I've been buying building of 4 units and/or less for many years...to include single family homes. First, there is a difference in returns depending on geographical area. California for instance you could not rent out a single family home for positive cash flow without a very large down payment. In the Midwest however, the numbers are all different. The Midwest is the land of positive cashflow, although appreciation is typically viewed as less. Second, single family homes are an area where there is considerably more emotional behavior when it comes to both buying and selling. The allows an astute investor many opportunities. Third, my suggestion when it comes to single family homes would be to buy houses that need considerable work. What this means is that you can't buy just any house. You have to buy houses that are in need of repair, from distressed owners. These type of houses allow large profit margins. Finally, I would point out that financing is much more favorable for under 4 units and under...especially single family homes, than it is for commercial real estate. I would not be a buyer of just any house. Likewise, I would not be a buyer of just any apartment building either. Depends on the numbers as always. But I can assure you that single family homes when purchased under the right conditions can be extremely profitable as rentals. OldTrader
One thing that comes to mind in reading your post is that a net migration to Florida from boomers coming of retirement age is an event that would be a long term trend of like the next 15 years or more. A real estate pullback would be of a shorter nature, with max pain out of the way in a few years. Florida is a big state...it will still be there after a pullback. Just an opinion.
I ran across an interesting chart in today's readings and have attached it here. It shows that the CRB Commodity Raw Industrials (basic materials for making just about everything) vaguely tracks the Fed Funds Rate. Sometimes it diverges for a few months, then corrects and more or less tracks it again. Interesting what is happening recently. Although the Federal Reserve claims there is only âbenign core inflationâ in their own massaged numbers, the more honest CRB Index has gone up about 40% in the last couple of years, and the Fed Funds Rate is going the opposite direction! You can see from the chart this just does not happen. But it is... I wonder how long Greenspan can keep interest rates low (and the real estate bubble alive) when faced with a parabolic rise in commodities, rising gold prices, falling dollar, exploding real estate prices, etc. Something just has to give it would seem to me. Opinions?
I have no idea what the likelihood of a housing crash is or where we are in the cycle, but whenever there is a universally-accepted "truth" -- like "you're throwing your money away if you're renting" -- it makes you wonder if we are, in fact, in the late stages of a bubble. Also, hearing comments from friends of mine who have decent jobs but aren't going to be millionaires soon who say "You can buy a lot of house with interest rates so low" makes me concerned as well. What happens if interest rates rise? Many people won't be able to buy a house of "equal value" if they are forced to relocate in the future. What are the implications of this? Who knows for sure!
Thanks for the chart. Are we worrying too much about Greenspan and not enough about US Treasury Bond Prices? For example, Greenspan didn't raise rates in June 2003, but interest rates (for consumer purposes) bottomed in mid-June and shot up quickly (I believe it was about 1% on a 30-year mortgage over a month or so period). That was caused by a sell-off in the bond market. If people sell US Treasury Bond Prices, that means that yields go up, which results in higher interest rates to consumers. I'm not sure how the Fed fits into all of this with the fed funds rate, but I just wanted to point that out. Maybe someone can explain the interplay.
Interesting point. My parents bought a nice house in a nice section of Tampa about 4 years ago which I thought was then, and still seems to me to be, reasonably priced in comparison to other major metropolitan areas in the country. Given the desirable location to retired folks, certain areas of Florida may "weather" (no pun intended) any real estate downturn much better than most other areas.
The discount rate is the interest rate charged by the Federal Reserve to it's member banks. That rate is fixed intermitting by the Fed. The Fed Funds rate is a floating, traded rate, that is the interest charged by lenders to borrower's on overnight's. The Fed attempts to manipulate (i.e. target) the Fed Funds by either injecting liquidity in the form of repurchases (repos) or to get rates up by draining reserves (reverse repo's). The Fed will look for hints as to where "the market" think's rates should be. As the curve(yield differential) between Funds and the two year continues to steepen, the Fed will feel pressured by free market forces to raise the targeted funds rate. This will generally cause the curve from notes to bonds to flatten a bit as investors seize the opportunity to get good yield and still be able to cut the duration of their portfolio's. Also a rising Fed Funds rate is a sign that the Fed is vigilant about cutting inflation which of course is music to bond holders. The Treasury's best attempt at reigning in the higher yielding long end of the market was by eliminating the issuance of new 30 years. However continued issuance of longer duration corporate's that are then hedged against T-Bond futures (creating a basis trade) has made the Bond contract sort of an unofficial proxy for Treasury supply that's not really there. After all the Treasury is just one of many borrowers and the need for a 30 year benchmark remains. Of course Bonds with only 20 years to maturity can be delivered against the Bond contract making the 15-30 year portion of the curve even further ambiguous. If you think that the Fed is going to tighten in response to higher prices (i.e. rising CRB, CPI, whatever) than your best bet on a duration weighted basis is to sell 5 years. If you don't think the Fed will tighten soon but you think inflation is becoming worrisome, then sell Bonds but buy shorter maturities as a hedge until you think the tighting will begin. Bottom line: If we're back in a cyclical inflationary phase (I believe we are) than sales of any debt future will reap rewards.
Firstly, 10% in selling costs? Is that for real? (I'm not in the US). That's quite exorbitant! Secondly, you must be in one of the high state CGT states right? Because for a no-state CGT seller he could well be looking at less than 20% CGT, including the recapture. Thirdly, I think a 30% decline is what could be expected at a minimum. And I'm fearing it will be far worse. Median property prices in Australia fell about 50% after the advance of the 80s and that one wasn't nearly as spectacular as this one. The market has gone absolutely nuts here, as almost everyone believes real estate is an absolute can't lose proposition. If historical precedent still counts for anything, you know the rest...
I think 10% in terms of selling costs is fairly close. The real estate commission alone will be 6-7% depending on the state. Other costs of sale could easily be 3% or so. As far as taxes and the depreciation recapture, I would estimate this as a total of 30%. But there may be states where it is less...you're right. Even if it's 20%, together with the selling costs we're looking at a 30% number. What I was trying to get at here was that there needs to be a sizeable decline to make it worth it to sell. Will we decline 30%? Good question. One aspect that is not figured here is the ongoing cashflow and loan paydown. When you take it all into consideration, again, there needs to be a sizeable decline. Normally declines are regional in nature, AND come in response to unemployment rather than interest rates. Are you expecting unemployment to rise? Here in the US it looks to me like unemployment has bottomed out. By the way, we're going to need a sizeable decline just to get back to where people started predicting real estate was going down! OldTrader