Where do Landlords make the most money?

48 Replies

@Kevin H. @George Chang I agree with respect to ROI. One thing I consider is ROT, that is return on transaction. I made that up for myself. It is a bit of a hassle to invest in SFH vs other options, with all the paperwork, loans,tenants, time, taxes, turnover, liabilities etc...For me it is important that is worth all the hassle. I think this chart addresses ROT when you read between the lines.

Speaking of reading between the lines @Ben Leybovich is the master of that style. His response this time leaves nothing to the imagination. I like REI straight shooters like Ben, thanks again!

@Bob Bowling @Cal C. Your imput is always valuable. Is it speculation if the area has a long history of appreciation? Or was appreciation already there and the speculation part ends up being merely a factor of time? Thanks!


@Bob Bowling @Cal C. Your imput is always valuable. Is it speculation if the area has a long history of appreciation? Or was appreciation already there and the speculation part ends up being merely a factor of time? Thanks!

 I believe that it is because you are still speculating on market timing since even in SF there have been significant downturns.  Of course, if you have the wherewithal to ride out any downturn or you understand the market extremely well to the point you know ahead of time when a market is going down then that mitigates your risk considerably, however, you are still speculating on market timing.   

BTW I speculate all of the time with flips, but I also invest in cash flowing real estate.  

@Cal C. I get your timing point. Coming from a perspective of a long-term hold, decades lets say, that timing part might be less of an issue. I know a dude who purchased a quad in 1973 for 13k and recently sold it for a mil. It probably would not have mattered much if he paid double or triple when you factor his appreciation for decades. The cash flow/cap/roi was near 50% monthly for decades as well. Thanks!

@Cal C.

 You are right CA markets do have up's and down's ( as most markets do) so if you can time it during the down turn your returns will be faster but if you are a true long term holder by that I mean in the range of 10 to 20 or more years I think the timing may be not be that much of an issue. Yes if your goal is to exit the property in 2 to 3 years or even 5 years You should look at timing and you could be caught in the wrong end.  So I agree that buying in CA does have risk and you should account for that (that is have cash reserves and be ready to hold the property until market turns)

What exactly is the point of this thread?  It comes off as a lot of cheer leading and patting each others backs, but there doesn't seem to be any commentary on what actually makes a market worth investing in.  If you had posted this same info in 2008 the reactions would be much different as investors in the Top 5 markets were getting slaughtered because they got caught up in speculation, ignoring all fundamentals.  Now after 5-6 years of a bull market everybody feels like an investing genius, but I wonder if they really are.  I don't see a lot of good information on this thread... some but not a lot.  Mostly it's a cheer leading session that seems eerily similar to the mid-2000's.

All we can really glean from the Zillow data is that since 2009 (the time period of the study), appreciation showed the largest volume gains (not even percentage gains) in the 5 West Coast markets.  It says nothing about current fundamentals or the prospects for future appreciation.  It shouldn't be used as proof of the best market to invest in going forward.

@Brent Seehusen undefined I can understand your take. This should be old hat for those experienced folks. If you are not getting anything new out of it that is probably a good sign. I see many newbies (myself included) look at short term numbers for buy and holding SFH. Perhaps looking at the bigger picture long-term is some info to consider as well. All locations are profitable. I think these are general observations vs cheerleading but it is all good. Thanks!

Originally posted by @Cal C. :

Hmm, here is one dictionary definition which is precisely what I meant by using the term speculating.  

to buy or sell commodities, property, stocks, etc., esp. at risk of a loss, in the expectation of making a profit through market fluctuations. 

 I think your definition would apply to ANY real estate purchase.  I'll stick

with the dictionary.  http://www.merriam-webster.com/dictionary/speculat...  "in  the hope of making a large profit but with the risk of a large loss"

My investing is based on factual market evidence of over 40 Years.  I invest for the NORMAL appreciation (9-11% annually) an have never been at risk of a large loss.  In every decade, 70's-2000  I've bought property that doubled in value in about 2 years.  I've NEVER had a property drop in value more than 10% and NEVER less than my purchase price.  

