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.
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- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
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.
So many questions if you want to go down this path...
1) And what annual passive income would you be at in 7 years?
2) What if you can't house hack for your first one because you don't live there? Where are you in 7 years with your $20k starting cash?
3) Even if you do live there and house hack, have you mapped out to know exactly where you would be in 7 years? Or is it just your guess that "it would not be a stretch to have acquired 3 small multiplexes in 7 years." Is that house hacking every property after refinancing the previous to a traditional mortgage once appreciation has created enough equity to do so? Or is that buying the next ones with a traditional investment loan?
4) Do you think that appreciation level of 10-20% annually is going to continue? Or was a lot of that the rebound from the crash? What happens when you plug a more realistic long term appreciation factor and not simply one that would have great market timing?
to number #1: I do not try to distinguish one source of profit from another. If the money is in my investment accounts I care little if it came from cash flow or appreciation and to be blunt do not understand why anyone would care. I try to keep my properties at 75% LTV so if I had acquired one property in 2010 and it went up $350K I would expect that I would have pulled out close to 75% of the $350K but I would have leveraged it to purchase the other properties. For simplicity lets assume I did not leverage it toward other properties but put it into my investment account. My net worth on the one property would have increased $350K but I could typically only obtain 75% of the total so I would have ~$200K on the one property in my investment account. Obviously if I leveraged it to buy more RE that performed similarly it would be much higher.
to #2: I am a strong advocate of investing local. If I lived in a different local that provided cash flow over appreciation I would start my investing local. After I had some success I would re-evaluate if there were better options but I never recommend someone start their RE investing not local. So #2 does not apply because I would not start investing somewhere I do not live.
To #3: It depends on what you consider map out. It is easy for me to see and prove that the original triplex would have more than doubled in value (I have a duplex that was not purchased 5 years ago that has doubled in value without any rehab). Do you think it would be a challenge to leverage over $300K in profit (from just the one unit) into two additional small multiplexes? In other words I tried to be real conservative on my estimate. I reality I believe an aggressive investor would have at least 4 small multiplexes and maybe 5.
To #4: No I do not think the appreciation will continue at that pace and I think some of it was from the rebound. So lets use some real examples of real long term appreciation in San Diego (all either mine or family purchases and all but one still owned). 1970: $19.5K, today ~$550k. 1977: $71K, today ~$800K. 1992: $167K, today ~$550K. 1999: $490k, today $1.3M. 2004: $751K, today ~950K, 2012: $302K, today ~$600K. 2013: $490k, today ~$700K. I am leaving one purchase from ~2002 out because I do not recall the price paid as well as leaving out the acquisitions in the last couple of years (too recent). Some of the purchases were purchased near market highs (1992 and 2004 both were down ~20% at one time) but they have all done well. That is because San Diego has over 50 years of long term appreciation but in that time there have been cycles of depreciation. So I do not attempt to know where San Diego prices will be 5 years from now (short-term) but I am quite confident that 15 years from now the prices with have appreciated more than inflation and more than most other locations.
Question #1 was the entirety behind my initial post about the fact that I was able to retire in under 7 years. So if you're not addressing the issue of passive annual income to achieve financial freedom then you missed the point of my initial post and all of the above we are talking about two different things.
Not in my opinion because the money that you acquire spends the same regardless of the source of the money. I have never understood the source of the money being much of a factor. Money in my account is money to spend/invest regardless of if it came from cash flow or appreciation and that money provides financial freedom regardless of the source. You are not the first person I have seen with your perspective but I simply do not understand it (not saying anything is wrong with your perspective but no one has been able to explain it to me where I understand their perspective).
But lets look at cash flow on the theoretical $300K triplex purchased 7 years ago and for simplicity no money is taken out to leverage elsewhere (I would never do this but it keeps things simple). Let's assume for simplicity that all the costs (PITI, vacancy, maintenance, misc, cap expense estimate) matched the rent. Assume the rent was $3K which 7 years ago 1% was easy to find on small San Diego multiplexes so this rent is likely lower than reality). However, a 1% San Diego property that is conventionally financed would have significant cash flow but for simplicity we will call it cash neutral. If the property is worth $650K today what do you think the rents have done? I suspect they did not double (otherwise it would still be easy to find 1% properties and it is not). But do you think it is reasonable that the rents are $4.5K? I do believe it is possible to find $650K non-rehabbed triplex in class c area with rents of $4.5K so I think that is reasonable. So in this theoretical case you would have close to $1.5K of cash flow (the reason I state close is vacancy is a function of the rent so the vacancy allowance should have increased).
