Where do landlords actually make the most money (profits) ?
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Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
9y@Matt R. I'll take a stab at answering the question as to having the highest total profits....
Any area that has something unique to offer that people want will have high appreciation because of basic laws of economics. Add to that many of those areas were hit pretty hard with the 2008 crash, and therefore had a tremendous opportunity to rebound. As such they had incredible gains in that period of time since then in both appreciation and rental growth. I believe going forward coastal towns will still always provide the greatest appreciation opportunities due to the fact that there is a very limited supply of coastal properties. History has proven that even pre crash.
To @David Faulkner 's point(s) - I don't think it's that people are appreciation haters, I think people go after the cash flow (and the areas that provide cash flow) because purchase prices are lower and they can move quicker along the path. They are looking for financial freedom in the shortest window, not just net worth on a balance sheet. I doubt I could have obtained financial freedom in under 7 years given a very meager starting position if I were investing in LA and San Fran; mainly because the amount needed for down payments and not having the cash on cash return to immediately funnel back into the machine.
If financial freedom is the goal and you're an average investor starting with say just $25k, cash flow on cheaper properties is the way to go. LA/San Fran/etc is out of reach. $25k isn't going to get you anywhere in those markets. They'd have to diligently save for another several years just to get one property. However; if you are looking for long term wealth building and net worth growth, those types of areas are definitely where you want to be in.
Now that I have reached my goal of financial freedom, I don't know that I'll be investing my own money in these plays much going forward. My plan is to begin stockpiling some cash reserves over the next few years. Then the next time one of those types of markets takes a hit hopefully I can pick up a house or two and get some awesome appreciation and net worth building and be able to be a part of getting the highest total profits. But even with all I have that will take quite some time of saving up to get even one decent property then.
97 Replies
- Real Estate Entrepreneur / Investor · Chicago, IL · Member since 2016 · 688 posts · 367 votes9yCash on cash return is the formula that's most important to landlords who I sell to. Some care about CAP rate but what your getting per month after expenses is the most important to most people and myself.
- Investor · Seattle, WA · Member since 2016 · 143 posts · 68 votes9ydifferent market has different parameters. in high appreciation market, cash flow will follow and it will surpass the so call high cash low appreciation market big time. cash flow and appreciation goes hand by hand. think about how many years rent doubles on the coast market vs linear market. at the end of the day cash flow is the king for long term buy and hold in any market. appreciation is another story. I am going out on a limb to say the top three markets in the national get the best of the both world cash flow and appreciation. I have experienced that personally myself Seattle market has run up so much and still has a lot more to run compare to California. I used to live in midwest back in the mid 90s. the difference between these two markets are getting wider, not narrower. looking back, moving to Seattle turned out to be the best decision I ever made. even though it was completely work related, had nothing to do with rei at the time.
- Rental Property Investor · Hong Kong, Hong Kong Island · Member since 2014 · 188 posts · 114 votes9y
@David Faulkner and @Matt R. let's put aside personal preferences for a moment and let the number talk. I will take a long term view and I will compare San Diego, America's Finest City with Kansas City, the City of Fountains. I would be interested in your view on these numbers.
Let's assume that some areas of San Diego and Kansas City were at same home value 50 years ago, and all overperformance came in the last 50 years. This assumption is favaorable to the appreciation camp.This implies a 3.2% appreciation differential. You would end up with zillow home price index at 575k in San Diego and 120k in KC.
Conclusion 1: net rent yield needs to be 3.1% higher in KC to make sense vs San Diego
The law of compounding is such that a 7% net rent differential will favour KC against San Diego even if the price index was to climb to 6mln (inflation adjusted) in the next 50 years. The lesson is: it should be very hard for appreciation to keep up against a substantial net rent yield differential.
Now let's look at why there was might have been such a stellar 3.1% in America's Finest City long term appreciation and where this number is going to be.
Appreciation Effect 1 - Rising Inequality and Ricardian Rent less than +1%
Living in San Diego gives access to higher paying jobs, and space there is very limited. So prices go up.
Looking at US census data, I see that wage growth of the top 5% of the US population was never more than 1% higher than the bottom 20% since 1967. So even assuming that San Diego was inhabited by the top 5% US income only (median income at 160k), only 1% would be explained,
Appreciation Effect 2 - mortgage affordability +2.7% since 2000, +3% since 1981
Since 1981 to now mortgage rates have gone from 18% to 4%, this contributes an annual growth 3% per year to the mortgage can afford. The number since 2000 is from 8.5% to 4% contributing 2.7% .
