CoC returns in todays high rate environment?

Short-Term & Vacation Rental Discussions

CoC returns in todays high rate environment?

Developer · Bend · Member since 2023 · 64 posts · 12 votes

What's a reasonable cash-on-cash Short Term Rental return with 7.5% rates nowadays? Feels like 12-15% is solid, while we expect to refinance in the years ahead at a point or two lower. Any strong opinions?

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John Carbone

Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes

Quote from @Luke Carl:

When my parents bought their first house their rate was 22%

These rates aren’t high. It just happened quickly.

I hear this argument all the time from people but it is a loaded answer. What was the asset price of your parents home when they bought and what was their household salary? The old timers I talk to usually have a story of “I made 20k a year and my house was 60k”, now you talk to younger kids who don’t already own a house and they are making 60-70k in a decent job but they are needing to pay 500k+ and they are spending half of household income on shelter. I’m sure you know what needs to happen in the long run to get things to equilibrium.

ever since the fed started raising rates the market has been predicting a stop and rate cuts since we were at a 3-4 percent fed funds, now we are nearing 6 percent and no guidance on cuts, but the “market” still doesn’t believe it. It’s the belief that rates will go back lower that is keeping asset prices higher. If we had 22 percent mortgages like your parents did (even 6-8 percent) and the duration was known to be several years of it, asset prices would collapse 50 percent in both stocks and real estate.

Notice how in every cycle the cost to own dips down to at or below the cost to rent. Cost to buy right now is parabolic relative to cost to rent. So either rents go much higher, which if that happens, the fed will keep raising rates because they are fighting inflation and shelter is their biggest culprit right now.

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Collin HaysBusiness Member
Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
3y
Quote from @Daniel Netzer:

What's a reasonable cash-on-cash Short Term Rental return with 7.5% rates nowadays? Feels like 12-15% is solid, while we expect to refinance in the years ahead at a point or two lower. Any strong opinions?
If your rental is paid off, the interest rate doesn’t matter. Otherwise, it depends a lot on how much debt you have. If you’ve got a $1 million loan on a $1 million house at X%, that’s a different picture than a $100K loan for the same property.
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Luke CarlPro Member
Rental Property Investor · Tennessee Florida · Member since 2016 · 4k+ posts · 5k+ votes
3y
When my parents bought their first house their rate was 22%
These rates aren’t high. It just happened quickly.
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John Carbone
Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
3y
Quote from @Daniel Netzer:

What's a reasonable cash-on-cash Short Term Rental return with 7.5% rates nowadays? Feels like 12-15% is solid, while we expect to refinance in the years ahead at a point or two lower. Any strong opinions?
the days of the 10 percent down 2nd home/STR loophole are closed. Fannie Freddie added several origination points to these loans to make them more expensive and rates are obviously higher. If you put 10 percent down now, you very likely will be negative each month. There will be exceptions, but very few.

also For every dollar you invest now in a rental you have a 4-5 percent opportunity cost with bonds to factor in your equation.
1 Reply
John Carbone
Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
3y
Quote from @Luke Carl:

When my parents bought their first house their rate was 22%
These rates aren’t high. It just happened quickly.

I hear this argument all the time from people but it is a loaded answer. What was the asset price of your parents home when they bought and what was their household salary? The old timers I talk to usually have a story of “I made 20k a year and my house was 60k”, now you talk to younger kids who don’t already own a house and they are making 60-70k in a decent job but they are needing to pay 500k+ and they are spending half of household income on shelter. I’m sure you know what needs to happen in the long run to get things to equilibrium.

ever since the fed started raising rates the market has been predicting a stop and rate cuts since we were at a 3-4 percent fed funds, now we are nearing 6 percent and no guidance on cuts, but the “market” still doesn’t believe it. It’s the belief that rates will go back lower that is keeping asset prices higher. If we had 22 percent mortgages like your parents did (even 6-8 percent) and the duration was known to be several years of it, asset prices would collapse 50 percent in both stocks and real estate.