Again I find this scenario very conservative as it does not leverage the appreciation and it started off with a 1% property that we made cash neutral (a 1% property in San Diego that got conventional financing is doing significantly better than cash neutral but it made this example simpler).
Not bad for an initial investment of <$20K especially because in this example we were conservative in every area except for maybe the current rent (i.e. we did not use any leverage beyond the initial loan, we had a 1% property show as cash neutral which it would definitely be cash positive). I believe the current rent estimate ($4,500) was not conservative or aggressive but pretty accurate to market depending on the class C area (pretty accurate to my class C investment area).
Note that as the property continues to appreciate the rents are likely to also appreciate so the cash flow on this property is likely to increase in this example where no equity is removed (again it is not what I would choose to do but it works for showing the potential cash flow).
Compare that to an location that has appreciation that is less than or equal inflation. What sort of rent appreciation are you likely to see? I would expect none in inflation adjusted dollars. Assume you used the initial $20K to purchase a non-owner occupied SFR investment property (typically requires 20% down) that was $90K (some of the $20K was used for closing costs in the previous example) that cash flows $500/month (darn good initial cash flow and probably not possible on a $90K property but lets be aggressive here). What is your expected cash flow today? Likely $500 plus inflation adjustment.
Property appreciation usually has a high correlation with rent appreciation. Therefore, if you did not refinance your San Diego purchase you would probably have better cash flow today, due to rent appreciation, than most other markets would have today on a property purchased 7 years ago.
So as far as achieving financial freedom in 7 years; you're saying your annual income needed because you would refinance a property (or the 3-4 that you have after 7 years). Pull out cash to add to the cash flow to cover your annual living expenses? Bold strategy. Max leverage til you die I suppose and hope that values don't drop when you're planning to refi and hope that interest rates don't jump a ton.
That's why people look at them as being very different (albeit two sides of the REI coin). Appreciation and equity in a property is completely dead until you either sell it or refinance because that's the way it only gets into your account. Cash flow is monthly money actually in your account that you can spend.
Yeah, you could do that, or you could let the equity ride and enjoy the cash flow from rent increases, as in his example. Or you could cash out refinance and acquire more property if you prefer to grow. Or you could 1031 the equity into a larger property that may cash flow better. Or you can sell off some appreciated assets and us the proceeds to pay off the mortgages on the other properties and live off the cash flow that way. There are lots of options, all made possible by the equity and rent increases from market appreciation. The only way you can get that kind of appreciation in a so called cash flow market is to use forced appreciation. That is a great strategy to be sure that also works in appreciation markets, but it is a lot of work and you can only do it once per property where as market appreciation is truly passive, even more passive than cash flow in fact, and can happen repeatedly for the same property.
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
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.
So many questions if you want to go down this path...
1) And what annual passive income would you be at in 7 years?
2) What if you can't house hack for your first one because you don't live there? Where are you in 7 years with your $20k starting cash?
3) Even if you do live there and house hack, have you mapped out to know exactly where you would be in 7 years? Or is it just your guess that "it would not be a stretch to have acquired 3 small multiplexes in 7 years." Is that house hacking every property after refinancing the previous to a traditional mortgage once appreciation has created enough equity to do so? Or is that buying the next ones with a traditional investment loan?
4) Do you think that appreciation level of 10-20% annually is going to continue? Or was a lot of that the rebound from the crash? What happens when you plug a more realistic long term appreciation factor and not simply one that would have great market timing?
to number #1: I do not try to distinguish one source of profit from another. If the money is in my investment accounts I care little if it came from cash flow or appreciation and to be blunt do not understand why anyone would care. I try to keep my properties at 75% LTV so if I had acquired one property in 2010 and it went up $350K I would expect that I would have pulled out close to 75% of the $350K but I would have leveraged it to purchase the other properties. For simplicity lets assume I did not leverage it toward other properties but put it into my investment account. My net worth on the one property would have increased $350K but I could typically only obtain 75% of the total so I would have ~$200K on the one property in my investment account. Obviously if I leveraged it to buy more RE that performed similarly it would be much higher.
to #2: I am a strong advocate of investing local. If I lived in a different local that provided cash flow over appreciation I would start my investing local. After I had some success I would re-evaluate if there were better options but I never recommend someone start their RE investing not local. So #2 does not apply because I would not start investing somewhere I do not live.
