When the economy goes down people lower their expectations... people on the bottom get priced out. Sounds like a great time to raise rents. Worked well in 2001 from what I remember. But you weren't around here then were you?
That's a great theory you have on "move downs" pushing out lower end buyers. If you have any reliable sources to back up that BS, I'd be interested in seeing them.
Your MBA is from the University of Phoenix I'm betting. I take that back... I think U of P accredited.
When the economy goes down people lower their expectations... people on the bottom get priced out. Sounds like a great time to raise rents. Worked well in 2001 from what I remember. But you weren't around here then were you?
That's a great theory you have on "move downs" pushing out lower end buyers. If you have any reliable sources to back up that BS, I'd be interested in seeing them.
Your MBA is from the University of Phoenix I'm betting. I take that back... I think U of P accredited.
As a matter of fact I was around as I have been since '82. As for reliable sources, I experienced it firsthand. It's been reliable enough for me to profit from. I personally have no interest in changing your mind because when it gets down to the nitty gritty, I'll get you when you buy or I get you when you rent. It matters not to me. You seem to have an emotional investment in your belief and that's usually enough to manifest it as your personal reality. The fact that I still make home ownership a viable wealth building tool just upsets you no end, doesn't it? Like I said, it doesn't matter to me, as my reality is obviously different.
JD, Here's a sobering article about what's happening to the rental market elsewhere, after the market started to flatten. Good luck with your investment theory that past performance is a guarantee:
"The glut of U.S. properties for sale is about to hit the rental market.
A record number of homeowners who can't sell condominiums and houses are competing for tenants with the country's biggest apartment owners, led by Chicago-based Equity Residential, said Jack McCabe, the founder of Deerfield Beach, Fla.-based McCabe Research & Consulting.
Vacant rental apartments rose to 6.1 percent in the U.S. during the first quarter, the most in almost two years, even as the average monthly rent reached a record $991, said Sam Chandan, chief economist of New York-based real-estate research company Reis."
I managed a 15% increase in rental rates this year and the appreciation rate hasn't dropped much. Make no mistake, if appreciation rates go down your rent *will* go up. In the Puget Sound area there's a *lot* of room for rent to increase. If you're good at managing your own stock portfolio you may be right but I submit that if you're *that* good you can buy anything you want. Most of us are too far out of the insider loop to be making any kind of serious money in stocks. If I plug in $2500 rent for a $450,000 Ballard house it could *lose* at -1.5% in 7 years with a 15% rent increase rate and still break even at the 7 year turnover time. I don't see a decrease in appreciation rate going that low.
Here's a sobering article about what's happening to the rental market elsewhere, after the market started to flatten.
It's easy to understand why people get confused about the effects of a real-estate market on rents because the data is confusing. In most markets where the cycle has already played itself out (south Florida, say), rents actually rose when the housing market first began to show signs of weakness. This happens because rental inventory is lowest right at the peak, as landlords take properties off the rental market hoping to cash out (e.g. condo conversions) and increasing numbers of people decide to rent instead of paying the inflated property prices.
Eventually, however, many properties come back on the rental market as owners struggle to find buyers. Then rents fall again.
So, yes, rents may actually rise as the bubble begins to unwind, but they will eventually come crashing down as well. We've already seen this play out in other parts of the country, and I don't see why Seattle should be any different.
So, yes, rents may actually rise as the bubble begins to unwind, but they will eventually come crashing down as well. We've already seen this play out in other parts of the country, and I don't see why Seattle should be any different.
Exactly...and on this point: rents so far have barely kept up with inflation. So starting from today, 15 percent of next to nothing ROI is still next to nothing ROI. Remember to calculate that ROI based on what you would get if you sold the property tomorrow - not what you paid for it back in the 1990s.
As the market flattens, first there's a flood of cheaper houses, and then a glut of cheaper rentals from people who can't get their price, and hope the market will turn back around tomorrow.
Soft real estate markets though usually take several years to play out, and typically the market over-corrects on the down side. I don't think the market really starts to flatten here until 2008, and then we probably won't hit bottom until 2014.
A lot of time to have your nest eggs all in one basket, earning nothing.
As a matter of fact I was around as I have been since '82. As for reliable sources, I experienced it firsthand. It's been reliable enough for me to profit from. I personally have no interest in changing your mind because when it gets down to the nitty gritty, I'll get you when you buy or I get you when you rent. It matters not to me. You seem to have an emotional investment in your belief and that's usually enough to manifest it as your personal reality. The fact that I still make home ownership a viable wealth building tool just upsets you no end, doesn't it? Like I said, it doesn't matter to me, as my reality is obviously different.
As a matter of fact I was around as I have been since '82. As for reliable sources, I experienced it firsthand. It's been reliable enough for me to profit from. I personally have no interest in changing your mind because when it gets down to the nitty gritty, I'll get you when you buy or I get you when you rent. It matters not to me. You seem to have an emotional investment in your belief and that's usually enough to manifest it as your personal reality. The fact that I still make home ownership a viable wealth building tool just upsets you no end, doesn't it? Like I said, it doesn't matter to me, as my reality is obviously different.