Notice how in every cycle the cost to own dips down to at or below the cost to rent. Cost to buy right now is parabolic relative to cost to rent. So either rents go much higher, which if that happens, the fed will keep raising rates because they are fighting inflation and shelter is their biggest culprit right now.

11 Reply
Daniel Netzer
OP
Developer · Bend · Member since 2023 · 64 posts · 12 votes
3y
Quote from @John Carbone:

Quote from @Luke Carl:

When my parents bought their first house their rate was 22%
These rates aren’t high. It just happened quickly.
I hear this argument all the time from people but it is a loaded answer. What was the asset price of your parents home when they bought and what was their household salary? The old timers I talk to usually have a story of “I made 20k a year and my house was 60k”, now you talk to younger kids who don’t already own a house and they are making 60-70k in a decent job but they are needing to pay 500k+ and they are spending half of household income on shelter. I’m sure you know what needs to happen in the long run to get things to equilibrium.

ever since the fed started raising rates the market has been predicting a stop and rate cuts since we were at a 3-4 percent fed funds, now we are nearing 6 percent and no guidance on cuts, but the “market” still doesn’t believe it. It’s the belief that rates will go back lower that is keeping asset prices higher. If we had 22 percent mortgages like your parents did (even 6-8 percent) and the duration was known to be several years of it, asset prices would collapse 50 percent in both stocks and real estate.

Not sure I follow you. Are you saying that if we ( the market ) knew we were staying in the 6-8% rates range for several years, the market would drop 50%? It doesn't work that way... Unless we have a sharp recession or a huge influx of inventory. Prices are staying here and will continue to creep upward, even at 7%+. Assuming all else being equal.

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John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
3y
Quote from @John Carbone:

Quote from @Daniel Netzer:

What's a reasonable cash-on-cash Short Term Rental return with 7.5% rates nowadays? Feels like 12-15% is solid, while we expect to refinance in the years ahead at a point or two lower. Any strong opinions?
the days of the 10 percent down 2nd home/STR loophole are closed. Fannie Freddie added several origination points to these loans to make them more expensive and rates are obviously higher. If you put 10 percent down now, you very likely will be negative each month. There will be exceptions, but very few.

also For every dollar you invest now in a rental you have a 4-5 percent opportunity cost with bonds to factor in your equation.

Great point about the opportunity costs. There are also high yield money market accounts paying 4.5 and 5%.
1 Reply
Daniel Netzer
OP
Developer · Bend · Member since 2023 · 64 posts · 12 votes
3y
Quote from @John Underwood:

Quote from @John Carbone:

Quote from @Daniel Netzer:

What's a reasonable cash-on-cash Short Term Rental return with 7.5% rates nowadays? Feels like 12-15% is solid, while we expect to refinance in the years ahead at a point or two lower. Any strong opinions?
the days of the 10 percent down 2nd home/STR loophole are closed. Fannie Freddie added several origination points to these loans to make them more expensive and rates are obviously higher. If you put 10 percent down now, you very likely will be negative each month. There will be exceptions, but very few.

also For every dollar you invest now in a rental you have a 4-5 percent opportunity cost with bonds to factor in your equation.

Great point about the opportunity costs. There are also high yield money market accounts paying 4.5 and 5%.

Yeah, but you have to factor in the opportunity cost of lost appreciation/yield of a real estate asset acquired today at tomorrow's reduced interest rates. Nobody has a crystal ball, so that's the gamble.
1 Reply
John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
3y
Quote from @John Carbone:

Quote from @Luke Carl:

When my parents bought their first house their rate was 22%
These rates aren’t high. It just happened quickly.

I hear this argument all the time from people but it is a loaded answer. What was the asset price of your parents home when they bought and what was their household salary? The old timers I talk to usually have a story of “I made 20k a year and my house was 60k”, now you talk to younger kids who don’t already own a house and they are making 60-70k in a decent job but they are needing to pay 500k+ and they are spending half of household income on shelter. I’m sure you know what needs to happen in the long run to get things to equilibrium.

ever since the fed started raising rates the market has been predicting a stop and rate cuts since we were at a 3-4 percent fed funds, now we are nearing 6 percent and no guidance on cuts, but the “market” still doesn’t believe it. It’s the belief that rates will go back lower that is keeping asset prices higher. If we had 22 percent mortgages like your parents did (even 6-8 percent) and the duration was known to be several years of it, asset prices would collapse 50 percent in both stocks and real estate.

