Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
Here's a chart that I saw today from a reliable source. It shows the total debt of households, businesses and the government. There are two things that are quite clear from the chart:
1. Total debt has increased each year even during this new "era of austerity" because we have merely transferred debt from individual families and businesses to the government, in effect making some people's problem into everybody's problem.
2. Even more striking is how little household debt has declined relative to its historical norms. I think this means that we are going to witness perhaps an entire generation of financial stress as households try to reduce expenses and increase savings.
The thing that concerns me, as an RE investor, is how this will affect various investment strategies. If people are going to be strapped for cash for decades to come, doesn't that mean that their ability to pay rent will be diminished and any evaluation of rental properties should assume declining rents instead of stable or growing rents?
And what about investors who buy SFRs thinking that the lower rent yield will be offset by asset appreciation? How will home prices appreciate when the entire economy slowly shrinks to fit a more sustainable level of debt?
Although I have been doing short-term flips until now, my long-term goal is to be a buy-and-hold investor. But the chart below is making me reconsider my plans.
I would appreciate the thoughts of other BP members on this subject.
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y
Vikram, There are some things that people would have trouble living with out. I'm sure people will eat. People will also need a place to stay. If they can't afford to own a home or need to be able to move quickly then that will create a bigger pool of renters.
Property Manager · Dublin, OH · Member since 2009 · 1k+ posts · 291 votes
16y
With my bad english I can´t speak verbosely!
My strategy is to serve units to acceptable prices. You will find more tenants for low-cost (but good comfort and condition!) units whereby I eliminate Section 8 tenants for me.
If you can rent a building for $1k each unit and you find only 2 tenants for it, but for $700 you find more than 10 tenants then I would rent for $700 each unit assumed price of building is acceptable too.
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y
Vikram, There are some things that people would have trouble living with out. I'm sure people will eat. People will also need a place to stay. If they can't afford to own a home or need to be able to move quickly then that will create a bigger pool of renters.
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
16y
Charles, I agree that people need a home to stay in, but what about pricing? If homes continue to decline in value, why would rents move in the opposite direction?
Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes
16y
Let's consider the age old economic rule, "Supply and Demand". No matter what the economy does, people will always be pro creating. Thus demand for housing, whether to rent or buy, goes up. Also, people from other countries still want to come to the US because we are still the best country on the planet. More demand. But builders have backed way off from building, slowing down the supply side.
Although individuals may have high consumer debt, the last thing they want is to be homeless, thus the rent is paid first, in most cases.
As an investor, highly leveraged properties could be a concern. If you can keep the mortgage payment below half the rent amount, you should be OK. Then, if you have to lower the rent to keep it rented, you are still safe. But those investors who need the rent just to make the mortgage payment, the slightest hiccup, ie., vacancy, repair, eviction costs, etc..., puts them in a bad way.
There is good money to be made in today's market, but be careful where you tread. Appreciation is gone for at least 10 years. Rents will fluctuate, market to market. Keep a reserve for repairs, vacancies and miscellaneous expenses.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
I think that history is still the best way to prdict the future, with some modern day adjustments. Look at what happened during the depression. While most were strapped, those that could take advantage of the conditions created a great deal of wealth in real estate.
What is significantly different now is that were are moving into a world economy. There is the greatest transfer of wealth now than ever before and for the firts time ever, the next generation may be worse off than the previous.
As Charles said, we all have to eat and live somewhere, I don't see buying property at current prices and holding long term as a failing startegy. Bill
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
16y
Mike, that makes sense. So as population grows and the current overhang in supply is used up, do you expect prices to stablize at a level sufficient to construct new homes? I think I would have to agree with that.
What do you think would be the effect of the current price decline on future prices? In the same way that leverage + price increases led to a spiral of appreciation, I can see price decreases resulting in more and more mortgage defaults that create a downward spiral in prices. The data show that default rates are less correlated with affordability than with how much a property is underwater. (In other words, strategic defaults outnumber defaults by people who cannot afford their payment.)