So agree you have no source other than your ego.
We should all be so lucky as to be able to take our egos to the bank. I can only thank God and a positive attitude that my ego doesn't lead me to the same places yours does.
JD@Preview: I am curious as to whether you think there are good opportunities to buy profitable rental properties in the Seattle area today? Particularly rental investment properties that would do well even if one were to take a pessimistic assumption that the property appreciation were to go to 0 for the next 5 years.
What kind of return from rents should one expect with a property purchased in Seattle today?
george - "Exactly...and on this point: rents so far have barely kept up with inflation. So starting from today, 15 percent of next to nothing ROI is still next to nothing ROI. Remember to calculate that ROI based on what you would get if you sold the property tomorrow - not what you paid for it back in the 1990s."
ROI = (Revenue - Costs)/Costs
Thus you calculate the ROI based on what you bought the investment for...not what it would cost today. However, if you purchase another property today the ROI would be different, but the basis does not change until it is sold. For example for accounting purposes the book price of the land on your books stays the same until it is sold...then you "realize" the gain from a tax persepective.
But you also have to take into account opportunity costs. Compare the ROI from selling tomorrow and investing in a typical investment vehicle to the ROI from continuing to rent the property out. If you want to make the right decision with respect to opportunity cost then you should compute the ROI based on what you would get for selling tomorrow.
If you want to make the right decision with respect to opportunity cost then you should compute the ROI based on what you would get for selling tomorrow.
Are you infering that the only way a rental property investment in Seattle today would make sense is if one factored in the expected appreciation of the property? But I thought JD@Preview had already explained that Seattle rental properties are a great investment today, with a positive cash-flow.
Are you infering that the only way a rental property investment in Seattle today would make sense is if one factored in the expected appreciation of the property? But I thought JD@Preview had already explained that Seattle rental properties are a great investment today, with a positive cash-flow.
I can't infer anything without looking at specific numbers. Neither am I implying that rental investments do not make sense at the moment. Each situation is different and it may be the case that JD's rentals are rational investments going forward (they almost certainly have been stellar investments if he purchased a few years ago).
FWIW and take it with a grain of salt, I talked to an agent today who works exclusively for a REIT. He's been instructed to buy all the Snohomish County rental property he can get his hands on. Draw your own conclusions
FWIW and take it with a grain of salt, I talked to an agent today who works exclusively for a REIT. He's been instructed to buy all the Snohomish County rental property he can get his hands on. Draw your own conclusions
FWIW...I have a friend down here in L.A. that is a VP for Oppenheimer Investments.
They were all surprised when the subprime implosion hit.
FWIW and take it with a grain of salt, I talked to an agent today who works exclusively for a REIT. He's been instructed to buy all the Snohomish County rental property he can get his hands on. Draw your own conclusions
The total amount of capital raised in REIT security markets exceeded $38 billion in 2004 and 2005, and was running at a similar rate in 2006. Most of that capital raised was debt capital, a majority of which was unsecured.
Although interest rates have risen somewhat in the past two years, there seems to be no shortage of financial capital available for investment in real properties by REITs and private equity funds.
Now they need to invest it. Good deals or not, that money is going into the market. Given the growth of REITs over the past 5 years - I'll bet you have a bunch of jr. investors running them. Kind of like Venture Capital in 1999. Unless your buddy tells you it is Warren Buffet who's doing the buying- I'd say there is a good chance they will see the sort of substandard returns that most funds do when they are late arrivals to the party.
george - "Yes, technically, but what really matters is the discounted cash flow.
So you need to know what the rental property would sell for today so we can calculate the discount rate.
Right?"
Not exactly. DCF is calculated on your current Free Cash Flow from rents (the actual cash you receive), not what the property is worth today. If you were selling the property and re-investing it in another property it would need to be in the calc. If your DCF is above your hurdle rate then you should invest in it.
As for the discount rate, that is based on your current cost of capital. If you have a fixed rate mortgage then that is the Discount Rate (adjusting for other operating expenses).
Actually - in financial theory, the DCF is exactly what the property is worth today - under the theory that what you should pay for an asset is the present value of of all future cash flows discounted at your cost of capital.
So current value of a property should be the PV of rents less costs, + the PV of the terminal value - which would usually be the sale price.
George is just saying if you know the value today, and you know the future rents, you can impute the cost of capital.
of course, all this is theoretical and generally has no bearing on the cost of a properties. Most RE investors look entirely at cash on cash returns.
oh - and this statement
If your DCF is above your hurdle rate then you should invest in it.
Comments
That's a great theory you have on "move downs" pushing out lower end buyers. If you have any reliable sources to back up that BS, I'd be interested in seeing them.
Your MBA is from the University of Phoenix I'm betting. I take that back... I think U of P accredited.