Notice how in every cycle the cost to own dips down to at or below the cost to rent. Cost to buy right now is parabolic relative to cost to rent. So either rents go much higher, which if that happens, the fed will keep raising rates because they are fighting inflation and shelter is their biggest culprit right now.

I have a bunch of LTR properties that are paid for. When I have a turn over a few years later, I am amazed on what the new market rent is.
2 Reply
John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
3y
Quote from @Daniel Netzer:

Quote from @John Underwood:

Quote from @John Carbone:

Quote from @Daniel Netzer:

What's a reasonable cash-on-cash Short Term Rental return with 7.5% rates nowadays? Feels like 12-15% is solid, while we expect to refinance in the years ahead at a point or two lower. Any strong opinions?
the days of the 10 percent down 2nd home/STR loophole are closed. Fannie Freddie added several origination points to these loans to make them more expensive and rates are obviously higher. If you put 10 percent down now, you very likely will be negative each month. There will be exceptions, but very few.

also For every dollar you invest now in a rental you have a 4-5 percent opportunity cost with bonds to factor in your equation.

Great point about the opportunity costs. There are also high yield money market accounts paying 4.5 and 5%.

Yeah, but you have to factor in the opportunity cost of lost appreciation/yield of a real estate asset acquired today at tomorrow's reduced interest rates. Nobody has a crystal ball, so that's the gamble.

You are absolutely correct that no one knows the future and appreciation is never guaranteed.
Some people that bought a STR at too high of a price and found out their market was saturated have had to sell and write a check at closing.
However bond yields and high interest money market accounts are guaranteed for now.
2 Reply
Collin HaysBusiness Member
Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
3y
In the Smokies, the average sales price has declined 25 percent YOY. That’s a chunk, particularly for the 2021 and 2022 buyers. I look for another 25% decline in the next 12 months.

This really isn't that difficult: Prices will continue to decline until new buyers decide it makes economic sense to buy with a 10% APR loan. That means we've got a lot more downside in prices.

With 3.5% interest, a house at 10X earnings might make sense. With 10% interest, the new multiple might be 5X or 6X.
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Daniel Netzer
OP
Developer · Bend · Member since 2023 · 64 posts · 12 votes
3y
Quote from @Collin Hays:

In the Smokies, the average sales price has declined 25 percent YOY. That’s a chunk, particularly for the 2021 and 2022 buyers. I look for another 25% decline in the next 12 months.
This really isn't that difficult: Prices will continue to decline until new buyers decide it makes economic sense to buy with a 10% APR loan. That means we've got a lot more downside in prices.
This seems like one of the less regulated FOMO STR markets that spiked over the last few years. Makes sense that it's going to tumble down a bit.
1 Reply
John Carbone
Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
3y
Quote from @Collin Hays:

In the Smokies, the average sales price has declined 25 percent YOY. That’s a chunk, particularly for the 2021 and 2022 buyers. I look for another 25% decline in the next 12 months.

This really isn't that difficult: Prices will continue to decline until new buyers decide it makes economic sense to buy with a 10% APR loan. That means we've got a lot more downside in prices.

With 3.5% interest, a house at 10X earnings might make sense. With 10% interest, the new multiple might be 5X or 6X.

Good points, and if you factor in declining revenues on top, it’s a nice recipe for a Molotov cocktail on the sales prices. That being said, there are still some late comers paying the higher multiples, but the herd is being thinned out as there are fewer and fewer buyers at current asking prices.