To #3: It depends on what you consider map out. It is easy for me to see and prove that the original triplex would have more than doubled in value (I have a duplex that was not purchased 5 years ago that has doubled in value without any rehab). Do you think it would be a challenge to leverage over $300K in profit (from just the one unit) into two additional small multiplexes? In other words I tried to be real conservative on my estimate. I reality I believe an aggressive investor would have at least 4 small multiplexes and maybe 5.
To #4: No I do not think the appreciation will continue at that pace and I think some of it was from the rebound. So lets use some real examples of real long term appreciation in San Diego (all either mine or family purchases and all but one still owned). 1970: $19.5K, today ~$550k. 1977: $71K, today ~$800K. 1992: $167K, today ~$550K. 1999: $490k, today $1.3M. 2004: $751K, today ~950K, 2012: $302K, today ~$600K. 2013: $490k, today ~$700K. I am leaving one purchase from ~2002 out because I do not recall the price paid as well as leaving out the acquisitions in the last couple of years (too recent). Some of the purchases were purchased near market highs (1992 and 2004 both were down ~20% at one time) but they have all done well. That is because San Diego has over 50 years of long term appreciation but in that time there have been cycles of depreciation. So I do not attempt to know where San Diego prices will be 5 years from now (short-term) but I am quite confident that 15 years from now the prices with have appreciated more than inflation and more than most other locations.
Question #1 was the entirety behind my initial post about the fact that I was able to retire in under 7 years. So if you're not addressing the issue of passive annual income to achieve financial freedom then you missed the point of my initial post and all of the above we are talking about two different things.
Not in my opinion because the money that you acquire spends the same regardless of the source of the money. I have never understood the source of the money being much of a factor. Money in my account is money to spend/invest regardless of if it came from cash flow or appreciation and that money provides financial freedom regardless of the source. You are not the first person I have seen with your perspective but I simply do not understand it (not saying anything is wrong with your perspective but no one has been able to explain it to me where I understand their perspective).
But lets look at cash flow on the theoretical $300K triplex purchased 7 years ago and for simplicity no money is taken out to leverage elsewhere (I would never do this but it keeps things simple). Let's assume for simplicity that all the costs (PITI, vacancy, maintenance, misc, cap expense estimate) matched the rent. Assume the rent was $3K which 7 years ago 1% was easy to find on small San Diego multiplexes so this rent is likely lower than reality). However, a 1% San Diego property that is conventionally financed would have significant cash flow but for simplicity we will call it cash neutral. If the property is worth $650K today what do you think the rents have done? I suspect they did not double (otherwise it would still be easy to find 1% properties and it is not). But do you think it is reasonable that the rents are $4.5K? I do believe it is possible to find $650K non-rehabbed triplex in class c area with rents of $4.5K so I think that is reasonable. So in this theoretical case you would have close to $1.5K of cash flow (the reason I state close is vacancy is a function of the rent so the vacancy allowance should have increased).
Again I find this scenario very conservative as it does not leverage the appreciation and it started off with a 1% property that we made cash neutral (a 1% property in San Diego that got conventional financing is doing significantly better than cash neutral but it made this example simpler).
Not bad for an initial investment of <$20K especially because in this example we were conservative in every area except for maybe the current rent (i.e. we did not use any leverage beyond the initial loan, we had a 1% property show as cash neutral which it would definitely be cash positive). I believe the current rent estimate ($4,500) was not conservative or aggressive but pretty accurate to market depending on the class C area (pretty accurate to my class C investment area).
Note that as the property continues to appreciate the rents are likely to also appreciate so the cash flow on this property is likely to increase in this example where no equity is removed (again it is not what I would choose to do but it works for showing the potential cash flow).
Compare that to an location that has appreciation that is less than or equal inflation. What sort of rent appreciation are you likely to see? I would expect none in inflation adjusted dollars. Assume you used the initial $20K to purchase a non-owner occupied SFR investment property (typically requires 20% down) that was $90K (some of the $20K was used for closing costs in the previous example) that cash flows $500/month (darn good initial cash flow and probably not possible on a $90K property but lets be aggressive here). What is your expected cash flow today? Likely $500 plus inflation adjustment.
