The funny thing is, I agree with both sides of this argument. That just goes to show that y'all are completely talking past each other. Yes, real estate is a classic bubble right now. There is so much risk, so much downside, so little upside, the fundamentals couldn't be stacked up any higher against real estate. The arguments have been beaten to death, I'm not going to rehash them, just state my personal belief that within one year, US real estate valuations in most markets will have dropped double digit percentages from where they are today. Yet like any bubble, it keeps rising till it pops. The faster the rise, the bigger the pop. I think it's absurd, a joke, that anyone would try to argue against the existence of a macro bubble by pointing at continuing asset inflation. That's what a bubble is! Have we forgotten so soon? It's hasn't been even five years. Still, this is Elite Trader, not Elite Investor, and momentum is the bread and butter of trading. So, you're right, trade the momentum, and watch for the top. Maybe you can time it, maybe not. That's the spice of life. I've put my money where my mouth is. I have been holding TOL for a few months, NVR, some other homebuilders over the last year, but as the pressure on long term rates builds, I've been stocking up on ICF and FNM puts. I live in California, and I've been happily renting, waiting for valuations I can live with. Sure, I missed the asset inflation, but I can also sleep at night. If I owned a house, I'd be selling it right now. Martin
All good points. But the payment numbers I was providing include the escrow of insurance, and tax, and were a little high because they also included PMI, which doesn't happen when you put more than 20% down. Yes, there is wear and tear. I've found with the newer places, the tax break from depreciation will cover that if you've got good tenants. As for tenants damaging things, those costs are covered (or at least defrayed) through the deposit. Knock on wood, I've never had to evict a tenant in the 8 years I've been doing this. I attribute this to tenacious tenant screening...but I also stick to upper end properties and that tends to help. My tenants tend to be young professionals that only plan to stay in town before they move on...yuppies mostly, or small families wanting a good school zone. I admit my numbers are a cinderella scenario...but so far, I've had results in line with those. When one of my air conditioners does crap out, I've got lines of credit based on the equity I've built up to handle this. To tell you the truth, I've never changed my balance sheet as quickly as I have with buy and hold real estate by a wide margin.
One of the great things about Real Estate is the fact that you can use leverage. I don't think any landlord here would advocate paying all cash. Rather, some mixture of cash and a loan is a nice way to ramp up the returns while taking on the risk that you find tolerable. For me, If I had the cash to buy one rental property outright, I'd make a downpayment on 2 or 3 and ride them for cash flow. But thats me. I don't know how old you are, how close to retirement, what percentage of your portfolio this investment would be, etc. FWIW, as a buy and hold Landlord, I don't see ARMs as bad. In my view, as the economy picks up, interest rates will pick up, and more people will be moving out of households (like Junior moving out on his own). The net result (I think) will be that rents will go up, but if you have an ARM, the cost of the note will offset it. They will likely wash out, with no major hurt or help in either direction. Since we *know* that we're at historically low loan rates, why not lock in, so that your payment won't climb while rents do?
I believe there is another way to play the bubble. It has worked for me so far, and if it continues, I'll be a happy, happy, guy. Basically, if you buy rental property, and lock into a rate, the cash flow over the years will increase, even if the bubble pops. If you agree with that, then one way to play the bubble is to buy rental property, lock in on a fixed rate, and then as the value of the property is still going up, borrow against it to pay for a downpayment on a second property which is then locked into a fixed rate. The idea is to see how many properties you can aquire before the bubble pops, because all of them will give you good cash flow that increases over time and you only take a loss if you sell. As an example, I bought a property using a Heloc against my house only 18 months ago. I borrowed 10% down plus closing costs. Now, only 18 months, because of the crazy increase in value of that townhouse, I have enough equity to borrow against that townhouse and buy two more townhouses with 10% down on fixed mortgages. At any time, if the bubble pops, I'm not worried about it. I may even decide to establish the line of credit, but not use it, so that if the bubble does pop and prices do drop, I will have an established line of credit available to pay the downpayment on some real bargains.
If the rent pays the mortgage. Where I live, you'd be lucky to cover 2/3 of the mortgage with rent income, before expenses. Rents have dropped every year since 2000. The house I'm renting now has a P/E ratio of ~27. This, to me, is the biggest sign of trouble in the market. The same thing happened in Japan before their real estate bubble burst. Rents dropped sharply, asset prices just kept going up. Martin
Again, we keep confusing and blending "home" ownership and single family rental property. These is two very distinct types of real estate!!!!! As someone pointed out, as rates go down the "good" tenants buy a home. You as a landlord are left with the more undesirable type of tenant in most cases. The speculators in the hot, overheated markets could get burned if they are forced to sell at the wrong time. The family that bought for a 20 year home will be just fine, thank you. If you people don't understand this most basic of all forms of ownership, I would suggest you liquidate any real estate holdings in the near future. You really are "over thinking" this. The idea that everyone is just going to sell their home, at any price, and move WHERE??? To their car, for God's sake?? Simple unadulterated silliness. The sky is not falling boys and girls. SteveD
Rent. Heck, move to Pittsburgh, where you can still get a nice three bedroom house in a good neighborhood for $125k. If we were talking about a $50,000 capital gain that would be nuts. Where I live, people who've been in the same house for a decade are looking at gains of 300 or 400 large. That's not retirement money but it's still enough for a pretty long vacation. You just watch. Martin
Hmmmm. I wonder what my mortgage broker would say if I asked him about a loan to buy some virtual land!
Clearly, not "everyone" has to sell for the bottom to fall out of the market. "Everyone" didn't sell their internet stocks in 2000 but they still managed to drop, what, 60-90%? Most of "The family that bought for 20 years" will be fine, yes, unless they have to sell (unemployment, rates go up). And even then, those that don't have to sell will be "feeling" poorer, the way every human does when the thing you just bought for $100 is now selling for $70 -- all "in the head", yes, but real enough for the people who feel that way. Anyway, we have it on good authority that house prices never fall much, so I guess there's no need to worry.