Conclusion 2: Comparative Annual Appreciation of CA to MO go back below 1%
recent price appreciation in California from 1981 is due to mortgage rate going down 14%, and that it can not continue as mortgage rates will not got negative.
In case mortgage rates go up, some of the previous excess appreciation (compared to the long term rate of 1%) may have to be forfeited (While nominal depreciation is unlikely because rich people do not like to sell at a loss, we may see stagnant nominal prices until affordability is reestablished).
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Sebastien Hitier:
@David Faulkner and @Matt R. let's put aside personal preferences for a moment and let the number talk. I will take a long term view and I will compare San Diego, America's Finest City with Kansas City, the City of Fountains. I would be interested in your view on these numbers.
Let's assume that some areas of San Diego and Kansas City were at same home value 50 years ago, and all overperformance came in the last 50 years. This assumption is favaorable to the appreciation camp.This implies a 3.2% appreciation differential. You would end up with zillow home price index at 575k in San Diego and 120k in KC.
Conclusion 1: net rent yield needs to be 3.1% higher in KC to make sense vs San Diego
The law of compounding is such that a 7% net rent differential will favour KC against San Diego even if the price index was to climb to 6mln (inflation adjusted) in the next 50 years. The lesson is: it should be very hard for appreciation to keep up against a substantial net rent yield differential.
Now let's look at why there was might have been such a stellar 3.1% in America's Finest City long term appreciation and where this number is going to be.
Appreciation Effect 1 - Rising Inequality and Ricardian Rent less than +1%
Living in San Diego gives access to higher paying jobs, and space there is very limited. So prices go up.
Looking at US census data, I see that wage growth of the top 5% of the US population was never more than 1% higher than the bottom 20% since 1967. So even assuming that San Diego was inhabited by the top 5% US income only (median income at 160k), only 1% would be explained,
Appreciation Effect 2 - mortgage affordability +2.7% since 2000, +3% since 1981
Since 1981 to now mortgage rates have gone from 18% to 4%, this contributes an annual growth 3% per year to the mortgage can afford. The number since 2000 is from 8.5% to 4% contributing 2.7% .
Conclusion 2: Comparative Annual Appreciation of CA to MO go back below 1%
recent price appreciation in California from 1981 is due to mortgage rate going down 14%, and that it can not continue as mortgage rates will not got negative.
In case mortgage rates go up, some of the previous excess appreciation (compared to the long term rate of 1%) may have to be forfeited (While nominal depreciation is unlikely because rich people do not like to sell at a loss, we may see stagnant nominal prices until affordability is reestablished).
When I put a property up for sale or rent, I have a line of people around the block to buy or rent, and most of them are very well qualified, even during the pits of the recession ... when I drive around the block, I do not see many boarded up and/or vacant homes, and the ones that are are owned by the bank and only that way because they are being held that way, the second they go up for sale at auction or REO, they get sold, fixed, and populated ... and it has been that way for me for the last 15 years, and same for my parents and 10 years before that; if I see that change in a big way, then yes I would worry about the long term sustainability and adjust my strategy accordingly, but it just hasn't happened and I honestly don't think it will any time soon. Affordability is an actual metric that can and should be tracked. Affordability in San Diego is lower than it is in KC, and has persistently been so for decades. Comparing SD affordability to KC affordability does not tell you much IMO ... comparing SD affordability in 2017 to SD affordability in 2002 is more insightful (or KC 2017 to KC 2002). Vacancy rates can also be tracked and give some insight into the balance of supply and demand in the housing market .... low and decreasing vacancy means that there is an undersupply of housing relative to demand.
Appreciation in CA also happened in the 1970's, when rates were not dropping. Rent increases went right along with the price appreciation, so the gains were not all in equity alone, the cash flow increased too, as did the tax savings aided by CA prop 13. I do not know the KC market, so I cannot comment intelligently ... by all accounts it is an excellent investment market for locals. I make no claim that one is market is universally better than the other at all times. One thing I do know is that I would not have the level of knowledge and control over my investments in KC as I have in SoCal, and that drives much of my returns ... I could in theory move to KC, learn that market, and apply the same level of control, but I prefer where I live in SoCal (personal preference), and my local market is very profitable for me so I see no valid investment reason for me to leave.
