Renters left hanging after foreclosures http://www.mercurynews.com/business/ci_7024126?nclick_check=1 Several months ago, Eugene Wright found a foreclosure notice posted on the door of the three-bedroom South San Jose house he and his family had been renting since January. He called his landlord, who told him not to be concerned. It wasn't until a real estate agent showed up in July to tell him that a bank had repossessed the house that he realized he had to move. "He was saying 'Don't worry about it, just keep paying the rent,' " Wright said, referring to the landlord --- Too Funny
Awesome stuff. To make the case stronger, its important to point out that the tenant's monthly payment will go up at 3 to 4% a year, and even during the 15 years that the homeowner is paying off the house, his payments will stay mostly flat since the only variable is the smaller portion of the payment that is taxes and insurance. Also, you could also factor in the write-off that the homeowner makes while making payments, but I guess one could argue it washes with the maintenance costs. But...in my experience, my tax break is always bigger. Gotta say, I wish everyone was a tenant. They make us landlords rich. SM
Rock on! Another thing that people don't get is that you don't have to pay something off to cash in. If I put $500K of my own money (or pledged equity...yummy) into the purchase of a $5 million dollar apartment complex, and then just barely make ends meet over a 5 year period, then the complex's value would be about $6 million. If I then sold, I get my $500K back, plus the million dollars in equity that I "earned". Ideally, I would fill it with people who are confident that they are making a fortune by renting from me in a down market instead of buying a house. Seem to be more of those these days and my phone rings like never before. SM
I think you are right. I raised my rents 20% this year and have had no problem finding tenants. Guess there are lots of people who want to get rich
Most of the people here are completely missing the point; if housing, according to Case and Shiller, barely has long-term appreciation in excess of inflation, and if the cashflow from rental is substantially below the T-bill rate, then your long-term overall ROA is around 6-7%. Which, incidentially, is roughly what a 30-year mortgage costs today. If you are paying 6.5% to leverage an asset that returns 7% in the *long-term*, then you are only earning a 0.5% spread, and to earn a 10%/annum return, you need to use 20X leverage. Obviously very risky. Even if the spread widens to 2%, you need to use 5X leverage just to obtain a 10%/annum ROE. 10X or even 5X leverage is *very* risky, even in real estate. But you can park your cash in a stock porfolio and earn 10%/annum in the long term fairly consistently (the long-term return of the Dow or the S&P500 is around 10%/year) without using leverage, on a tax advantaged basis. If you apply even moderate amounts of leverage (again, tax-advantaged), you can increase long-run ROE far beyond that available with investment in housing. What you have been seeing in the past 2 decades has been asset re-pricing. With stocks, we refer to this as P/E multiple expansion, which, of course, is completely unsustainable and will eventually revert to the mean.
Also, you might ask yourselves why most major corporations in America have been offloading their real estate to REITs and to other buyers gradually over the past decade. Why? Because they see that property is in a bubble, and they can rent, and deploy their capital towards other activities that are far more profitable. If property ownership was such a great deal for businesses, then every CFO would be clamouring to buy into condominium-style commercial real estate for their operations. They'd be buying fractional ownership positions in retail centres. They'd be using substantial amounts of their on-balance-sheet cash to buy up as much real estate as they could use. After all, its such a great investment, better than investing in their own operations, eh? (sarcasm). Better than buying back their own stock very inexpensively. In most places in America, RE is priced at a P/E well over 20 at the moment, and has a long-term growth rate of inflation. None of us would bid for a stock at a multiple of 20 and a growth rate of inflation -- why pay such inflated valuations for real estate? The author of that article, IMHO, is right on the money.
cash is king right now, if you could buy a house cash, then do it. Sooner or later, soldiers will be returning from war. Baby boomers will retire and help out the ever sinking florida. CASH IS KING....