0 Reply
Michael BaumPro Member
Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
3y
This is quite a can of worms. Everything is in flux all the time, especially right now. No way to know how things will shake out in the end.
Like just about everyone said, it is going to all depend on purchase price, location etc.
I think you could be optimistic on 15%. 7-10 is probably more real, if you could get it.
3 Reply
Kyser Montalvo
Member since 2022 · 5 posts · 1 vote
3y
@John Carbone I like your breakdown. I just have one question. Why would rates go higher if rents go higher? I feel like that's a self-defeating situation for the fed.
If rates go higher more people are gonna be priced out of the housing market and forced to rent. Therefore pushing rents higher. Thus rent inflation increasing. Tell me if I'm missing something, but with real estate being ultra rate-sensitive I don't see how the fed can stop this self-eating snake if they are looking to stop shelter inflation.
0 Reply
John Carbone
Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
3y
Quote from @Kyser Montalvo:

@John Carbone I like your breakdown. I just have one question. Why would rates go higher if rents go higher? I feel like that's a self-defeating situation for the fed.
If rates go higher more people are gonna be priced out of the housing market and forced to rent. Therefore pushing rents higher. Thus rent inflation increasing. Tell me if I'm missing something, but with real estate being ultra rate-sensitive I don't see how the fed can stop this self-eating snake if they are looking to stop shelter inflation.

Yeah it’s not an easy thing to accomplish from the fed since they left interest rates too low for too long to finance the covid giveaway money for sitting at home.

Higher rates will slowly lead to more job loses/higher unemployment. Just Friday we finally saw the number tick up from 3.5 to 3.8 percent. It’s a slow process, but each month that passes with elevated interest rates like we have the economy gets squeezed harder. With higher unemployment, you get the pullback in rents due to demand softening. Humans are adaptable if need be, it’s not their choice to live with parents or roomates but it happens when economic conditions require it. This happened during 2008-2012 the college graduates then were the butt of jokes for still living with their parents. We have a housing shortage based on convenience and it’s essentially a first world problem.

also, there are many developments going on across the country to bring more rentals onto the market. Vacant high rise office buildings are being converted to apartments at a very cheap entry point for developers and many people are living in RVs right now across the country and that number is constantly going up. all of this puts downward pressure on housing rentals at the entry level point.

home builders are also building at record levels right now to meet the demand that’s out there with 2 year teaser rates to keep the payments low. They are building these as cheap as possible to keep costs low to get sales.

on the single family home front, investors are pulling back drastically on home purchases to rent out.

https://www.redfin.com/news/investor-home-purchases-drop-q2-...

we essentially have a “have” and the “have nots” economy now. Those who bought with sub 4 percent mortgages are in the “have” camp and those who do not have those favorable terms are the “have nots” life isn’t fair sometimes but it is what it is. Essentially if you listened to Dave Ramseys advice you have shot yourself in the foot twice and you are probably set back a decade or more in wealth.

Trying to fight the math won’t change the outcome. Either wages need to rise astronomically, which data suggests it’s falling ….or asset prices need to fall….or the fed needs to go back to rate cuts and risk inflation spiraling out of control to keep asset prices elevated long term.

https://fortune.com/2023/08/29/salaries-raises-new-hires-dec...

I’m not selling my holdings because my interest rates average mid 3s.

3 Reply
Andrew SteffensBusiness Member
Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes
3y
Every market is different. Here in Tampa we are still appreciating because of the demand coming from people moving here. I suspect similar in other markets where there is strong buyer and demand. We also have high tourist demand here. While peak demand and rates are now behind us, strong properties continue to do well and good potential properties are still to be found. I am seeing properties every week in the 10-15% CoC range.
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Collin HaysBusiness Member
Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
3y
Quote from @John Carbone:

Quote from @Kyser Montalvo:

@John Carbone I like your breakdown. I just have one question. Why would rates go higher if rents go higher? I feel like that's a self-defeating situation for the fed.
If rates go higher more people are gonna be priced out of the housing market and forced to rent. Therefore pushing rents higher. Thus rent inflation increasing. Tell me if I'm missing something, but with real estate being ultra rate-sensitive I don't see how the fed can stop this self-eating snake if they are looking to stop shelter inflation.

Yeah it’s not an easy thing to accomplish from the fed since they left interest rates too low for too long to finance the covid giveaway money for sitting at home.