In fact, I will go one step further and go against the grain of this post by saying that the argument that one market is better than another is a nonsensical one ... some are better for some things and worse for others, and a skilled local REI operator will know what these better and worse things are and tailor an investment strategy optimized for those conditions ... I have no doubt that a skilled REI operator in KC will have better returns than an unskilled one in SD, and visa versa too BTW. The only one with a major disadvantage is the unskilled operator going out of state ... not only do they not have the knowledge to optimize an investment strategy for the market conditions and this vulnerability shines like a big target on their forehead to the less scrupulous operators that can easily spot and take advantage of it, but they also have no means to learn or apply hands on control in order to execute such an optimal strategy. They truly have the worst of all worlds ... which is why you see me hammer them on BP so frequently.
- 9yLevi T.Pro MemberRental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
@Sebastien Hitier That's where I'm at on my view with this entire thing. For many years these high value areas have been feeding off of mortgage payment cost, and other factors. If a buyer can get a lower rate, they will pay more for these properties. Even a equity play has to have some cashflow, if they don't, one will eat up all the equity in the world time they exit, no matter how rich they are.
As soon as we get back to the pre-2000's interest rates of 6%. That's almost double the cost of owning the same property from a year ago today. Suddenly what looked affordable, no longer is. We normally see this in luxury homes sales data in cities like NY, SF, etc. When the luxury homes start the soften, you know peeps are about to get squeezed across the board, especially those who are buying and expecting to use equity appreciation like the OP is for his "profit".
I know people have been saying for years and years that Cali has it coming, and it looks like it never will.. It's not a question of if it will arrive, but when. IMO that is when the rates climb back to normal levels, which was pre-2000's. That's when the long hall happens, people have to spend time balancing things back out, off loading, paying down, or finding other means to balance out the old ledger. - Matt R. I don't think most larger players post on mostly beginners site like here. As David Faulkner pointed out, a lot of people here still debate either to buy on local "expensive" market vs multiple "out of state". Simply put, they can't compute, or they are only limited to what other people say, and not dig deep enough. Most formulas for BRRRR don't have appreciation, why not? Inflation, why not? I don't have properties but I run a business, I count borrow of money as part of my expenses, why? expansion ability, i can take in more if i borrow money that i could use and use reserves to get more business. Why not use the same as appreciation increases and you take in more debt? Sure, you won't make any money when market dips if you cash flow a bit on your rental, but if you monitor trends, you would have sold it earlier than the dip, only to get more cash and buy lower. Tip of the iceberg answer but I want to pitch that if, and that's a big IF i would be a landlord, I'd take appreciation any day vs cash flow, BUT, being a landlord is too drip income for me, I mean you literally need millions to be able to sustain yourself and have a 2-hour week work.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Levi T.:
@Sebastien Hitier That's where I'm at on my view with this entire thing. For many years these high value areas have been feeding off of mortgage payment cost, and other factors. If a buyer can get a lower rate, they will pay more for these properties. Even a equity play has to have some cashflow, if they don't, one will eat up all the equity in the world time they exit, no matter how rich they are.
As soon as we get back to the pre-2000's interest rates of 6%. That's almost double the cost of owning the same property from a year ago today. Suddenly what looked affordable, no longer is. We normally see this in luxury homes sales data in cities like NY, SF, etc. When the luxury homes start the soften, you know peeps are about to get squeezed across the board, especially those who are buying and expecting to use equity appreciation like the OP is for his "profit".
I know people have been saying for years and years that Cali has it coming, and it looks like it never will.. It's not a question of if it will arrive, but when. IMO that is when the rates climb back to normal levels, which was pre-2000's. That's when the long hall happens, people have to spend time balancing things back out, off loading, paying down, or finding other means to balance out the old ledger.People have not been saying Cali has it coming for years, they have been saying it for DECADES. They have been wrong. We already have examples of all of the conditions that you mentioned. Rates were rising in the 70's, CA housing prices doubled. Rates were double digits in the '80's, CA housing prices doubled. Rates were back to normal levels of 6% pre-2000's, CA housing prices doubled. If you don't want to invest here, that's just fine, no skin off my back, but I don't see much historical evidence to support your arguments. This market does have corrections from time to time but they are a mere blip on the raidar when put in the context of the long term trends ... as cruel as it may sound, these corrections are normal and a healthy thing, it cleanses and purges the market of the weaker players that over-leverage themselves and provides some excellent buying opportunities for the stronger ones. So, I hope you are right and it does crash ... all my stuff is free and clear and I don't plan on selling, so it is no skin off my back either; all of the profits that put me into this condition and going forward are not imaginary, they are quite real I assure you.
