nodoodahs
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Joined: 06 May 2005
Posts: 2408
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 Posted: Thu Jun 23, 2005 12:19 pm Post subject: Rental Real Estate |
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Love the photo!
Just as clarification of my opinion on housing - it's a "bubble" really only in 20-30 major metro areas, "bubble" meaning good chance for actual decline in pricing of 20-20% over 2-3 years with 9-10 years to recover to high range.
In general housing is overpriced and a poor investment choice today IMO. You can still make money in rental real estate (outside the bubble areas), but you either have to go significantly downmarket to those that can't pass the "fog a mirror" credit checks, or have to tie up sufficient funds to make your PITI+management+maintenance lower than your rates x occupancy in more mainstream housing. If you have to compete on rental rates the only way to get positive CF is to invest more down, which lowers your ROE and ties up capital. There may be a market for renting to displaced professionals, those that have to move to your location today but will wind up buying in 6-12 months.
Components of rental real estate benefit:
1. cash flow
2. tax benefit
3. appreciation
Cash flow in most areas means monthly rent has to be about 1% or more of the acquisition price. If it's much less than that, financing has to be minimal or creative to make a positive cash flow, otherwise you've got an alligator on your hands.
Think about it: 1% monthly is 12% annually; TI will be about 2% annually; management fees will be 1.2-1.8% annually (unless you have enough property to get scale by managing them yourself); a meaningful maintenance budget is around 1% annually ($1000 for a $100K home); we are now at 7.5% annual return, and that is without financing (cash purchase). Financing eats into that as does any rental concession below the 1% mark. Not to mention that occupancy will scale down the whole deal, with a mere 14 vacant days between tenants cutting your 7.5% return to 7.2%. The rent to purchase ratio is the equivalent of the PE ratio or yield on a bond ...
Tax benefit is 1/27th of acquistion price as depreciation. Think of this as a 1% or so of purchase price refund, annually, from the government. I don't believe we should look at negative cash flow as a tax benefit, because you pay out 100% of the loss in cash flow but get only 33% of the benefit making negative cash flow a loss any way you count it.
Given that housing in most areas is overpriced, appreciation is overrated IMO right now. In the bubble area, it's musical chairs as to when it falls.
I know this is slightly off topic but ...
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose. |
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