Property appreciation usually has a high correlation with rent appreciation. Therefore, if you did not refinance your San Diego purchase you would probably have better cash flow today, due to rent appreciation, than most other markets would have today on a property purchased 7 years ago.
So as far as achieving financial freedom in 7 years; you're saying your annual income needed because you would refinance a property (or the 3-4 that you have after 7 years). Pull out cash to add to the cash flow to cover your annual living expenses? Bold strategy. Max leverage til you die I suppose and hope that values don't drop when you're planning to refi and hope that interest rates don't jump a ton.
That's why people look at them as being very different (albeit two sides of the REI coin). Appreciation and equity in a property is completely dead until you either sell it or refinance because that's the way it only gets into your account. Cash flow is monthly money actually in your account that you can spend.
Note max leverage on a convention refinance is 75% LTV. Most ELOC on investment properties have similar constraints (when they can be found). It does not seem extremely bold to refinance to a 25% stake but I have not reinvested all of my RE profits back into RE so it is easy for me to say that.
I see your point on high rates could make it less desirable to take money out whether via ELOC or refinance but for the last over 20 years the interests rates have either lowered or been near historical lows. This could end at any time but it is also possible that a cash flowing property ceases to cash flow. In the last 20 years I am confident there are more areas that have ceased to cash flow (areas like Detroit if purchased near 2008) than there have been rate issues refinancing or using ELOC to get appreciation out of a property (because there have been no significant rate issues refinancing in the last 20 years as long as you qualify for the refinance (i.e. are not over extended)).
Anything is possible but what you point as an issue has not been an issue in a long time but purchases less than 10 years ago that cash flowed have ceased to cash flow (not in all areas but it did get some expert/experiences investors: Ever hear of Mike Butler? He wrote a good/great book (Landlording on Auto Pilot) and was successful for quite a few years but his market was Detroit).
I wasn't saying 75% LTV is a bold place to be. I was just saying that counting on a cash out refinance every couple years to be your income to live on is a bold plan.
There's a lot of hypothetical talk, so lets get to brass tax.
Are you financially free with enough passive income to live without working? If so, what did you start with? What did you have when you hit that goal? How quickly did you reach that goal? If you aren't there, why aren't you if it's as easy as you're stating it is within 7 years even if you only started with $20k?
I started with around $20k and am financially free purely off of the cash-flow and it took me less than 7 years.
I suspect you can tell that I have accumulated a fair amount of net worth but the definition of what is enough varies from person to person and their associated goals. I think I would be comfortable with 8 digits of assets and I am not there yet but more than half way there.
However, if I got a layoff notice tomorrow I would likely "retire" from my W2 job pursuits.
Most of my assets have been accumulated since 2012 as the great recession greatly reduced my net value as my real estate was down 20% and that was a large part of my net worth (everything was down). Today I am a bit more diversified mostly because I have not found the right REI to spend some of my pulled equity combined with the stock market has appreciated quite a bit (so my stock holdings are significantly higher than in 2012 due to leveraging RE appreciation).
Sounds like our paths have worked for both of us. I know I would have started investing for cash flow if that was what the local market presented as I feel strongly that a beginner investor's best chance of success is investing in his local market and self managing (I know there are exceptions as some people have invested out of their locale and been quite successful). I believe that an RE investor can be successful with cash flow, appreciation, or ideally both but I also believe appreciation for financed buy n hold will produce better ROI than cash flow without appreciation (due to leverage: 20% down and 10% appreciation provides a 50% return on the initial investment).
Good luck
- Rental Property Investor · Hong Kong, Hong Kong Island · Member since 2014 · 188 posts · 114 votes9y
There are a lot of valid points and contributions from @Matt R. @David Faulkner
- California had appreciation each time mortgage rates went down, and appreciation is commensurate to the bump in affordability provided by that in the long term.
- Rates are not going down much further so it is likely that prices will not appreciate as much there. Whether it is less likely for nominal prices to go down when rates go back up (anchoring) is not relevant.
- it only takes 3% net rental yield difference in the long run to compensate the past appreciation, and that difference may go down below 1% if rates stop going down.
Looking at past periods where rates went down significantly and rental yields similarly compressed is not helping anticipate appreciation now that the rates are low.
This is a long term consideration, in the short term, any markets can move up 15% just because of momentum, but I doubt you can sustain this in the next 15 years.
