't buy many as I lowballed every offer. But you
don't want every property anyway, and using my system, when you do buy
it's a no-brainer. The downside is it takes a lot of leg work to find them.
BTW...........I also tried for no money down deals (100% leverage).
Don't know anything about NYC, but you can do these all day long out here
in the boonies.

JG

Yeah vacancies have to be dealt with - we try to minimize that by keeping rent increases low to retain long-term tenants and get new tenants in at market rent.

However, that being said, there is also this to deal with: Last year my property management co. had to go through extended expensive eviction proceedings (lawyer) - my expense.
End result lost 4 months rent, belongings and furniture hauled at my expense, $5000+ in cleanup and repair, because angry tenant punched holes in walls broke all the windows, stopped up drains and left water to run everywhere. Yes, I use a leasing company to screen. Management co. so far hasn't been successful recovering any money from the rat. Thank goodness I don't have to deal with the day to day. The 5% management fee is a bargin

 

[tryan]

5% management fee is a bargin

Just an observation ... you might be better off with a 12-15% manager.

Mine attended evicition hearings (no lawyer). And filled vacancies caused by eviction free of charge.

Point is - you get what you pay for. At 5% my educated guess is the manager is getting a kick-back for hiring contractors, lawyers ... ect. Certianly no incentive to find the best people. The $$ is in maintenance or "fast" vacancies, or evictions.

 

[Danny]

Point is - you get what you pay for. At 5% my educated guess is the manager is getting a kick-back for hiring contractors, lawyers ... ect. Certianly no incentive to find the best people. The $$ is in maintenance or "fast" vacancies, or evictions.

I hear ya.
So they get a kick back. They deserve it. I can live with it. Don't want to hassel finding someone that doesn't. How would I know? and still pay higher fee? If there was high turnover and expenses then I would fret - but I'm 2000 miles away and the net is about 40+% - no debt -so, no worries.