OK, one of us is failing to see the other's point. In real estate, you either take out a mortgage (lets say at 6%), and you pay interest on the amount borrowed, or you pay rent. I promise you, that when you rent, you're still paying down the mortgage, (for someone else) which is the same 6%. Whether you rent or purchase, you're still paying as much as, or almost as much as, a mortgage payment due to market forces. By your logic, if I'm renting, I when I calculate my stock portfolio return, I should take that 6% I'm indirectly paying for housing away from the 10% I'm making in stocks. But you can see the fallacy with that logic. You shouldn't do that for the same reason you don't subtract out your grocery bill when you calculate your stock portfolio return. Here's what I don't think you're getting. (Truly, pardon me if I'm wrong). If inflation is at 3%, and I pay 10% of the purchase price of a house to control that asset, then I am making 30% return on the downpayment. Thats because though I am shelling out $100K to control a $1 million dollar house, I get the growth of 3% on the ENTIRE value of the house. The $1 million. Not the amount that I actually put down as a down payment. So, if that million dollar house is only yielding the inflation rate, I am making 3% of $1 million dollars a year in equity or $30,000. So my house is going up in value at $30,000 a year, yet I only invested $100K to control that. That is a 30% return. If I took that $100K and invested it in the stockmarket, I would get a 10% return on the $100K, but I'd still be shelling out a rent payment every month comparable to a mortgage payment. Yes, I pay maintenance cost, but I get a tax break that offsets it. You see, the crazy thing about real estate as an investment is that with the leverage, even a property appreciation below the inflation rate (a negative real rate) can still lead to stunning gains. If you're leveraged at 10 to 1, even if the value of the property goes up 1% a year, essentially falling behind inflation at 2 to 3% a year, (a "real" loss) you're still making 10% returns. Another way to look at it is like this. Imagine If I came to you and told you that I'll rent you any place of your choosing for 20 to 30% over the prevailing rent. And, I will let you lock into the rental payment for 30 years, and if you complete that contract, you never have to pay rent again. There is a catch that you'll have to put up some earnest money for 6 to 10% of the value of the property, but the good news is that if you ever decide to back out of the contract, I'll give you your money back plus 30% interest. Too good to pass up? SM
A lot of those CFO's elect to unload properties not because of a bubble, but because of tax advantage. If you purchase, you can write the building depreciation off over decades. But if you lease it back to yourself, you can write it off immediately. A major drugstore chain does this as a routine course of business. And some don't do that. McDonald's made its fortune in real estate, because they buy great locations and the franchisee's pay them off for them. The bottom line is that a CFO evaluates the ROI of real estate versus the opportunity costs of other ventures. If they can leverage their money better internally (and many companies can), then they opt to lease the property, take the tax advantage, and leverage themselves. But Joe Blow investor gets a tax advantage by purchasing (not leasing), and they typically don't have access to investments that can earn a higher ROI. If they have access to those kind of returns, then....heck yeah...put all your money in that. But we're not talking 12% here. The bottom line is that real estate...especially your own, is a relatively safe way to make 30% or more, and most of us don't have a better opportunity than that. SM
The fallacy lies in looking at it from the point of view of 'paying down the mortgage'. That's not the issue. Leverage only works if the total return on an asset is greater than the cost of the financing. The current yield on typical real estate is less than 5%. Inflation is 3%. 30-year money costs 6.5%. Rents will grow at the rate of inflation in the long run, and no faster, on average. Thus, the ROA for 'typical real estate' using the parameters given is 8%. The spread earned between the cost of borrowing, and the return on assets acquired through borrowing is, at best, 1.5%. To achieve a return of 10%/annum, which is the long-run unlevered return of the stock market, you would have to lever your money up by 6.7X. But wait! Its fairly unlikely that you're going to find a 6.5% interest rate to finance an asset that's been levered up 6.7X. So you have a little bit of a problem even maintaining the same ROE that you would get from an unlevered investment in the stock market, through real estate. What 6%? My calculations are based on *total* return, which is the rent (net of expenses) paid to the owner of the real estate asset + a component for inflation of the underlying building itself. But leverage always has a cost (and 10X leverage has a much higher cost than lower amounts of leverage). Yes, but that $900k note is costing you at least $65k/year to service. Yes, your tenants will give you some cashflow to pay for it (~$40k), but at the end of the day, you only have $15k/year left over as 'return' on your $100k investment. A 15% rate of return on an investment that's been leveraged 10X isn't impressive at all; in fact, its just outright pathetic, and you could achieve the same 15% at far less risk either by buying good quality growth companies, or buying large-caps, and using a comparatively small amount of leverage (margin) to augment those returns. Why would you only get a 10% return? You were willing to borrow $900k to buy a $1M building, why aren't you willing to borrow even $50k to buy a $150k stock portfolio? Crash of 1929 aside, borrowing $50k to fund a $150k stock portfolio would not have posed any risk to your portfolio in the long term. But there have been plenty of instances of 10% declines in RE prices in markets throughout the world. Not very likely. And what would 'reversion to mean' do to your 10X leveraged RE portfolio? What would 'reversion to mean' do about a non-leveraged stock portfolio? Or even a 1.5X leveraged stock portfolio? Shiller makes a fairly good case that RE is 50% overvalued based on historic relationships between incomes and rents; if reversion to mean took place on your 10X leveraged RE investment, you would be in the hole by $400k. At worst, with the stock portfolio, it can go to zero, and no worse. If, under the conditions you describe, I can lock in a return for my landlord that is far beneath the long-run average of the stock market, and offload all of the risk associated with owning a home, then I absolutely would take you up on your offer. When I do the math on the scenario of renting a $100k place at $4000/year, 3% inflation, for 30 years, the present-value, discounted at 10% of that obligation is $49,699. I'd have to look at exact figures, since the ranges you give are fairly wide, but when I run the numbers using a 6% up-front payment, and a 20% premium, I get a present-value calculation of $50,953. (plus free rent for the rest of my days...) So its pretty much a wash, and definitely not a magic means to transfer a lot of wealth from me to you, or vice versa.