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
16y
I think buy and hold makes sense IF you pick the right locales. My belief in this is primarily because:
1. The current environment signals cheaper currecy of all types...including dollars. This will decrease real costs/yields of dollars on fixed-rate investments like mortgages. Note that this only works if you don't have call provisions in your debt because you invoked the due-on-sale claue
2. The renter pool should grow because fewer people can afford to buy. This bodes well for the right types of rentals in the right spots
3. Having good tax shields through depreciation expense allows you to minimize taxes...which will be a VERY big deal with all of the debt the gov-mint has to pay back
I am not purchasing any more SFRs for long-term holds because the numbers suck when you compare them with MFDs. That is a primary reason the bulk of my time is spent finding investors now. Having investors to buy bigger properties eliminates 90% of my competition for product, gives me better cash yields, and appeals more toward the investment end of property purchase analysis instead of the, "Making it look pretty" end.
I think having a handful of buy-and-hold SFRs to reduce taxes and provide for an inflation hedge is a good next step for deploying your fix-and-flip funds. The alternative is to hold the money while it is depreciating and use it to chase MFDs. It is a judgment call IMO as to which scenario is better, but it is always a good policy to diversify your investments...place lots of small to medium bets a number of places...including securities. You won't get rich as quickly doing this, but if you are discplined and have a plan you WILL get rich.
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
16y
Bryan, your point regarding debt becoming less expensive over time presupposes significant inflation. With all the money that the government has been printing, that is not a bad assumption.
But I am worried that the inflationary consequences of printing money are going to get more than offset by the deflationary effects of shrinking consumer spending and, consequently, excess capacity in the economy.
While I admit that the jury is still out on this issue, why should we investors take the significant risk of capital depreciation when there are other opportunities out there that do not have macro-economic risks?
Regarding your other point about people moving out becoming renters, it is a valid point and similar to what Charles mentioned. But please see Jon's post about average household size increasing. In addition, I do not think higher rents are sustainable over time while SFR prices continue to decline.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
Originally posted by Mike M:
Let's consider the age old economic rule, "Supply and Demand". No matter what the economy does, people will always be pro creating. Thus demand for housing, whether to rent or buy, goes up. Also, people from other countries still want to come to the US because we are still the best country on the planet. More demand. But builders have backed way off from building, slowing down the supply side.
This is a common statement in the real estate investment business. Reality does not bear it out. While it is currently true that US population is currently growning, that's not the case in many countries. Japan, Europe and Russia, among others, are experience population declines. Their birth rate is below the replacement level. China is setting itself up for a large birth rate decline as their "one child" policy combined with a strong preference for boys is resulting in a large imbalance between the genders.
I tried to locate some reference to this. "The Economist" has had several articles in the last year about this topic, but it seems they're only available to subscribers, so it doesn't do any good to post links.
Harry Dent has data in his next-to-most recent book (haven't looked at the most recent one) that shows US population peaking in about 2050. The source is the UN. Admittedly, that's a long time. But statements like "don't you wish you could have bought your parents house for what they paid" imply the same kind of long term time frames.
Immigration is a significant source of population growth, and yet there's strong anti-immigrant sentiment in the US.
I too think Vikram's thesis has some support. While the current US budget deficit implies we will get inflation at some point, the debt burden and lack of economic growth may hold this back. Japan has experience over 10 years of stagnation and deflation. I think the parallels are scary.
Vikram mentions "strategic defaults". I assume you mean where people who could pay choose to walk away because their house is worth so much less than they owe. You see those posts here once in a while. Often the argument is its some big bank who got bailed out that holds that loan. In reality, every dollar in a mortgage (or any sort of debt) eventually traces its way back to some person. People put their money in banks and mutual funds and pay their taxes, and those are the dollars that are going away when someone "strategically defaults." That effect has to ripple through the economy as people's nest eggs shrivel.
Baby boomers are beginning to retire. They're shifting from putting money into savings, which creates demand for investments (stocks, bonds, and real estate) to withdrawing and spending that money. Investments are just like any other product. As demand declines, prices decline. Young people are struggling to just to have a job and make ends meet, let alone be serious about saving. I think this bodes badly for stock prices in particular and investment values in general. That creates a vicious cycle as retirees see their nest eggs evaporate because of declining prices.
Yet another data point. On the east side of downtown Denver are lots of big, old Victorian houses. Those have all been cut up into small apartments. So, what was one house for one family has become four or six apartments. Higher occupancy. MikeOH has mentioned he's seen people moving in together. Yes, people will need places to live. Doesn't mean each four member family needs a 6/6/4 in the burbs.
Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
16y
i think someone said it best on another thread....3 and 4 bedroom rentals are the way to go right now....families and generations within a family will be moving in with eachother to save money...i'm already seeing this where in one 2 bed apartment i have where a brother and sister who have moved in together, each with one child...i just got a house under contract today for 10,000.....how much lower can we possibly get i wonder??? i say yes, it's a great time for buy and hold
Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes
16y
Jon
Obviously, Supply and Demand is an extremely simplistic way to look at something as complicated as the US Housing Market. You have to toss in John Nash's Theory of Governing Dynamics, Keynesian Economics and even Chaos Theory. Throw in banks unwillingness to lend, and you have a very mixed up housing market.
How would our housing market look if the government never got involved? No FHA, VA, FNMA, FDMC, etc... Adam Smith would say that the free market would equalize itself, via the 'invisible hand.' John Keynes would say the market would collapse without government help. While I lean heavily towards Smith, I also understand the government's role as well. Our current crisis, as far as I am concerned, is from TOO MUCH government intervention, starting back in the mid 1990s. Not everyone deserves to be a home owner!
As for the OP, buy and hold makes better sense now than it did, even 2 years ago.
Rental Property Investor · Baltimore, MD · Member since 2009 · 624 posts · 559 votes
16y
Great topic... and one that I talk about a lot on my radio show.
Several things to consider in support of the "buy and hold" crowd...
The overall homeownership rate is now at 67+% down from 69.7% and it is expected to drop to its structural norm of around 65%. It is obvious that those one time homeowners will need some place to live and many will become renters in the process.
Also, the attrition rate of available rental units exceeds 200K a year and the build rate for new units doesn't come close to covering the delta.
Assuming our economy continues to be challenged (a correct assumption in my opinion) the demand for rentals should only increase... making for some great opportunites for those so inclined.
Bottom line... I am extremely bullish on buying and holding for the foreseeable future.
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y
I would have to agree with your assessment Peter. I'm sure that many will be looking for more affordable rents, but I don't think we are going to see a long term multi-generational living arrangements. Most younger people that I know do what they can to get away from parents. Other cultures tend to have stronger family ties and can make these situations work, I don't see this becoming the norm in the US at least not in the foreseeable future.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
16y
Originally posted by Vikram C.:
Bryan, your point regarding debt becoming less expensive over time presupposes significant inflation. With all the money that the government has been printing, that is not a bad assumption.
It doesn't presuppose SIGNIFICANT inflation. It presupposes some inflation over a long period of time...which is virtually assured. The government has a vested interest in paying back debt in cheaper dollars and likely cannot pay things back any other way. Think of all of the schmucks out there buying zero coupon bonds at a "discount" and getting zero real yield...laughable.
Cheap currency is here to stay in all of the developed countries because of our massive entitlement beast that cannot be slayed.
Originally posted by Vikram C.:
But I am worried that the inflationary consequences of printing money are going to get more than offset by the deflationary effects of shrinking consumer spending and, consequently, excess capacity in the economy.
I see this as a transitory phenomenon. I am fully confident that the US consumer will go right back to spending 103% of their income as soon as the media stops pounding the crisis drum. Our society is built on living outside of our means. As a landlord you are exploiting this fact, getting someone else to pay off an appreciating asset, and getting tax benefits to boot. It is hard to argue with this as an investment strategy.
Originally posted by Vikram C.:
While I admit that the jury is still out on this issue, why should we investors take the significant risk of capital depreciation when there are other opportunities out there that do not have macro-economic risks?
What opportunities do you know of that are immune to macroeconomic risks? I don't know of any. There are, perhaps, many that have lower betas. These investments carry lower returns though. The beauty of real estate is that you are able to leverage the investment with very cheap debt. The government drives down the real cost of capital and it is super cheap after tax shields are factored in. The trick is buying right and finding something that is desirable for prospective tenants. Something in the meaty part of the bell curve for the average family to afford makes and excellent rental if purchased in the right locale.
Originally posted by Vikram C.:
Regarding your other point about people moving out becoming renters, it is a valid point and similar to what Charles mentioned. But please see Jon's post about average household size increasing. In addition, I do not think higher rents are sustainable over time while SFR prices continue to decline.
Average household size may increase for a while, but as employment improves people will want to venture out on their own. Our culture emphasizes independence, which doesn't bode well for the philosophy that we will have European-style multi-family households.
Rents aren't perfectly correlated with housing prices. SFR prices aren't declining everywhere. I am very confident that prices will rise in Austin over time. You need to pick the right markets for your long-term investments. Quick turn projects work well in every market, but I am a fan of being very choosy about where to buy long-term investments. The primary component of returns for SFRs is usually driven by appreciation because you are competing with owner-occupant's bid prices for the asset. Prices are inflated beyond what a discounted cash flow model would say the investment is worth.