It seems easier to me for a single house price to go from 200k to 400k than from 1m to 2m, so given equal growth rates, I would favor areas where price is nearer replacement cost. It seems less fragile to me.
To answer the original question, its important not to get lost in all the valuation / cash flow criteria for assessing investments and recognize the key factors. Why does San Francisco RE appreciate so much?:
1) Location: SF is one of the most desirable, beautiful cities in the world. It is surrounded by ocean, nature, within 3 hours from skiing with a cosmopolitan, diverse population, a thriving cultural life. If you travel globally, and mention you live in SF, you always get people saying they love the city or want to move there. Compared to other international cities, its actually underpriced and will eventually catch up. http://www.financialsamurai.com/the-cheapest-inter...
2) Jobs: San Francisco is part of Silicon Valley and is home to startups and established tech companies (SalesForce, AirBnb, Uber etc). 10 years ago, if you worked in tech, you worked in the South Bay and lived in SF. Now, you can live and work in SF. SF currently has something like a <4% unemployment rate. That creates a huge pressure on rents.
3) Demand / Supply: Strict zoning laws and NIMBY prevent overbuilding which keeps housing supply extremely limited. Which combined with 1,2 is why rents are high. Go outside the downtown area and the rest of the city is 3 stories or lower.
So when buying in SF, you miss the point when you just look at cash flow/income only. IRR is a better picture since it includes appreciation. Imagine say, putting 400k down on a $1.6m multi-unit, making 0 cash flow in year 1 but increasing your net worth 120k a year based on IRR. That $0 cash flow eventually turns into 5k, 8, 10k over 10 years. Plus, SF RE essentially doubles in value every 10-15 years.
- Whittier , CA · Member since 2013 · 176 posts · 96 votes9y
@DavidD
You should be able to. Find the right broker/agent.
- Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes9y
@Jay Hinrichs However you slice it, there is still the same factors and dynamics in play. RE prices in Vancouver and Toronto got so high apparently it appears the government there felt it necessary to step in and regulate prices by imposing a 15% tax on foreign buyers.
This doesn't mean this is happening in every market in Canada. Vancouver is one of the most dense areas. Land area of only 115 square kilometer and 631,486 living in it equals about 5,491 persons per square kilometer. Toronto is about the 6th most dense with 630 square kilometer and 2.73 million people living in it or about 4,334 persons per square kilometer. This explains why the market there have in recent years appeared to be on speed.
If you compare this to say Hamilton, you see a different picture. Land area of 1,117 square kilometer, population of 536,917, and only 480 people per square kilometer. So average prices in Vancouver ($864,500) and Toronto ($755,755) is materially higher than in Hamilton ($414,476) for such reasons.
The same in California. Prices and conditions in San Francisco will tend to give California as a whole a bad rep but there are still nooks in California, 3 times less than the average price in SF. You just may spend some time in traffic to get around which has its own cost.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Account Closed Quickly I think were you live is a prime example of the CA thought process for many... they think NY they think Manhattan they think super expensive.. but little do they know they can go to many other parts of New York state and average sales prices are well under 150k per.
same with CA...
With many CA investors and I is one.. is I call them accidental millionaires.. I just happened to be born in the bay area and raised in Cupertino... so if you just happen to invest were you live and you did it a few decades ago you made millions.. simple as that.. luck of the draw.. luck of were your parents wanted to live etc etc.
But if you look at someone like @Austin Fruechting he played the cards that were dealt to him.. he invested were he lives.. and in those markets done right you can create cash flow that will give you meaningful spendable money.. most of course has started after the great crash.. So like me were I was lucky to grow up were I did and buy in CA in the 80's these folks bought post crash at incredible prices and cash flow worked.. and they had a means to scale.. you can't get anywhere if you don't scale with cash flow.. Whereas in CA its history has proven you can retire buying one SFR to live in . We see this in Oregon everyday.. Someone bought a home in Palo Alto for 400k late 80s sold it for 2.5 today made 500k tax free ( best tax treatment on the planet I have done it 4 times in the bay area and it created my lifestyle) pays some tax comes to Orygun pays cash for a nice 500k home puts a millski in the bank.. that sort of thing all on one home to live in.. there are very few markets in the US were this is true but there are others.. LA prime areas.. Boston NY WA Charleston North side Chicago etc etc. its not only CA or SF particularly.
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!
