Rental Properties - Investment or Junk?
Hi all,
I have to admit that I've been a huge fan of SB and the forum community since 2007... for some reason, I never managed to create a forum account... until now!
My question on hand is essentially this: what's your assessment of rental properties in a down market?
I have a huge stake in this position as I own four houses, all of them are rentals as I moved out last year from my primary residence. I am fairly competent in finance/accounting and I am a RE agent (one of the reason why I wanted/was able to invest in real estate).
From a cashflow standpoint, assuming that housing in Seattle stays flat for the next 5 years (you can argue that it will drop but I think recovery in 2014 back to today's level is possible), my cash outflows = rental income.
My only obligations are partial taxes (some are included in regular outflow) and maintenance which I estimate to be $5,000 to $6,000 a year overall. Overall, my analysis still shows a positive - although somewhat lower ROI in the range of 6-7% using a 2% growth after 2014.
Can anyone give me insight on my strategy and whether this is viable? It really hurts to sell right now considering that I may need some major remodeling before I even think about it.
I have to admit that I've been a huge fan of SB and the forum community since 2007... for some reason, I never managed to create a forum account... until now!
My question on hand is essentially this: what's your assessment of rental properties in a down market?
I have a huge stake in this position as I own four houses, all of them are rentals as I moved out last year from my primary residence. I am fairly competent in finance/accounting and I am a RE agent (one of the reason why I wanted/was able to invest in real estate).
From a cashflow standpoint, assuming that housing in Seattle stays flat for the next 5 years (you can argue that it will drop but I think recovery in 2014 back to today's level is possible), my cash outflows = rental income.
My only obligations are partial taxes (some are included in regular outflow) and maintenance which I estimate to be $5,000 to $6,000 a year overall. Overall, my analysis still shows a positive - although somewhat lower ROI in the range of 6-7% using a 2% growth after 2014.
Can anyone give me insight on my strategy and whether this is viable? It really hurts to sell right now considering that I may need some major remodeling before I even think about it.
Comments
I think it is a pretty tall assumption to think that prices won't decline much more. In fact, I believe we are in for massive price declines in the coming years, far in excess of 50% greater declines in median prices than we've already seen. The other thing to keep in mind is that rental rates are liable to decline in the next 5 years as well. Already we have seen erosion in Puget Sound rents over the last 6 months, and my belief is that they will drop substantially in the next few years.
If this scenario I predict plays out, landlords can expect to own assets that are dropping in value year after year for 5 to 10 years, as well as face declining incomes on the same properties (i.e. as rents fall). Things are going to be tough (unless you are a renter, that is).
If you want to see my reasons for expecting a major decline in asset prices, check out my podcast on deflation at:
http://www.surkan.com
This is a bad way to state that assumption but I guess I am looking at 5 years out and hoping that the recovery will bring housing back to today's level, which I think is possible.
While it is "possible" housing prices will return back to current levels (which are already off of peak) in 5 years, I think it is highly unlikely. I believe we are headed to a lengthy period of asset price declines (where the dollar gains purchasing power). Moreover, even when he hit "bottom", I expect us to drag along for a good 4 or 5 years after that with barely noticeable appreciation.
I'd keep rents flat even if other people are raising thiers. It depends on where the properties are. If they are prime rental locations you may be in for a ten year hold. If not figure out how to pay down the principle balance, they may end up being your retirement fund.
sniglet did start me thinking about credit markets. The Financial Markets are a mess. When Obama was talking about building lender confidence it sent shivers down my spine.
Phrases like "we need to get credit flowing again" or "businesses need credit to float pay roll" should be a warning signal that something is very wrong.
When the government gave "bail out" money to auto manufacturing that was a sure sign we were in for some very deep and long running hard times.
Kind of a good news portion is that properties will be cheap. There is a thing called averaging. You can average rental incomes or equity. You own four at what length of time? Are they all thirty year fixed mortgages?
You may be able to trade your self into a better position. Talk with other owners, join trade organizations such as Apartment Managers, or CBA. Talk with others who are in the same situation.
I can say with assurance that in the very worst of economic times people will do unusual things. Some people will walk away from perfectly good properties. Stay alert and you may be able to average your way into a better cash flow. If worse comes to worse you can lease option .