As a matter of fact I was around as I have been since '82. As for reliable sources, I experienced it firsthand. It's been reliable enough for me to profit from. I personally have no interest in changing your mind because when it gets down to the nitty gritty, I'll get you when you buy or I get you when you rent. It matters not to me. You seem to have an emotional investment in your belief and that's usually enough to manifest it as your personal reality. The fact that I still make home ownership a viable wealth building tool just upsets you no end, doesn't it? Like I said, it doesn't matter to me, as my reality is obviously different.
"The glut of U.S. properties for sale is about to hit the rental market.
A record number of homeowners who can't sell condominiums and houses are competing for tenants with the country's biggest apartment owners, led by Chicago-based Equity Residential, said Jack McCabe, the founder of Deerfield Beach, Fla.-based McCabe Research & Consulting.
Vacant rental apartments rose to 6.1 percent in the U.S. during the first quarter, the most in almost two years, even as the average monthly rent reached a record $991, said Sam Chandan, chief economist of New York-based real-estate research company Reis."
http://seattletimes.nwsource.com/html/r ... ts06.html'
It's easy to understand why people get confused about the effects of a real-estate market on rents because the data is confusing. In most markets where the cycle has already played itself out (south Florida, say), rents actually rose when the housing market first began to show signs of weakness. This happens because rental inventory is lowest right at the peak, as landlords take properties off the rental market hoping to cash out (e.g. condo conversions) and increasing numbers of people decide to rent instead of paying the inflated property prices.
Eventually, however, many properties come back on the rental market as owners struggle to find buyers. Then rents fall again.
So, yes, rents may actually rise as the bubble begins to unwind, but they will eventually come crashing down as well. We've already seen this play out in other parts of the country, and I don't see why Seattle should be any different.
Exactly...and on this point: rents so far have barely kept up with inflation. So starting from today, 15 percent of next to nothing ROI is still next to nothing ROI. Remember to calculate that ROI based on what you would get if you sold the property tomorrow - not what you paid for it back in the 1990s.
As the market flattens, first there's a flood of cheaper houses, and then a glut of cheaper rentals from people who can't get their price, and hope the market will turn back around tomorrow.
Soft real estate markets though usually take several years to play out, and typically the market over-corrects on the down side. I don't think the market really starts to flatten here until 2008, and then we probably won't hit bottom until 2014.
A lot of time to have your nest eggs all in one basket, earning nothing.
So agree you have no source other than your ego.
We should all be so lucky as to be able to take our egos to the bank. I can only thank God and a positive attitude that my ego doesn't lead me to the same places yours does.
What kind of return from rents should one expect with a property purchased in Seattle today?
ROI = (Revenue - Costs)/Costs
Thus you calculate the ROI based on what you bought the investment for...not what it would cost today. However, if you purchase another property today the ROI would be different, but the basis does not change until it is sold. For example for accounting purposes the book price of the land on your books stays the same until it is sold...then you "realize" the gain from a tax persepective.
thanks for the laugh JD.
Are you infering that the only way a rental property investment in Seattle today would make sense is if one factored in the expected appreciation of the property? But I thought JD@Preview had already explained that Seattle rental properties are a great investment today, with a positive cash-flow.
I can't infer anything without looking at specific numbers. Neither am I implying that rental investments do not make sense at the moment. Each situation is different and it may be the case that JD's rentals are rational investments going forward (they almost certainly have been stellar investments if he purchased a few years ago).
FWIW...I have a friend down here in L.A. that is a VP for Oppenheimer Investments.
They were all surprised when the subprime implosion hit.
Draw your own conclusions.
Well, lets see. REIT are awash with money.... ]
Now they need to invest it. Good deals or not, that money is going into the market. Given the growth of REITs over the past 5 years - I'll bet you have a bunch of jr. investors running them. Kind of like Venture Capital in 1999. Unless your buddy tells you it is Warren Buffet who's doing the buying- I'd say there is a good chance they will see the sort of substandard returns that most funds do when they are late arrivals to the party.
Yes, technically, but what really matters is the discounted cash flow.
So you need to know what the rental property would sell for today so we can calculate the discount rate.
Right?
Funny you should say that. I *have* heard that before from his pilot. Not that it's terribly relevant to this discussion.
oh, not much is relevant to this thread. Its about the silliest discussion on this board. I am just tired of it scrolling to the top.
So you need to know what the rental property would sell for today so we can calculate the discount rate.
Right?"
Not exactly. DCF is calculated on your current Free Cash Flow from rents (the actual cash you receive), not what the property is worth today. If you were selling the property and re-investing it in another property it would need to be in the calc. If your DCF is above your hurdle rate then you should invest in it.
As for the discount rate, that is based on your current cost of capital. If you have a fixed rate mortgage then that is the Discount Rate (adjusting for other operating expenses).
So current value of a property should be the PV of rents less costs, + the PV of the terminal value - which would usually be the sale price.
George is just saying if you know the value today, and you know the future rents, you can impute the cost of capital.
of course, all this is theoretical and generally has no bearing on the cost of a properties. Most RE investors look entirely at cash on cash returns.
oh - and this statement is nonsensical. I think you mean IRR>hurdle