Investing: Is the current prices to high?

31 Replies

I would still classify myself as a newbie in the real estate investing world, i have 3 rentals currently, but they all came from my military days as personal owned homes that i kept and turned into rentals, i had 7 rentals at one point, but i sold off the non-performing properties as soon as i could break even on them. The last few months i have been looking into another property to buy as a rental, but i feel like the prices around me are just way overpriced to make a buck. Seems like every deal i come across when i run the numbers the property is barely breaking even if i purchase and turn into rental. 

Just curious what others think on this as of lately, seems like the prices are climbing at the rate of pre-2007 did.. 

I'm not sure where Holiday is but here in Palm Beach County the prices are outrageous.

Properties that need full rehabs are asking market value or very close to it.

1% rents can only be found in the rougher parts of town where I don't want to be.

Hello William!  

I have been concentrating on buy-and-hold rental properties in more rural areas of North Florida and, to a lesser extent, the Ft Lauderdale area and I've seen the same thing:  Prices have risen more quickly than rents to an extent that it is difficult to find properties with the right fundamentals.  Around  2009 - 2014, I could find nice, well-kept brick ranch homes in Columbia and surrounding counties and easily rent them.  Now, the prices of those homes are 50% higher than they were before.  I've been able to continue making purchases only through private, off-market deals.  I'm now seeing a lot of potential investors stay on the sidelines, but when something good comes up, they pounce quick.  That has only helped keep the market high.    

To me, this confirmed the value of focusing on an area, building a good maintenance team and a solid network of agents and contractors.  That network has really lead to a pipeline of private, off-market deals.  It has also kept me in touch with local economic trends that look like they could evolve into new ways to capitalize on the properties I already own.  

Like you, the higher market has given me an opportunity to prune lower performers and re-invest in better deals, when  I can find them.  

Originally posted by @Joe Hines :

Hello William!  

I have been concentrating on buy-and-hold rental properties in more rural areas of North Florida and, to a lesser extent, the Ft Lauderdale area and I've seen the same thing:  Prices have risen more quickly than rents to an extent that it is difficult to find properties with the right fundamentals.  Around  2009 - 2014, I could find nice, well-kept brick ranch homes in Columbia and surrounding counties and easily rent them.  Now, the prices of those homes are 50% higher than they were before.  I've been able to continue making purchases only through private, off-market deals.  I'm now seeing a lot of potential investors stay on the sidelines, but when something good comes up, they pounce quick.  That has only helped keep the market high.    

To me, this confirmed the value of focusing on an area, building a good maintenance team and a solid network of agents and contractors.  That network has really lead to a pipeline of private, off-market deals.  It has also kept me in touch with local economic trends that look like they could evolve into new ways to capitalize on the properties I already own.  

Like you, the higher market has given me an opportunity to prune lower performers and re-invest in better deals, when  I can find them.  

is it not the goal of every investor to have their properties go up.. I think we are just returning to balance.. 09 to 2014 was not normal buying time it was a once in a lifetime buying opp the last one that great was during the great depression.. we cannot judge everything based on those metrics..  when you bring capital back into a market after capital froze you are going to have many more folks able to buy and prices will rise.. its what we all want.. no one I think anyway buys into a market and says.. hey I am going to buy this rental house and I sure hope the prices never rise..  I want them to always be flat.. so that when I sell I lose money.. given depreciation recapture and cap ex and sales costs.. nothing is forever.. 70% of folks will sell their rentals at some point and unless you have some nice appreciation you will have done a lot of work for very little money or a loss. 

There will always be opportunity and deals in any market because there are always deaths divorce sickness unemployment and of coarse landlords just plain sick of dealing with people . Most of those deals probably won’t be on the mls though .

@Jay Hinrichs undefined

Sorry if my post was unclear.  Of course I want prices to rise after I've invested!  That's been the best part of real estate investing in the past decade!  That seemed so obvious that it was not even worth mentioning.  