You select one time period to make your point that is not real long in duration It would be a very good market if for every time period it was the best performing market. How about trying the following start points: 2000, 1990, 1980, and 1970? This reflects various long term appreciation measurements and not a single medium term duration that is comprised of one of the biggest house depletion cycles in history. Then try the same durations for San Diego, Orange County, and San Francisco. When you have these numbers you will have a better idea why many "think Cali is the best thing on the earth to invest into".
In addition the return you site since 2012 may not be the best in the nation but it still is outstanding.
- Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes9y
@Jay Hinrichs Its not just a New York or California issue. Humans generally are quite good at stereotyping. You hear of NYC or SF RE prices and mentally extrapolate that fact to the rest of the state.
You can buy in Buffalo NY which according to Zillow currently has an average listing price of $75,000. But Buffalo is a city of some 250,000 people, less denser, and some 378 miles away from the population center of NYC. Think 378 miles away from LA.
The average price in Brooklyn with some 2.62 million people is about $718,000 and Manhattan about $1.3 million but the economic and social characteristics of these areas are very different.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Dan H.:
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!
You select one time period to make your point that is not real long in duration It would be a very good market if for every time period it was the best performing market. How about trying the following start points: 2000, 1990, 1980, and 1970? This reflects various long term appreciation measurements and not a single medium term duration that is comprised of one of the biggest house depletion cycles in history. Then try the same durations for San Diego, Orange County, and San Francisco. When you have these numbers you will have a better idea why many "think Cali is the best thing on the earth to invest into".
In addition the return you site since 2012 may not be the best in the nation but it still is outstanding.
Dan has found the Hot Tub Time Machine too! LOL. Hop on in ... the water is nice and warm. I suspect that you are wasting your time replying to Levi. No amount of reason will convince him.
Doesn't matter that his thesis has been consistently wrong on long term holds for decades on end.
Forget the long term historical data.
Forget that his thesis was wrong in environments of high interest rates, of low interest rates, of rising interest rates, and of falling interest rates.
Forget the underlying market fundamentals of high demand and persistently limited supply.
Forget that all our stuff cash flows too.
Forget that rent increases come along side price increases so that cash flow increases along with it.
Forget that we as locals can force appreciation and apply other methods to intelligently hedge our bets.
Forget logic.
Forget reason.
Nope, if anybody makes any profit in CA it is because they got lucky, and you need a hot tub time machine to make any money going forward. LOL. He doesn't like that movie much ... I think he prefers watching Slumdog Millionaire. All I can say is that it is probably a good thing that he wears that helmet all the time.
- I've participated in these conversations before so don't have much more to add but I'll say this: As much as I love San Diego I couldn't have done here what I've done in houston. Using the 7 year example I for sure built a portfolio in that time where I'd never have to work again. I don't want to get too personal but I had plenty enough cash to live comfortable. The only reason I kept going is I love it. And in those 3 years I double my portfolio again. Something else I wouldn't have been able to do here in SD. The cash flow generated is way more than I need so I use it to buy more property. I still look at deals all the time here in SD. Some M&M guy just sent me a 16 unit that was a 5 CAP with optimistic proforma in an "okay" area of San Diego. $4m for $25k/month rents. That wouldn't qualify for financing without a ton down and liberal amo (my stuff in houston I finance with 20% down and 20 year am and it his a DCR of 1.25x that the bank needs easily). And if that's an optimistic 5 CAP if you fix operations how the heck is that going to increase in value anytime soon? And that's one of the better deals I've seen here.
Originally posted by @Cody L.:
I've participated in these conversations before so don't have much more to add but I'll say this:
As much as I love San Diego I couldn't have done here what I've done in houston. Using the 7 year example I for sure built a portfolio in that time where I'd never have to work again. I don't want to get too personal but I had plenty enough cash to live comfortable.
The only reason I kept going is I love it. And in those 3 years I double my portfolio again. Something else I wouldn't have been able to do here in SD. The cash flow generated is way more than I need so I use it to buy more property.
I still look at deals all the time here in SD. Some M&M guy just sent me a 16 unit that was a 5 CAP with optimistic proforma in an "okay" area of San Diego. $4m for $25k/month rents. That wouldn't qualify for financing without a ton down and liberal amo (my stuff in houston I finance with 20% down and 20 year am and it his a DCR of 1.25x that the bank needs easily). And if that's an optimistic 5 CAP if you fix operations how the heck is that going to increase in value anytime soon? And that's one of the better deals I've seen here.