Higher rates will slowly lead to more job loses/higher unemployment. Just Friday we finally saw the number tick up from 3.5 to 3.8 percent. It’s a slow process, but each month that passes with elevated interest rates like we have the economy gets squeezed harder. With higher unemployment, you get the pullback in rents due to demand softening. Humans are adaptable if need be, it’s not their choice to live with parents or roomates but it happens when economic conditions require it. This happened during 2008-2012 the college graduates then were the butt of jokes for still living with their parents. We have a housing shortage based on convenience and it’s essentially a first world problem.

also, there are many developments going on across the country to bring more rentals onto the market. Vacant high rise office buildings are being converted to apartments at a very cheap entry point for developers and many people are living in RVs right now across the country and that number is constantly going up. all of this puts downward pressure on housing rentals at the entry level point.

home builders are also building at record levels right now to meet the demand that’s out there with 2 year teaser rates to keep the payments low. They are building these as cheap as possible to keep costs low to get sales.

on the single family home front, investors are pulling back drastically on home purchases to rent out.

https://www.redfin.com/news/investor-home-purchases-drop-q2-...

we essentially have a “have” and the “have nots” economy now. Those who bought with sub 4 percent mortgages are in the “have” camp and those who do not have those favorable terms are the “have nots” life isn’t fair sometimes but it is what it is. Essentially if you listened to Dave Ramseys advice you have shot yourself in the foot twice and you are probably set back a decade or more in wealth.

Trying to fight the math won’t change the outcome. Either wages need to rise astronomically, which data suggests it’s falling ….or asset prices need to fall….or the fed needs to go back to rate cuts and risk inflation spiraling out of control to keep asset prices elevated long term.

https://fortune.com/2023/08/29/salaries-raises-new-hires-dec...

I’m not selling my holdings because my interest rates average mid 3s.

Really good analysis.
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0 Reply
Daniel Netzer
OP
Developer · Bend · Member since 2023 · 64 posts · 12 votes
3y
Quote from @Collin Hays:

Quote from @John Carbone:

Quote from @Kyser Montalvo:

@John Carbone I like your breakdown. I just have one question. Why would rates go higher if rents go higher? I feel like that's a self-defeating situation for the fed.
If rates go higher more people are gonna be priced out of the housing market and forced to rent. Therefore pushing rents higher. Thus rent inflation increasing. Tell me if I'm missing something, but with real estate being ultra rate-sensitive I don't see how the fed can stop this self-eating snake if they are looking to stop shelter inflation.

Yeah it’s not an easy thing to accomplish from the fed since they left interest rates too low for too long to finance the covid giveaway money for sitting at home.

Higher rates will slowly lead to more job loses/higher unemployment. Just Friday we finally saw the number tick up from 3.5 to 3.8 percent. It’s a slow process, but each month that passes with elevated interest rates like we have the economy gets squeezed harder. With higher unemployment, you get the pullback in rents due to demand softening. Humans are adaptable if need be, it’s not their choice to live with parents or roomates but it happens when economic conditions require it. This happened during 2008-2012 the college graduates then were the butt of jokes for still living with their parents. We have a housing shortage based on convenience and it’s essentially a first world problem.

also, there are many developments going on across the country to bring more rentals onto the market. Vacant high rise office buildings are being converted to apartments at a very cheap entry point for developers and many people are living in RVs right now across the country and that number is constantly going up. all of this puts downward pressure on housing rentals at the entry level point.

home builders are also building at record levels right now to meet the demand that’s out there with 2 year teaser rates to keep the payments low. They are building these as cheap as possible to keep costs low to get sales.

on the single family home front, investors are pulling back drastically on home purchases to rent out.

https://www.redfin.com/news/investor-home-purchases-drop-q2-...

we essentially have a “have” and the “have nots” economy now. Those who bought with sub 4 percent mortgages are in the “have” camp and those who do not have those favorable terms are the “have nots” life isn’t fair sometimes but it is what it is. Essentially if you listened to Dave Ramseys advice you have shot yourself in the foot twice and you are probably set back a decade or more in wealth.