Originally posted by @Austin Fruechting:
Originally posted by @David Faulkner:
I'm so sick and tired of the it is too expensive excuse ... you don't think that many of us that started investing in CA started with very little? And rather than looking to those that have built up something and trying to figure out how you start with very little and build it up to something, they use the excuse that they can't afford it and can't get started because it is too expensive.
That to me is almost as funny as calling somebody who is many times wealthier than you a complete idiot because they spend more money on their properties rather than try to figure out how it is that they got to be that wealthy in the first place and why do they choose to spend their money in that manner. I'm not talking about me here with that statement ... I am a nobody, a minnow in an ocean of really big fish, mostly by design, but I'm at least open minded enough to think that maybe there is something to be learned from those really big whales.
Which brings me back to my original question ... why is it so expensive here? Why is it so cheap other places? Does being cheaper mean that it is lower risk and the profits will be higher?
A cash flow guy trying to throw the appreciation guy a bone... even saying I want to/plan to invest in those markets in the future...
I don't know why you poop on the cash flow guys so much. Maybe it's because so many of them poop on the appreciation guys. I understand the market. I understand the numbers. I understand there are countless ways to make money in real estate. That's what is great about real estate. Wherever you're at, whatever your circumstances, there is a path.
I also know that if I were starting at the same point in time, with the same money, it would have been much more difficult to be retired in under 7 years if I were investing in LA vs here as a buy and hold guy. Would it have been possible in LA? Yes. Would it have been as easy? No. Spending $400k to get $2500 in rent is a lot tougher to move along in a fast manner then spending $100k to get $1500 in rent.
I do not understand your belief. 7 years ago you could purchase a triplex in c area in San Diego for $300k. Assume you house hack the purchase using FHA at a cost of <$20k including closing costs. It likely would have been close to 1% rule. If you used the cash flow you could save for an additional purchase. the San Diego appreciation those years was between ~10% and just over 20% (last couple of years around 8%). Using the cash flow and any extracted appreciation you could purchase another multiplex unit. I think that it would not be a stretch to think you could have acquired 3 small multiplexes in the 7 years. The initial unit would be ~$650k today. The other properties would have experienced similar appreciation rates.
I cannot see cash flow on a $20k REI having produced ~$350k not including any reinvestment of the profits. Of course the smart investor in both markets would realize the profits and reinvest resulting in much greater than the $350k profit in San Diego.
Originally posted by @Sebastien Hitier:
@David Faulkner and @Matt R. let's put aside personal preferences for a moment and let the number talk. I will take a long term view and I will compare San Diego, America's Finest City with Kansas City, the City of Fountains. I would be interested in your view on these numbers.
Let's assume that some areas of San Diego and Kansas City were at same home value 50 years ago, and all overperformance came in the last 50 years. This assumption is favaorable to the appreciation camp.This implies a 3.2% appreciation differential. You would end up with zillow home price index at 575k in San Diego and 120k in KC.
Conclusion 1: net rent yield needs to be 3.1% higher in KC to make sense vs San Diego
The law of compounding is such that a 7% net rent differential will favour KC against San Diego even if the price index was to climb to 6mln (inflation adjusted) in the next 50 years. The lesson is: it should be very hard for appreciation to keep up against a substantial net rent yield differential.
Now let's look at why there was might have been such a stellar 3.1% in America's Finest City long term appreciation and where this number is going to be.
Appreciation Effect 1 - Rising Inequality and Ricardian Rent less than +1%
Living in San Diego gives access to higher paying jobs, and space there is very limited. So prices go up.
Looking at US census data, I see that wage growth of the top 5% of the US population was never more than 1% higher than the bottom 20% since 1967. So even assuming that San Diego was inhabited by the top 5% US income only (median income at 160k), only 1% would be explained,
Appreciation Effect 2 - mortgage affordability +2.7% since 2000, +3% since 1981
Since 1981 to now mortgage rates have gone from 18% to 4%, this contributes an annual growth 3% per year to the mortgage can afford. The number since 2000 is from 8.5% to 4% contributing 2.7% .
Conclusion 2: Comparative Annual Appreciation of CA to MO go back below 1%
recent price appreciation in California from 1981 is due to mortgage rate going down 14%, and that it can not continue as mortgage rates will not got negative.
In case mortgage rates go up, some of the previous excess appreciation (compared to the long term rate of 1%) may have to be forfeited (While nominal depreciation is unlikely because rich people do not like to sell at a loss, we may see stagnant nominal prices until affordability is reestablished).