I don't know ANY investor that sold at a loss UNLESS they were in some callable financing.  The financing was the problem, not the property.  

Originally posted by @Kevin H.:

After all, if you had the choice to choose between two types of investments, and could have an unlimited number of whichever category you chose, any reasonable person would choose to make a $10 return on a $10 investment, rather than a $100,000 return on a $10,000,000 investment, right?  Simply put: the dollar value of the return isn't the whole story if it isn't presented along with the cost of getting such a return.  

I guess I might be unreasonable then...if there were no time costs or transaction costs then I'd absolutely go for a bunch of small $10/$10 investments.  But if my options for investing my $10M lottery winnings (after taxes of course) were to put it into on investment that earned a decent return or thousands of smaller investments that earn great returns, I'd probably go for the single investment for the sake of simplicity (think management, taxes, liability, etc).  

I love my current rental properties, but some day hope to be in a financial position that I wouldn't even look at the types of deals that I look at today.  I'd be happy to take a lower return on a higher dollar amount in exchange for less work/effort/stress!

I'm confused - what are you all arguing about...? 

how do you respond to someone's post or mention someone? New to bigger pockets. 

Thanks,

Stephanie Garcia 

@Brent Seehusen To address some of the fundamental reasons why certain markets might make more money than others. I can start with the supply and demand. There has been a housing shortage in high demand areas. This figure below illustrates;

With respect to LA City the shortages are actually far greater as most that housing built in the county since the 80s is 30 to 50 miles out. LA City for example is more like SF when you unpack the numbers. You will notice in the outliers inventory is much more normalized.

Updated over 3 years ago

The figure above is housing built and needed per year. LA County pop 1980 7.4 million LA County pop 2010 10.2 million

Originally posted by @Stephanie Garcia :

how do you respond to someone's post or mention someone? New to bigger pockets. 

Thanks,

Stephanie Garcia 

 Try clicking on the quote box.

I'm with @Ben Leybovich

you can make money in real estate in most places one way or another.  I can't document it but heard someplace the CA has a net out migration.  Even though CA is the largest state there still are 49 other states where people want to live, have jobs and need housing.

Who wouldn't multiple offers and sales prices above asking price if you are a seller, but you can make money anywhere there is a demand for real estate.

One aspect over looked is taxes.  CA state income is one of the highest if not the highest.  SEVEN states have ZERO income taxes including TX, FL, AK, NV, SD, WA, & WY. 

@David Krulac I agree. Investors make money everywhere. The disadvantage for a Calif is they will pay income tax on that investment regardless.  So even investing in a zero income tax state does not help however CA does have low property taxes if they stay home. 

Calif domestic migration is net negative but when you add foreign migration it is positive. The domestic has some interesting stats. 73% who leave make less than 50k annually and the majority coming make 100k+. 

What is your favorite state for out of state? Thanks!

@David Krulac Yes, that is a good option for some. Where are you planting your out of state trees?

@Matt R.

I've owned real estate in stateS with no income tax.  I've also owned real estate in stateS with no sales taxes.

My opinion as above noted, I think that you can make money anywhere.  I still own properties that I bought decades ago.  I also say that the longer the period of your ownership the more you can pay for the property.  If you own the property for 20 years, you can pay fair market value or darn close to it if you have positive cash flow and appreciation potential.  If on the other hand you are owning the property for 20 minutes, or 20 hours or even 20 days, you better be paying a deep discount.

I even think that you can make money with little or no appreciation if you have a big cash flow.  There's milking cows and cattle, you need to know the difference, but you can make money with both.

@David Krulac 100% agreed! But darn I was hoping for some sharing of some usable geography. I tried:) Thanks!

@Matt R.

It not a secret.

Are there jobs?

