I'd say that most of the traders don't understand real estate. Let me give you an example. The basic formula I have used over and over is to buy a property that requires fix-up...sometimes signficant fix-up. Not just paint and carpet. I pay cash for the property. Cash for the fix-up. At this point I could resell the property for significant profit. This is true because I pencil all this out before I ever make an offer. I make my profit in essence going into the deal. In my market though, I am able to rent for signficant profits as well. And therefore, I have tended to choose this route, because over time the rent makes more profit than selling. Further, if I keep for a while I can do a 1031 exchange which defers any tax I would have due. If I need my cash back out of the property to do another deal, I can always refinance all of my cash back out without problem, because I bought the property so cheap to start with. When I was first starting I used partners at times, so that they put the cash up and we would split the deal in accordance with an agreement. I think the difference is that stocks fluctuate. In real estate on the other hand the rent is consistent, and growing over time. Equity builds in the property whether there is appreciation or not, through loan pay down. Completely different than stocks. Not unique to me either...this basic formula was one I read in a book. Buy a property in disrepair, fixup, either sell or rent. Refi your cash back out. Trade up. etc etc. It's always a question of value. But understand, I don't buy a property at retail value. I buy at significant discounts to retail, such that when fixed up I am still under retail. What you're talking about is trying to time the real estate market...something I have never done. I buy under market routinely because the house needs so much repair, the normal mom and pop won't buy the property. OldTrader
The income approach applied to a single family home is patently absurb to begin with. The vast majority of homes are not rental houses...they are owner occupied. And therefore, the rental value per se is almost irrelevant. If you believe that people decide to buy based on some type of comparison to rent...I think you're mistaken. I have sold many, many houses over the last 30+ years, and never once did I see a single buyer look at some notion of what rent was. Instead, they looked at the decor, the yard, the neighborhood, though about whether it would serve their family, etc etc. They would look at the payment, but not against rent, but against what they felt they could afford. Wall Street consistently tries to predict real estate prices based on things like rent. It's never worked even once. Maybe it will this time. Wall Street does not understand real estate in essence. Hell, Wall Street does not understand stocks, why should they understand real estate? OldTrader
That's because you were selling the house, not renting it. As you said, your buyers were comparing it against what they can afford. But they also have alternatives, and they are also comparing those alternatives against what they can afford. They look at the rental down the street, they look at the decor, the yard, the neighborhoood, whether it would serve their family, etc. They are also, as you have pointed out, taking into account the advantages and disadvantages of ownership versus the advantages and disadvantages of renting. And then they make a decision based on relative cost, relative value, relative tangibles and intangibles, and of course, ultimately, what they can afford. Do you really think that they will buy your house if the nicer house down the street is renting for a third of what their mortgage will cost on your house? If they can afford the rental but can't afford the mortgage? Finally, even in your alternative universe where no home buyer ever considers renting as an alternative, house prices and rents will still have a long term market equilibrium, and there is no better illustration than your own post: Your action increased the supply of rentals because it was profitable to do so. If it hadn't been profitable, you would have increased the supply of homes for sale instead. You are, by your own example, the exact market force which brings about the equilibrium between house prices and rents, an eqilibrium whose existence you deny! Martin
Marty: Like stocks, you need to pick and choose your real estate targets carefully. If you choose some cheaper areas, such as Phoenix or Houston, you will come out ahead much sooner than the 10-15 years you calculated for the Bay Area. In fact, for most locations in US, the buyer would come out ahead of the renter in 1-5 year's time, because your monthly payments go toward building up your own equity, not your landlord's pocket. SF Bay Area and NYC are not your typical locations. Do you use GOOG's stock price to say the stock market is over-priced, or no one can afford it, or there is no more money to be made from the stock market? You would be an idiot to say that. But that's the kind of statement you are making about real estate.
Like OLDTRADER said not in exact words but more or less ( or maybe he didnt say it i dont recall)....you make your money on the purchase not on the sale...ooooooh so true.
You assumed away the biggest reason people are in a panic to buy, namely that prices will far outpace inflation. Maybe prices are in a once in a lifetime bubble. Maybe not. I have seen markets that appeared insanely overvalued get even more overvalued. I have also seen people get their heads handed to them in California and Texas property. When the exit door shuts in real estate, it shuts hard and they lock it. But that's what you're dealing with and no amount of discounted value calculations can capture it.
But I live where I live. For personal reasons, that's more important to me than owning a house or becoming a landlord. That's why I haven't said any such thing. I was quite careful not to generalize to all real estate markets in the US. I might have been a little loose once or twice but it gets old writing "in my neighborhood" or "on the coasts" or "in overpriced markets" all the time. I thought the point was crystal clear on enough repetitions, but apparently not. The only generalization I would make is that, if real estate valuations revert quickly in some markets, it's likely to have some negative effect even on fairly priced markets. In 2000 and 2001, the stock market correction was led by the vastly overpriced tech stocks, but even the most conservative value plays got caught up in the selling. Martin P.S. I'll be the first to grant that real estate is more fragmented than the stock market; it was your analogy not mine.
Great advice everyone should pay attention to. I know a number of people who have done the same thing with similarly satisfying results. It takes a lot of foresight and patience when you're younger and starting out to invest in real estate, but over long periods of time, nothing has come close.
Yes, intentionally so. I have no desire to incorporate an assumption that all the evidence tells me will not persist in the long run. Sure, it could happen. I don't mind waiting. Martin