I think these two are in two different leagues. One has been solid since the 1950s and the other has streets full of vacant and abandon homes. On paper any mathmatical scenario is possible to compare but the realities in 2017 tell a much different story. I get your point still.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @David D.:
If you are 25 and have 10k in the bank, how do you buy a 300k starter condo in CA? I saw some people in the thread saying it's possible, but they didn't say how to do it.
You put your nose to the grindstone and you work your tail off to save more ... you can't always have everything you want, right now, with no or low money down ... doesn't mean it is impossible.
In the meantime you educate yourself, both online and local networking. You find a way to earn more money, and perhaps accelerate your education, if that is holding you back. You familiarize yourself with the local market, pricing, neighborhoods, dynamics. By the time you do all of this and are ready to invest, you will have earned and saved much, much more than money.
The first one is the toughest ... it gets much easier once the compounding of capital and knowledge take hold. It can be done, but sadly there are no tricks, no shortcuts ... don't believe the gurus that would attempt to take your money to persuade you otherwise ... those only serve to derail you and put you back further than you would've been otherwise.
Originally posted by @David D.:
If you are 25 and have 10k in the bank, how do you buy a 300k starter condo in CA? I saw some people in the thread saying it's possible, but they didn't say how to do it.
If you house hack using a FHA it would take almost $20k including closing costs (maybe a little less). With $10k you would need to find non traditional finance options such as owner financed which is difficult without committing to above market rates.
- Victorville, CA · Member since 2017 · 22 posts · 20 votes9y
Originally posted by @Matt R.:
Originally posted by @Jorge Contreras:
Originally posted by @Matt R.:
There is so much misinformation on this site it is crazy.
Here are the facts;
For total profits, cash flow plus equity since 2009 the top 3 locations are San Francisco, San Jose and LA.
Since 2000, that is LA, SF and San Diego.
For the sake of discussion... why do you think that is the case?
You stated there is so much misinformation on this site, can you prove this as a fact or is this simply your opinion?
And if there is so much misinformation on this site why ask the opinion of the users on this site if it is filled with misinformation?
Good point. This source is Zillow senior editor for the since 2009 portion and CoreLogic NYSE symbol CLGX for since 2000.
can you please provide links to the quotes.
Originally posted by @Jorge Contreras:
Originally posted by @Matt R.:
Originally posted by @Jorge Contreras:
Originally posted by @Matt R.:
There is so much misinformation on this site it is crazy.
Here are the facts;
For total profits, cash flow plus equity since 2009 the top 3 locations are San Francisco, San Jose and LA.
Since 2000, that is LA, SF and San Diego.
For the sake of discussion... why do you think that is the case?
You stated there is so much misinformation on this site, can you prove this as a fact or is this simply your opinion?
And if there is so much misinformation on this site why ask the opinion of the users on this site if it is filled with misinformation?
Good point. This source is Zillow senior editor for the since 2009 portion and CoreLogic NYSE symbol CLGX for since 2000.
can you please provide links to the quotes.
That market research info is google able. Are you surprised by the results? This is not really some unknown secret. If I get a chance I will dig the links up as I have posted these links on BP before.
- 9yLevi T.Pro MemberRental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
Originally posted by @David Faulkner:
Originally posted by @Levi T.:
@Sebastien Hitier That's where I'm at on my view with this entire thing. For many years these high value areas have been feeding off of mortgage payment cost, and other factors. If a buyer can get a lower rate, they will pay more for these properties. Even a equity play has to have some cashflow, if they don't, one will eat up all the equity in the world time they exit, no matter how rich they are.
As soon as we get back to the pre-2000's interest rates of 6%. That's almost double the cost of owning the same property from a year ago today. Suddenly what looked affordable, no longer is. We normally see this in luxury homes sales data in cities like NY, SF, etc. When the luxury homes start the soften, you know peeps are about to get squeezed across the board, especially those who are buying and expecting to use equity appreciation like the OP is for his "profit".
I know people have been saying for years and years that Cali has it coming, and it looks like it never will.. It's not a question of if it will arrive, but when. IMO that is when the rates climb back to normal levels, which was pre-2000's. That's when the long hall happens, people have to spend time balancing things back out, off loading, paying down, or finding other means to balance out the old ledger.People have not been saying Cali has it coming for years, they have been saying it for DECADES. They have been wrong. We already have examples of all of the conditions that you mentioned. Rates were rising in the 70's, CA housing prices doubled. Rates were double digits in the '80's, CA housing prices doubled. Rates were back to normal levels of 6% pre-2000's, CA housing prices doubled. If you don't want to invest here, that's just fine, no skin off my back, but I don't see much historical evidence to support your arguments. I hope you are right and it does crash ... all my stuff is free and clear and I don't plan on selling, so it is no skin off my back either; all of the profits that put me into this condition and going forward are not imaginary, they are quite real I assure you.