Do people want to live there?

Are there good Schools?

Low crime rates?

Positive cash flow

@David Krulac I agree! We all appreciate any of your valuable experience shared either way. Thanks!

Originally posted by @Matt R. :

@Brent Seehusen To address some of the fundamental reasons why certain markets might make more money than others. I can start with the supply and demand. There has been a housing shortage in high demand areas. This figure below illustrates;

With respect to LA City the shortages are actually far greater as most that housing built in the county since the 80s is 30 to 50 miles out. LA City for example is more like SF when you unpack the numbers. You will notice in the outliers inventory is much more normalized.

You could have made that same argument in 2006 just before prices collapsed by 30-40% in LA, so there is more to the picture than just population increase vs lack of new housing supply.  If people lose their jobs or can't get financing it doesn't matter how much "demand" is out there.  They are going to stop buying and any investors betting on future appreciation are going to get wiped out due to the alligator they are feeding every month.

The more unaffordable housing becomes the more dramatic the eventual crash will be as people have less ability to hang on once they've lost their jobs during a recession.  So my issue with the Zillow chart is that it only measures gains from 2009-2014 when nearly all housing markets were in recovery mode.  It's misleading to call that a chart of "where landlords make the most money".  It doesn't even represent a full cycle's worth of data.  If they had measured the same thing from 2006-2011 they would have ended up with a completely different list of top markets.  The cash flowing markets that didn't budge in price would come out on top. Texas did great compared to the rest of the nation in that regard.

My point is that you are using shoddily constructed data to make broad conclusions that are likely to be incorrect.  There's a lot of California Kool-Aid flowing in this thread, meaning people are starting to believe the hype over fundamentals.  I guess that's why real estate cycles happen every 10-12 years, as people have short memories.

@Brent Seehusen

 I understand what you are saying. First off, this is not my chart. Second, I did not make any investment conclusions rather these are general observations to what is going on in all these cities. I started with one fundamental and not the sole reason as there are obviously other factors to consider. This is not a post for or against any areas....it is merely how the numbers stacked up. I am not sure anyone is drinking kool aid;) I understand you are interpreting this thread that way but I don't see any post being unrealistic. 

The affordability has decoupled in certain locations. This we much we know. Certain high demand locations don't go by average incomes and never will.  I do believe supply and demand is an underlining fundamental still. Some areas did not really go down even during GFC. This was due to supply and demand overcoming the other negative factors. I have not seen the unrealistic buying and financing in this cycle.  Results may vary;)

Do you think the no budging areas will come out on top next cycle?  Thanks!  

I've heard people claim that certain areas didn't budge during the downturn, but I've never seen anybody provide proof of this claim.  Sure, certain areas may have had a milder crash during the recession, but they still went down in value, so I don't agree with the idea that they didn't budge.  Writing off a 10% price decline as insignificant just shows the level of cognitive dissonance that certain investors suffer from.  It's hard to admit you lost money. Combine that multi-year price decline with the massive negative cash flows being taken and those "high demand" areas were losers for investors.

I think the only lesson we can learn from the Zillow data is that buying in "high demand" areas after a market correction is a good strategy for profiting from the rebound.

@Brent Seehusen

 I agree. You mentioned Texas as not budging. I have not unpacked those Texas numbers but that might be a close example. I do know of areas that "hardly budged" but I guess that depends on interpreting opportunity cost as well.  Here is one example for a close to no budging partly due to supply and demand fundamentals. 

Santa Monica, CA

Median 2006 was 850K

2011 Median was $825K.

2015 median 1.25 mil 

If you were to able to time Gold investing 2006-11 alternatively you would have come out much better.

Many new investors are influenced by short term numbers as you noted. I still think the numbers for long term landlord results ( not shown) are telling. I am talking decades and multiple cycles in this respect. 

thanks! 

Updated over 3 years ago

Correction, you did not say Texas did not budge. I misread, less budging yes.

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