My comments were focused on the market fundamentals I've experienced.  It is simply harder to find new deals that meet the numbers I'm looking for.  Not impossible, but harder.  Knowing a lot of people in the area where you invest is helpful in finding those deals.    

Originally posted by @Joe Hines :

@Jay Hinrichsundefined

Sorry if my post was unclear.  Of course I want prices to rise after I've invested!  That's been the best part of real estate investing in the past decade!  That seemed so obvious that it was not even worth mentioning.  

My comments were focused on the market fundamentals I've experienced.  It is simply harder to find new deals that meet the numbers I'm looking for.  Not impossible, but harder.  Knowing a lot of people in the area where you invest is helpful in finding those deals.    

I was just commenting that many folks are new to investing and look at the 2010 metrics as what is normal or a good deal.. we are in a new normal stage of the market.. will it crash again who knows.. but this is the market

AS the poster above mentioned you will always have the US  owner with their financial issues and hoarder houses and burnt out landlord syndrome.. so I guess like you have done it becomes Gorrilla marketing to find these deals.. so that means spending some sort of money on marketing for them.. or wholesalers or what have U..    And of course were you live is the mother of all appreciation plays.. :)

The thing i am worried about is repeating my mistakes i dealt with for many years, prior to the 2008+ housing crash, i had bought multiple houses around the USA as i was re-stationed in the military. I held onto the propertied because i was seeing positive passive income coming from them and i felt like it was a great way to invest in myself with someone else paying down the mortgage, then 2008+ happened and many of the houses i owned the rents drop drastically as renters moved in and out. At one point i was making 50% less rent on houses than when i was renting them in 2006, so it truly hurt my pockets and for many years i was eating thousands of dollars with them all rented out getting the most i could for them at the time. The past year said properties have finally broke to a point they are making money again or breaking even, so i decided to get out with them in fear of the same thing happening again, thus why i feel like the values of houses have climbed to high again. I probably lost over 100k in the 12yrs of owning said properties during the housing depression, i just dont want the same thing to happen again to me, so i have been trying to be picky with my selection of next houses, i have come close on a few, but due to not able to pay 100% cash on those deals i was beaten by another investor, but honestly i feel the market is just to high right now...

I bought a house local to me for my mother 2 years ago that needed about 5k in repairs, for 100k even.. in 2 years the market is now saying this house is worth 133k, just seems like to high of a rise... 

Thank you for your service William and I agree we have to be very selective at this time if it doesn't cash flow.  I concentrate on flips because it is a sellers market and I do my own work which keeps me happy and eliminates a lot of competition.  I see you are a disabled vet glad you are being active and positive.  I'm a Navy vet and use our benefits whenever possible.  The market will change and we have to be ready to go when it does.  Semper Fi!

Thats why personally I’d only buy stuff that cash flows well . Look We are at the top now and if it can’t cash flow at the top

-how much worse will it be for you when the market  tanks  and potentially your rents drop people move out of area and you still have all those high expenses every month . 

@William Huston in the end, it is smart to be risk prudent.  It is how you don't end up "holding the bag" when things turn.  However, we also can't let it completely stop us from investing.  Given the rise in prices, for example in my area, south florida.   I have not only begun looking at out of state investing, but am even selling one of my places here to buy multiple places in the midwest.   

Granted that market see much much less appreciation/depreciation swings but that is also a positive as I am buying for cash flow only.  So after I factor in costs for vacancy, man't, reserves, etc. if I am getting my desired # or better than I am in.

I supposed I could also do the probate thing to hunt down off market deals in my area since MLS deal days are gone, but I search for the path of least resistance for my money and my time. Why spend 3-6 months getting one deal here when I can get three in less time elsewhere.

In the end, do your research.  Study a market, visit the market, find acceptable deals and make it happen.

My take:  For larger properties, especially apartment buildings, the prices are high.  I believe that we could be at the peak of the market.  For smaller properties, most easy opportunities have disappeared.  I thrived during the down market.  Many of us became landlords during this time.