Your face is turning red! People have been saying it for decades, and they have been right. Every market goes through cycles, sometimes crashes, even Cali. You would be a fool to say otherwise.
Case in point, LA lost 103 bases point from the peak in 2008 till it hit a bottom in 2009, it then gained 10 bases points from 2009 till late 2010.. only to lose another 18 points over the following 2 year period, that ended in 2012. Since that time it has been on a tear, climbing strongly, but it's still under water by as much as 51 point if you had bought anything within the 2004 - 2008 period.
If you managed to tap the bottom of 2012, your up 27 points, buy you can't see the future, and can't time any top or bottom. However for fun, let's say you did... If you had invested in Tampa Florida, you would have gotten better returns than LA over the same period with an price index change of 39 points, Boston grabbed 30 points, Atlanta got 31 points.
You may think Cali is the best thing on the earth to invest into, but it's not. It's good like any other market, I'm not sure I would want to pay for a property that is 43 based point's higher in cost, taxes, and crazy laws, than Boston or Tampa and get a lower rate of return. Whatever floats your boat right!
Source http://www.realestatedecoded.com/case-shiller/
Originally posted by @Levi T.:
Originally posted by @David Faulkner:
Originally posted by @Levi T.:
@Sebastien Hitier That's where I'm at on my view with this entire thing. For many years these high value areas have been feeding off of mortgage payment cost, and other factors. If a buyer can get a lower rate, they will pay more for these properties. Even a equity play has to have some cashflow, if they don't, one will eat up all the equity in the world time they exit, no matter how rich they are.
As soon as we get back to the pre-2000's interest rates of 6%. That's almost double the cost of owning the same property from a year ago today. Suddenly what looked affordable, no longer is. We normally see this in luxury homes sales data in cities like NY, SF, etc. When the luxury homes start the soften, you know peeps are about to get squeezed across the board, especially those who are buying and expecting to use equity appreciation like the OP is for his "profit".
I know people have been saying for years and years that Cali has it coming, and it looks like it never will.. It's not a question of if it will arrive, but when. IMO that is when the rates climb back to normal levels, which was pre-2000's. That's when the long hall happens, people have to spend time balancing things back out, off loading, paying down, or finding other means to balance out the old ledger.People have not been saying Cali has it coming for years, they have been saying it for DECADES. They have been wrong. We already have examples of all of the conditions that you mentioned. Rates were rising in the 70's, CA housing prices doubled. Rates were double digits in the '80's, CA housing prices doubled. Rates were back to normal levels of 6% pre-2000's, CA housing prices doubled. If you don't want to invest here, that's just fine, no skin off my back, but I don't see much historical evidence to support your arguments. I hope you are right and it does crash ... all my stuff is free and clear and I don't plan on selling, so it is no skin off my back either; all of the profits that put me into this condition and going forward are not imaginary, they are quite real I assure you.
Your face is turning red! People have been saying it for decades, and they have been right. Every market goes through cycles, sometimes crashes, even Cali. You would be a fool to say otherwise.
Case in point, LA lost 103 bases point from the peak in 2008 till it hit a bottom in 2009, it then gained 10 bases points from 2009 till late 2010.. only to lose another 18 points over the following 2 year period, that ended in 2012. Since that time it has been on a tear, climbing strongly, but it's still under water by as much as 51 point if you had bought anything within the 2004 - 2008 period.
If you managed to tap the bottom of 2012, your up 27 points, buy you can't see the future, and can't time any top or bottom. However for fun, let's say you did... If you had invested in Tampa Florida, you would have gotten better returns than LA over the same period with an price index change of 39 points, Boston grabbed 30 points, Atlanta got 31 points.
You may think Cali is the best thing on the earth to invest into, but it's not. It's good like any other market, I'm not sure I would want to pay for a property that is 43 based point's higher in cost, taxes, and crazy laws, than Boston or Tampa and get a lower rate of return. Whatever floats your boat right!
Source http://www.realestatedecoded.com/case-shiller/
Are you sure Boston and Tampa are in the same league? I recall Boston being mostly in the top 10 on all the historical stuff and can't remember ever seeing Tampa at that same historical level. Boston has the limited space and highest paying jobs thing going.