We have communicated before and you have done well but I do not understand how you can state you would not have done better than investing in San Diego 7 years back if you did financed buy n hold as mathematically it can be shown that San Diego has produced better ROI than Houston assuming San Diego financed at 20% (if you paid all cash for the San Diego property than maybe not). Leveraging the apprecion similar to how you leveraged the cash flow would have produced more in San Diego as indicated by the better ROI.
However if you were making the claim that Houston will be better for the next 7 years because you believe the CA appreciation cycle is over and the cash flow is minimal or none then only time will tell.
You did great in Houston but the stats indicate you would have done better in San Diego. I do realize that this is hindsite and maybe splitting hairs because Houston worked great for you.
Good luck
Originally posted by @Dan H.:
Originally posted by @Cody L.:
I've participated in these conversations before so don't have much more to add but I'll say this:
As much as I love San Diego I couldn't have done here what I've done in houston. Using the 7 year example I for sure built a portfolio in that time where I'd never have to work again. I don't want to get too personal but I had plenty enough cash to live comfortable.
The only reason I kept going is I love it. And in those 3 years I double my portfolio again. Something else I wouldn't have been able to do here in SD. The cash flow generated is way more than I need so I use it to buy more property.
I still look at deals all the time here in SD. Some M&M guy just sent me a 16 unit that was a 5 CAP with optimistic proforma in an "okay" area of San Diego. $4m for $25k/month rents. That wouldn't qualify for financing without a ton down and liberal amo (my stuff in houston I finance with 20% down and 20 year am and it his a DCR of 1.25x that the bank needs easily). And if that's an optimistic 5 CAP if you fix operations how the heck is that going to increase in value anytime soon? And that's one of the better deals I've seen here.
We have communicated before and you have done well but I do not understand how you can state you would not have done better than investing in San Diego 7 years back if you did financed buy n hold as mathematically it can be shown that San Diego has produced better ROI than Houston assuming San Diego financed at 20% (if you paid all cash for the San Diego property than maybe not). Leveraging the apprecion similar to how you leveraged the cash flow would have produced more in San Diego as indicated by the better ROI.
However if you were making the claim that Houston will be better for the next 7 years because you believe the CA appreciation cycle is over and the cash flow is minimal or none then only time will tell.
You did great in Houston but the stats indicate you would have done better in San Diego. I do realize that this is hindsite and maybe splitting hairs because Houston worked great for you.
Good luck
Maybe we meet for coffee and talk about it. Too long for this site. You'll have to take my word for it.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes9y
Regarding "There is so much misinformation on this site it is crazy." Indeed. The OP goes on to state "facts" such as "With that these locations mentioned have insane cash flow with rent appreciation as many have tripled or at least doubled rents since 2000." Has it doubled or trippled? Maybe in between? And this is facts based on ...? So I was curious to find out. The most uniform measure of Fair Market Rents comes from HUD. The stats are all out there on the . The reality is they are up about 50% in 16 years. For 0 (efficiency) to 4 BR, I looked up LA rents by MSA to start.
LA FMR 2017
Los Angeles-Long Beach-Glendale, CA HUD Metro FMR Area
fmr0 fmr1 fmr2 fmr3 fmr4
988 , 1195 , 1545 , 2079 , 2303LA FRM 2001
Los Angeles County Los Angeles--Long Beach, CA PMSA
New_FMR0 New_FMR1 New_FMR2 New_FMR3 New_FMR4
674 , 807 , 1021 , 1378 , 16460 BR delta= 47%
1 BR delta = 48%
2 BR delta = 51%
3 BR delta = 51%
4 BR delta = 40%$100 in 1/2001 has the same buying power as $139.77 today... so rents in LA are beating inflation. That's good.
I have no doubt that some landlords have doubled or tripled rents this century. But extrapolating to the general investor case doesn't work in the aggregate. There is no question the three cities you mention are top performers in the . And like rents, individual returns will be better or worse than the mean. San Diego and Houston are both good performers since 2010, up about 38%-39% in that time frame, again, on average. I'm sure there are people who have doubled or tripled their value since then.
