I'm not talking about what happened, when The Fed began to monetize our debt, artificially keeping interest rates low. I'm talking about what happens when we can no longer monetize our debt. You're old enough to remember the Carter era and the recession of 81. To wring inflation out of the system, Volcker let interest rates rise, which caused a deep and painful recession. However, it also got us the boom of the mid-80s through the dot.com bust. We're going to have to do it again, as there's no way around the math.
We had a weak economy and they increased. Supply and Demand. All the people foreclosed on needed to move _somewhere_.
Precisely. I wasn't even going to discuss weak economic conditions, simply the history of rental increases compared to interest rates on an inflation-adjusted basis.
Here's the math. $60K cash to buy the condo. $1500/month rent. 40 months (less than 4 years) and you're playing with the house's money. WHO CARES IF THE PRICE GOES TO $0 ?
I believe rents can rise in a weak real estate market, simply because of the increased demand. Less people being able to afford housing = landlords are able to charge more than usual since there will be a bigger pool of potential renters. There will be an increased number of rental options too, but I don't think the rental prices and housing prices rise and fall together. Rental prices for an area are more or less set...you know how much a 2 bedroom in "X" neighborhood is going to run...however, the price of a house in that same neighborhood will fluctuate greatly based on the market conditions.
Awesome. There are lots of things wrong with that assumption, but let's look at a simple one: You're just assuming that people will be forced to move to the location of your rental. Good luck with that.
$1500/mo on a $60K purchase? Please, tell me more about how common 30% cap rates are. Markets for even Class C properties are 15-17%, and you're not charging $1,500/mo. They're out there, but they're temporary.
I also like the part of the "math" where property taxes, maintenance costs, association fees, utilities (in some cases) and vacant months are ignored. Obviously it's free, risk-free money. Arbitrage, baby!
It was such a ludicrous example, I didn't even bother with the loan calcs, T&I and R&M. Not to mention that if you're willing to pay $1,500 a month for a $60K property, you could easily purchase one much nicer.
I don't assume anything other than the casinos nearby will stay in business and the workers got to eat.
And there won't be layoffs of those workers. And those workers won't consider living with roomates during a downturn which decreases demand for rentals. By all means, continue with your assumption that rental homes are risk-free investments that get you to "using house money" in less than 4 years.
First of all, it's not a ludicrous example. I know several people who bought those kinds of properties by the dozen. Second, I did the leg work of working the MLS listings and produced ROI statements for a number of those deals. Third, where do you get the idea there's some sort of "loan calcs?" The properties are all paid for with cash. The lenders won't lend on those anyway because they fear the associations will go under. They only lend on sites with like 80% of the units rented. Fourth, the association fees are typically under $200, and the DEPRECIATION is about $200. Fifth, property tax is about $40/mo.
My assumption is my rent was $1600 and now it's $2300. EDIT: It's been unoccupied for a month for the past 6 years, 3 different families rented it.
Denny, I think the point BB30 and I are trying to make is that while there are certainly individual examples of such properties (I have a few of them myself in my personal portfolio), it isn't normal and it's certainly not a long-term outcome. If there's a market with a 30% Cash on Cash return, then that market will be flooded with investors seeking returns. At a 30% annual return, you would be smart by leveraging as much as you can below a 30% interest rate and purchasing as many of these properties as possible, increasing your CoC. Of course, you can't because they don't exist on a large scale. And that's our point.
There is some risk involved. The association could go under. You now have a building that has a roof blow off, air conditioning fails (in Vegas, that's an emergency), the grass isn't mowed, etc. Nobody will rent a place that's not kept up. The trick for us was to pick out the units in complexes that were in desirable locations, reasonable cost of upkeep, high % ownership or occupancy (we looked at the county records for each property), etc. The thing is, no matter what happens other than the place burning down or the casinos going out of business, the places are going to shed ~$1500/mo in cash each. And the rents will go UP, not down. Even if it's 5% every 5th year. They did exist on a large scale. But the banks wouldn't lend on them. That's why virtually every one of them was an all cash sale. If the banks would have lent, I'd have bought a couple myself. There were a number of single family homes in the $100K range with similar rent to price characteristics. The CoC argument makes little sense. You'd still have to put down a lot down to make up for the mortgage interest rate. Something like 4.5% for a 20 year loan on investment property. That's just to break even, and then you ARE banking on appreciation or paying off the loan to capture a comparable return.
:bangshead: Sigh. Okey dokey. I guess you really do know it all when it comes to RE investment. Good luck finding that 30% IRR; according to you they're everywhere. And here's a simple rule: Until your marginal return equals or is less than your interest rate, you borrow as much as you possibly can.