There are still opportunities to be found, but it will take a lot more effort to uncover them.  But that was usually the case in most markets.  Finding underpriced properties, is difficult.  Since I have the ability to renovate, my best bet is to look for properties that need repair.

I do not begrudge the sellers in my current market looking for outrageous prices; I recently sold my Silicon Valley properties for equally crazy prices. If I happen upon a great deal I will follow up; otherwise I’ll just ride it out.

Deals and valuation are market specific. I can’t speak to other markets, but in Jacksonville, the biggest change I am seeing is velocity. There are still a lot of solid deals,especially in value add. Cash, quick decisions and fast closes are the new normal. I have also been working with a turnkey provider that offers 1% a month rent multiplier and he runs a backlog given the demand.

As long as the economy stays strong and we don’t end up in a land war in Asia or a trade war, I see the housing market continuing, but at a slower pace. In many cities the pace is unsustainable. 

Here is another data point to consider -- the yield curve.

https://www.nytimes.com/2018/06/25/business/what-is-yield-curve-recession-prediction.html

If the yield curve is predicting a recession, the economy will slow and some tenants might not be able to pay their rent. But what matters are the tenants in the properties you own. If they continue to pay their rent even in a recession, the state of the larger economy doesn't really matter to your financial well being.

Higher interest rates should cool the market off a bit. As money  gets more expensive, it will tighten  up the profit  margins  of investors. Rents are already outpacing wages,  so be careful of speculating future rent increases in the near term. 

Folks,

I am retired and live on Marco Island Florida. Pretty much a seasonal rental location but also some good annual renter opportunities. Ia m looking to buy a condo for rental/investment purposes. Some condo properties rent weekly to which in my opinion is a lot of hassle, maintenance due to high traffic, and attract some not so good renters occasionally; and with high management fees too. I plan on managing the unit myself. I am looking to see that the numbers will have to work, using the tools on BP. I have seen a lot on the market and prices have slowly been reduced. I attribute this to it now being off season and inventory is sitting there and very few buyers on the island.

Have any of you invested in a similar environment? Experiences? Suggestions?

thx

-F

'Too high' is subjective, but we can definitely say prices are rising and returns are compressing. Since ~2012 interest rates have hovered between 3.5-4.5%:

This was extremely low by historical standards:

At the same time, property prices were crushed from the financial crisis. The result was a golden age of opportunity if you had a little capital and decent credit. In the last year, rates have risen at least 1% (I'm now seeing 5-5.5% as the norm for investment properties - June 2018), and they will likely continue that ascent barring some major economic impact. Compounding this, unemployment is the lowest it has been since before the Great Recession, meaning people have money and are bidding up the prices of properties. The result is that we have both rising interest rates and rising home prices, which will ultimately compress returns. I ran some analysis on this, and for a property with a ~10.5% CoC return at 4% interest rates, that will drop to ~8.5% at 5% interest rates:

If you compound that with increasing property prices by say 5%, then the CoC drops to 7% . The relationship is pretty consistent - increase rates by 1%, see a ~2% drop in CoC. Increase prices by ~5%, see a ~1.5% drop in CoC. Both at the same time will drag down CoC by ~3.5%.

So yes, in the last year we've seen rates rise by ~1% across the board, and many markets are seeing home prices that are at least 5% higher than they were a year ago. The result is compressed returns for investors. The question is, what do you do about this? You can slow down or stop investing, which isn't a bad strategy in the short term if you don't see deals that make sense for you. You can search for new markets - which many people are doing. I believe this is why a lot of the secondary / tertiary markets are now picking up more. Or you can look for alternative ways to invest your money... unfortunately, the stock market isn't offering any bargains right now either. So the right choice is probably some version of move forward, but with caution. Hold to your standards and don't reach for returns by going outside your circle of competence. It's widely noted that we'll be in for a bumpy ride going into 2019/2020 as the Fed dials up interest rates, at the same time that the tax stimulus subsides. Only then will we find out who was swimming without any trunks on.

Good luck!