Originally posted by @Chris Martin:
Regarding "There is so much misinformation on this site it is crazy." Indeed. The OP goes on to state "facts" such as "With that these locations mentioned have insane cash flow with rent appreciation as many have tripled or at least doubled rents since 2000." Has it doubled or trippled? Maybe in between? And this is facts based on ...? So I was curious to find out. The most uniform measure of Fair Market Rents comes from HUD. The stats are all out there on the . The reality is they are up about 50% in 16 years. For 0 (efficiency) to 4 BR, I looked up LA rents by MSA to start.
LA FMR 2017
Los Angeles-Long Beach-Glendale, CA HUD Metro FMR Area
fmr0 fmr1 fmr2 fmr3 fmr4
988 , 1195 , 1545 , 2079 , 2303LA FRM 2001
Los Angeles County Los Angeles--Long Beach, CA PMSA
New_FMR0 New_FMR1 New_FMR2 New_FMR3 New_FMR4
674 , 807 , 1021 , 1378 , 16460 BR delta= 47%
1 BR delta = 48%
2 BR delta = 51%
3 BR delta = 51%
4 BR delta = 40%$100 in 1/2001 has the same buying power as $139.77 today... so rents in LA are beating inflation. That's good.
I have no doubt that some landlords have doubled or tripled rents this century. But extrapolating to the general investor case doesn't work in the aggregate. There is no question the three cities you mention are top performers in the . And like rents, individual returns will be better or worse than the mean. San Diego and Houston are both good performers since 2010, up about 38%-39% in that time frame, again, on average. I'm sure there are people who have doubled or tripled their value since then.
I hear ya. Insane is not a measurable number. A couple points of clarification. LA County is not the same as LA city proper and rents are much cheaper in those county outliers (40 miles out) or more than half less in most cases. So if you chuck in Long Beach ( Wrong Beach) + enitre county those will bring down the rent averages a bunch. I can assure you the rents stated above are approximately $1000-2000 a month less than LA city proper typically. It would be like comparing NYC Manhattan rents to NYC Staten Island rents.
I get your point still and this is very much exact location based. Just consider LA proper population approx 4 mil and LA County population 10 mil to get an idea of some mass differences on those two averages.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes9y@Matt R. over the last 16 years, several MSAs have added/changed area. The Raleigh/Cary MSA is one. So, yes, it isn't exactly the same over 16 years. But I will add another observation. Successful people like yourself in real estate, and business in general, tend to think of their experience(s) as being the 'general', or prevalent, experience. There isn't anything wrong with that, but a lot of times it distorts the reality of the average person in the industry (be it real estate, farming, or car sales.) I got a good feel for that phenomenon during the great recession. Other peers were not only struggling, they were folding. While I and my colleague partners (save for one) didn't, we felt the effects but they weren't catastrophic. It's an interesting topic. For me, personally, as past of a portfolio strategy I have asset classes that are focused on cash flow and asset classes that are focused on appreciation. In general, since I am on the east coast and not in CA, I find real estate a good vehicle for cash flow with modest appreciation. Historically, I use O'Neil's CAN SLIM methods (largely tech small cap high beta) for real appreciation (e.g. 10+ fold). But the reality is that even after selling quite a bit, I and my company/members are still heavily invested in real estate.
Anyway... carry on.
- Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes9y
Originally posted by @Eddie V.:
@Account Closed Brooklyn actually has 4 million residents and would be considered the 2nd largest city if on its own.
Most recent census figures has Brooklyn at 2.6 million. If its population were to continue to grow at 5% per year, it would get to 4 million in about 9 years.
- Investor · Toronto, Ontario · Member since 2016 · 50 posts · 15 votes9y
@Jay Hinrichs I agree 100% Jay. I spoke about this with Brandon and Josh on the show. I'm amazed when people buy 100s of units where here in Toronto that could be north of $30 million ($200k-300k per unit). I find the states, for the most part, to be much more entrepreneurial. The other thing to mention is on the commercial side in Canada a handful of large landlords dominate the market...and are much more conservative (pensions, REITs etc).
Originally posted by @Account Closed:
Originally posted by @Eddie V.:
@Account Closed Brooklyn actually has 4 million residents and would be considered the 2nd largest city if on its own.
Most recent census figures has Brooklyn at 2.6 million. If its population were to continue to grow at 5% per year, it would get to 4 million in about 9 years.
My bad... My numbers were flipflopped. Brooklyn would be the 4th largest city by population and potentially surpass Chicago at #3. Not 4 million residents. I'll go back to my business now :P
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