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9y
Ah, the fun of timed-market analysis. Personal perspective here but the timeframes mentioned are right after the .com crash and right after the sub-prime mortgage recovery had been going for, what, a year? What if you picked 2013? What if you picked 2006? I don't know what the answers there would be but I would be curious.
But my blanket issues with equity growth vs. cash-flow analysis usually boils down to taxes and reinvestment:
- In order to capture that equity, I have costs to sell (6% at least, probably closer to 10% after whatever closing costs are mine, getting the property sale-ready, etc.), I have to pay capital gains, and I also have depreciation recapture. I could 1031 but then I'd have to keep the debt load the same or bump it up. And if I refinance then I'm back to increasing debt load (which the property hopefully suppose with ease) which I may or may not want to do. If I have a huge amount of appreciation it costs me a huge amount to capture that and put it into my bank account.
- Let's suppose I did invest in a high(er) cash-flow market. Does the analysis done assume that it sat in a bank account since 2000 (17 years) earning nothing? Does it assume that I spent it on tacos and beer? Does it assume I invested it in the stock market? Did I do that in 2009 when the DOW was at around 10K and more than doubled by money since then? In short, if I (just for the sake or argument) started with 10% CoC vs. 5% CoC, it's not as though the time-value of that increased CoC return is zero. But maybe the Zillow analyst factored that in, who knows.
- And if you did want to use that CoC return (which is probably tax-free, especially in the beginning) to invest in real estate it's going to take less time to "reload" because a.) your cash-on-cash returns are higher, and b.) the cost-of-entry is lower. So your capital doesn't have to sit as long on the sidelines before investment 2, 3, 4, etc. Again, this assumes you don't need to use your revenues to pay your own mortgage or blow it on tacos and beer. Subsequent investments also give me more to depreciate (yay, tax benefits) assuming I don't have to sell/liquidate.
- Now, it's a valid argument that you could do the same over time with high appreciation properties through refinancing. And that's been awesome over the past 10-15 years with declining rates. You're refinancing anyway so who cares? Your monthly mortgage might actually stay the same with a higher debt load. But now it's 2017, we're off the lowest-lows (but still historically low) so now when you refinance it's going take that 4% rate and turn it into a 5% rate. A few years from now it could be a 7% rate, which still isn't exactly a horrible number. However, if you're used to that sweet 4% rate you got in 2014 how will trading in that 4% rate for a 7% rate feel?
All of this blabbering aside, I'm no expert. I have my home here in Encinitas with a ton of awesome appreciation, a super-low interest rate, and I'm happy to be in the market. I also have my investment properties in a cash-flow(ier) market. So I'm in both boats.
But I never like return analysis based on purposefully (or randomly) chosen time periods. If we can pick investments based on time periods we should have all gone back and bought Amazon 10 years ago.
Here is the latest for multis:
Los Angeles and Seattle were named the top US multifamily markets for 2017 in Marcus & Millichap’s National Multifamily Index (NMI), moving up 11 spots from one year earlier.
The West Coast cities were two of several markets with favorable supply-and-demand balances and hiring momentum that made major moves to ascend to the top spots in M&M's multifamily investment forecast.
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Los Angeles and Seattle moved to the top of Marcus & Millichap's National Multifamily Index for 2017.
Los Angeles moved up 11 places in the firm's ranking from one year ago based on a forecast for further tightening in apartment vacancy and minimal supply growth. Meanwhile, prospects for continued robust job growth moved Seattle-Tacoma and Boston into the second and third spots.Minneapolis-St. Paul was the highest-ranked Midwest metro, while former hot tech markets San Francisco and San Jose dropped from the top of last year's ranking as their growth cycles mature. NYC's apartment market rounded out the top 10.
- 9yLevi T.Pro MemberRental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
@Matt R. Your talking ranking, not growth. There's a deference.
You really should go back and read my post, and checkout my source, as I did link to it. In terms of growth, LA is not #1 over the period I outline. It may be the top most expensive place to own, however by the bases points, it did not even make top 5 in growth from 2012. That's long before you add in the fact that your paying 43 points higher than the cities I outlined, and getting an 8% lower growth rate.
You are literally saying, your willing to pay 2x more than everyone else to own the most expensive properties, but you want 8% lower rate. - Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Levi T.:
Originally posted by @David Faulkner:
Originally posted by @Levi T.:
@Sebastien Hitier That's where I'm at on my view with this entire thing. For many years these high value areas have been feeding off of mortgage payment cost, and other factors. If a buyer can get a lower rate, they will pay more for these properties. Even a equity play has to have some cashflow, if they don't, one will eat up all the equity in the world time they exit, no matter how rich they are.