This is also a big part of the reason why multi family dwellings (MFDs...for the other poster that asked) are more desirable from my perspective. I have a hard time valuing things based on the, "Principle of substitution" that NAR has promulgated to optimize their agency model commissions. As a businessman and entrepreneur first I like making rational decisions on investments based on cash flow discounting. Call me a purist ;-)
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
16y
Bryan, take a look at Japan over the last twenty years. Inflation has averaged less than 1% during that period. Home values have declined by about two-thirds during the same period. We have been assuming long-term price appreciation along with meaningful inflation for a while now but neither is inevitable.
The Japanese government has had decades-long economic stimulus during that period with huge deficits and low interest rates. This was all done to prevent the collapse after a real-estate bubble burst in the late 1980s. Sounds eerily familiar, doesn't it?
I guess one significant difference between us and Japan is that we have increasing population. This should, in theory, put a floor on our prices and make them anchored to new construction costs. (In the long run, of course.)
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
16y
I think the fix-and-flip business is relatively immune from macroeconomic changes if you price properties to get rid of them quickly. I actually like that business until the dust settles on the economy and we have some sense of long-term price stability.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
16y
The Japanese also save a lot more than we do and have a very conservative culture. I don't think you can compare our current situation to theirs without accounting for the significant cultural differences.
The tax benefits and low interest rates still make buy and hold a good investment even if there isn't inflation. You are still having someone else pay for your net worth gains...pretty simple. It doesn't get you rich quick, but I don't think there is a better long-term investment when you consider everything...absent maybe starting your own business exploiting your talents.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
16y
Originally posted by Vikram C.:
I think the fix-and-flip business is relatively immune from macroeconomic changes if you price properties to get rid of them quickly. I actually like that business until the dust settles on the economy and we have some sense of long-term price stability.
If you wait until there is long-term price stability you will be buying with the herd. The time to buy is NOW. When there is blood in the streets...
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y
IMO each investing strategy has its own positive and negative points. Part of my reason to be here on BP is to learn more about other investment strategies. Does that mean that I would end my current investment strategy? No, I have a high comfort level and am well acquainted with the good and bad aspects of rentals in my market.
Branching out to other forms of investing will eventually be funneled into additional buy and hold investments.
I'm sure we are going to be going through some tough times. IMO I will feel more comfortable holding onto RE rather than any other investment including cash.
I also fear that in time the legislature is going to make it tougher to invest, making many of the current strategies difficult or impossible.
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
16y
Originally posted by Bryan Hancock:
The Japanese also save a lot more than we do and have a very conservative culture. I don't think you can compare our current situation to theirs without accounting for the significant cultural differences.
Japanese household debt is currently about 70% of GDP while it is about 90% of GDP in the U.S. Not very different. The real savers are India, China, etc. where total household debt is about 10% of GDP.
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
16y
Originally posted by Bryan Hancock:
If you wait until there is long-term price stability you will be buying with the herd. The time to buy is NOW. When there is blood in the streets...
Bryan, I think this is more true of volatile markets such as stocks and commodities - you definitely have to see things ahead of others to make an extra buck. But RE prices seem to change at a glacial pace so why not wait unti it turns before getting into buy and hold? Why do that while prices are still declining and you do not know where the bottom is?
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
16y
Charles, when I joined BP, I was interested in buy-and-hold. I later stumbled upon the fix-and-flip stuff but have still been thinking about buy-and-hold as my long term plan. The reason I started this thread is because I am getting increasingly worried about that long-term plan and wanted to brainstorm with you guys.
This thread has been very good because it has given me a lot to think about.
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y
Originally posted by Vikram C.:
Charles, when I joined BP, I was interested in buy-and-hold. I later stumbled upon the fix-and-flip stuff but have still been thinking about buy-and-hold as my long term plan. The reason I started this thread is because I am getting increasingly worried about that long-term plan and wanted to brainstorm with you guys.
This thread has been very good because it has given me a lot to think about.
Just another reason I enjoy BP. There are many investors here with many diverse experiences and insights. I hope that I never get to the point I can't learn.
I think a large part of investing is buying right. Another important part is knowing that you bought a price at an appropriate price. I don't want to be second guessing after the purchase that is a recipe for eventual disaster.