Trying to fight the math won’t change the outcome. Either wages need to rise astronomically, which data suggests it’s falling ….or asset prices need to fall….or the fed needs to go back to rate cuts and risk inflation spiraling out of control to keep asset prices elevated long term.

https://fortune.com/2023/08/29/salaries-raises-new-hires-dec...

I’m not selling my holdings because my interest rates average mid 3s.

Really good analysis.
"Home developers are building at record high levels." Are you sure about that? I'm seeing the opposite as carrying cost is taking a toll on many.
1 Reply
Dustin Lauer
Lender · Orlando, FL · Member since 2016 · 340 posts · 115 votes
3y
@Daniel Netzer
My strong opinion is to be patient and demand at least a 18% cash on cash if you’re leveraging and at least a 10% return all cash. Things will get tough and sellers will sell cheap. It takes 100k salary to buy a basic car these days and more if you want to own a median priced home. If you can make 8+% investing with little risk in very passive options most people should require much more for isolating your capital into real estate and a less passive return. IMHO
3 Reply
John Carbone
Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
3y
Quote from @Daniel Netzer:

Quote from @Collin Hays:

Quote from @John Carbone:

Quote from @Kyser Montalvo:

@John Carbone I like your breakdown. I just have one question. Why would rates go higher if rents go higher? I feel like that's a self-defeating situation for the fed.
If rates go higher more people are gonna be priced out of the housing market and forced to rent. Therefore pushing rents higher. Thus rent inflation increasing. Tell me if I'm missing something, but with real estate being ultra rate-sensitive I don't see how the fed can stop this self-eating snake if they are looking to stop shelter inflation.

Yeah it’s not an easy thing to accomplish from the fed since they left interest rates too low for too long to finance the covid giveaway money for sitting at home.

Higher rates will slowly lead to more job loses/higher unemployment. Just Friday we finally saw the number tick up from 3.5 to 3.8 percent. It’s a slow process, but each month that passes with elevated interest rates like we have the economy gets squeezed harder. With higher unemployment, you get the pullback in rents due to demand softening. Humans are adaptable if need be, it’s not their choice to live with parents or roomates but it happens when economic conditions require it. This happened during 2008-2012 the college graduates then were the butt of jokes for still living with their parents. We have a housing shortage based on convenience and it’s essentially a first world problem.

also, there are many developments going on across the country to bring more rentals onto the market. Vacant high rise office buildings are being converted to apartments at a very cheap entry point for developers and many people are living in RVs right now across the country and that number is constantly going up. all of this puts downward pressure on housing rentals at the entry level point.

home builders are also building at record levels right now to meet the demand that’s out there with 2 year teaser rates to keep the payments low. They are building these as cheap as possible to keep costs low to get sales.

on the single family home front, investors are pulling back drastically on home purchases to rent out.

https://www.redfin.com/news/investor-home-purchases-drop-q2-...

we essentially have a “have” and the “have nots” economy now. Those who bought with sub 4 percent mortgages are in the “have” camp and those who do not have those favorable terms are the “have nots” life isn’t fair sometimes but it is what it is. Essentially if you listened to Dave Ramseys advice you have shot yourself in the foot twice and you are probably set back a decade or more in wealth.

Trying to fight the math won’t change the outcome. Either wages need to rise astronomically, which data suggests it’s falling ….or asset prices need to fall….or the fed needs to go back to rate cuts and risk inflation spiraling out of control to keep asset prices elevated long term.

https://fortune.com/2023/08/29/salaries-raises-new-hires-dec...

I’m not selling my holdings because my interest rates average mid 3s.

Really good analysis.
"Home developers are building at record high levels." Are you sure about that? I'm seeing the opposite as carrying cost is taking a toll on many.

There are pages of articles on this…..homebuilders don’t care about carry costs, they are building in their subdivisions and cranking them out and selling (trying) asap. Lumber prices have collapsed post Covid and other supply chain issues have been resolved, there are MASSIVE profit margins in new construction right now

https://www.investopedia.com/one-third-of-homes-for-sale-are...