As soon as we get back to the pre-2000's interest rates of 6%. That's almost double the cost of owning the same property from a year ago today. Suddenly what looked affordable, no longer is. We normally see this in luxury homes sales data in cities like NY, SF, etc. When the luxury homes start the soften, you know peeps are about to get squeezed across the board, especially those who are buying and expecting to use equity appreciation like the OP is for his "profit".
I know people have been saying for years and years that Cali has it coming, and it looks like it never will.. It's not a question of if it will arrive, but when. IMO that is when the rates climb back to normal levels, which was pre-2000's. That's when the long hall happens, people have to spend time balancing things back out, off loading, paying down, or finding other means to balance out the old ledger.People have not been saying Cali has it coming for years, they have been saying it for DECADES. They have been wrong. We already have examples of all of the conditions that you mentioned. Rates were rising in the 70's, CA housing prices doubled. Rates were double digits in the '80's, CA housing prices doubled. Rates were back to normal levels of 6% pre-2000's, CA housing prices doubled. If you don't want to invest here, that's just fine, no skin off my back, but I don't see much historical evidence to support your arguments. I hope you are right and it does crash ... all my stuff is free and clear and I don't plan on selling, so it is no skin off my back either; all of the profits that put me into this condition and going forward are not imaginary, they are quite real I assure you.
Your face is turning red! People have been saying it for decades, and they have been right. Every market goes through cycles, sometimes crashes, even Cali. You would be a fool to say otherwise.
Case in point, LA lost 103 bases point from the peak in 2008 till it hit a bottom in 2009, it then gained 10 bases points from 2009 till late 2010.. only to lose another 18 points over the following 2 year period, that ended in 2012. Since that time it has been on a tear, climbing strongly, but it's still under water by as much as 51 point if you had bought anything within the 2004 - 2008 period.
If you managed to tap the bottom of 2012, your up 27 points, buy you can't see the future, and can't time any top or bottom. However for fun, let's say you did... If you had invested in Tampa Florida, you would have gotten better returns than LA over the same period with an price index change of 39 points, Boston grabbed 30 points, Atlanta got 31 points.
You may think Cali is the best thing on the earth to invest into, but it's not. It's good like any other market, I'm not sure I would want to pay for a property that is 43 based point's higher in cost, taxes, and crazy laws, than Boston or Tampa and get a lower rate of return. Whatever floats your boat right!
Did you even read anything I said or look at the data from the source you provided?
Case-Shiller for the market examples you gave, Los Angeles, Tampa, Boston and Atlanta
Guess which line is that top one, the one that is on top for almost the entire period, which includes one of the worst housing recessions since the great depression? Can you cherry pick short term time periods where LA under performs on a percentage basis? Yes, of course, you have. Are there fluctuations in the short term, yes of course there are, and I've said as much if you'd have bothered reading it. My comments refer to the long term trend, going back even before Case-Shiller index above, but that picture illustrates 2000 to today. In fact, I'm not even claiming that Cali is the best market for everything at all times ... I also explicitly said that if you would have bothered reading. If my face is red, it is only because I'm laughing at your response.
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9y
Whew, this thread is turning salty...
Originally posted by @Levi T.:
@Matt R. Your talking ranking, not growth. There's a deference.
You really should go back and read my post, and checkout my source, as I did link to it. In terms of growth, LA is not #1 over the period I outline. It may be the top most expensive place to own, however by the bases points, it did not even make top 5 in growth from 2012. That's long before you add in the fact that your paying 43 points higher than the cities I outlined, and getting an 8% lower growth rate.
You are literally saying, your willing to pay 2x more than everyone else to own the most expensive properties, but you want 8% lower rate.Growth and profits are not the same. LA has less growth than many markets as it is pretty much out of land to create rapid growth so this will always be lower now. Phoenix and Vegas have way more percentage growth but that is not profits.
- 9yLevi T.Pro MemberRental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
@David Faulkner LOL - Your comical. One again, you and @Matt R. are ogling over top ranking, not returns on the very bases of your argument of equity growth. Once you two get done watching hot tub time machine, let the rest of us know how 1980's worked out for you, and please open a portal for the rest of us to go back in time, and join you. Until that point, we have to stay in the world of reality, and that reality does not make you a winner if your buying in a lower performing market over the last 5 to 6 years, at the most expensive prices just because your returns would have been amazing if you got into a market in 1980's. Your making less money, but don't want to except that fact, and just want everyone else to join you.
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