And rentals are coming quickly…

https://citymonitor.ai/environment/housing/apartment-constru...

0 Reply
Ryan MoyerBusiness Member
Property Manager · Orlando Kissimmee Davenport Salt Lake City, Park City · Member since 2019 · 990 posts · 1k+ votes
3y

Honestly we were screwed long before that.

The fed lost its way. They allowed political pressures to dictate what was supposed to be acting as an apolitical entity into violating its mandate.

The feds mandate involves inflation and unemployment. It does not involve the stock market. Yet they dictated policy from 2018-2021 based solely on the stock market, at the expense of inflation.

In 2018 the fed cut rates as was necessary. They had already been too low for too long. The stock market dropped 28% over the course of half a year, they got tons of pushback from politicians who cared only about how things made them look and not the long-term health of the economy, and they were strong-armed into stupidly slashing rates again in 2019 even though inflation and unemployment were perfectly healthy, just to make the stock market look good as an election approached.

Then covid hit, the market tanked again, and the fed once again put the markets first. Only this time, because they foolishly already had rates extremely low for no real reason, they didn't even have that tool to work with. So we got UNLIMITED QE. The promise to literally print unlimited money to prop up markets on top of an already overheated economy. And people act shocked that inflation was the result. Slash rates to near zero for no reason, print unlimited money, gee where is this inflation coming from?

This is why I've posted probably a dozen times in this forum over the last 18 months that the fed is going to keep rates higher for WAY longer than people are expecting. Many people were expecting them to start cutting rates again months ago. A year ago, for some people. Crazy. The fed learned their lesson from 2019 and 2020, and if anything they have a tendency to overreact to past mistakes.

And it's been working. The US is way ahead of the rest of the western world in curbing inflation, yet home prices haven't collapsed. The markets, with political forces acting appropriately this time and letting the fed act on their own accord instead of panicking, have had a decent recovery. There's no reason for them to start cutting rates any time soon. And they won't until absolutely necessary this time.
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Sarah KensingerPro Member
Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes
3y
Back to the original question asked.... Personally, we shoot for 20% COC and depending on how patient you are, there are still deals in that range. But it all depends on the person and what they're looking for. I have found that if you look at less expensive properties in the right location, add value to them which can boost the ADR, then your COC is much better.
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2 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
3y
Quote from @Kyser Montalvo:

@John Carbone I like your breakdown. I just have one question. Why would rates go higher if rents go higher? I feel like that's a self-defeating situation for the fed.
If rates go higher more people are gonna be priced out of the housing market and forced to rent. Therefore pushing rents higher. Thus rent inflation increasing. Tell me if I'm missing something, but with real estate being ultra rate-sensitive I don't see how the fed can stop this self-eating snake if they are looking to stop shelter inflation.

It's more complicated. Case in point...rates have been skyrocketing and rents are declining in many areas. It's more about household formation and that ebbs and flows based on lots of things. During the pandemic, household formation skyrocketed due to massive government stimulus...and now household formation is declining due to high inflation (including interest rates).
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Wesley WhiteheadPro Member
Rental Property Investor · Depends on where my employer sends me · Member since 2018 · 171 posts · 142 votes
3y
@Daniel Netzer I look for a CoC returns that us greater the current inflation and thus is after taking away vacancy loss/CapEX/Maintenance & Repairs/PM/P&I/Taxes/Insurance. My metrics were the sane when I bought my first place in 2018. Now I'm not familiar with STRs but as long as my loan is getting paid off with someone else's money, I'm satisfied. I bought 3 properties that did not meet this metric (for a variety of reasons) so I sold them and stuck with my original plan.
WD
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Daniel Netzer
OP
Developer · Bend · Member since 2023 · 64 posts · 12 votes
3y
Good news, guys: housing affordability is the same as 40 years ago. If this is true, it appears that our expectations have mooned, not prices: https://twitter.com/dvassallo/status/1698740626324635707?s=1... LOL
"What got inflated was people's desire for bigger and more luxurious homes. The median new house today is almost 1000 sqft bigger than 40 years ago."
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