Investing: Is the current prices to high?

31 Replies

Cam, that is a great analysis. I think most of us realize, just as before that the market run up was/is really created by unsustainable forces. Before it was the 0% interest balloon mortgages that created much of the problem (not nearly the only cause) and now it is the artificially low interest rate. When I first purchased my home in 2003 I got a 4.75% interest rate and my lender told me at the time that it was the lowest term he had ever seen..... Now we had that or lower for several years. So, while I think the fundamentals of the economy appear to be somewhat better, I agree with your assessment, we are in for a bumpy ride.I believe this is when most of us should be positioning ourselves for some good deals. 

William, first of all, thank you for your service. I wish I could give you better advice, but I feel the same as you, deals are extremely difficult to come by. I am seeing more and more investors speculating on GARBAGE deals. At some point the peak will be reached and many will be stuck with things that will crush them.... which I know all to well about. My advice is do your homework and don't feel pressure just to "do a deal" and make sure it makes good sense. You will find one eventually. Good luck. 

Originally posted by @Jeremy Turner :

Cam, that is a great analysis. I think most of us realize, just as before that the market run up was/is really created by unsustainable forces. Before it was the 0% interest balloon mortgages that created much of the problem (not nearly the only cause) and now it is the artificially low interest rate. When I first purchased my home in 2003 I got a 4.75% interest rate and my lender told me at the time that it was the lowest term he had ever seen..... Now we had that or lower for several years. So, while I think the fundamentals of the economy appear to be somewhat better, I agree with your assessment, we are in for a bumpy ride.I believe this is when most of us should be positioning ourselves for some good deals. 

William, first of all, thank you for your service. I wish I could give you better advice, but I feel the same as you, deals are extremely difficult to come by. I am seeing more and more investors speculating on GARBAGE deals. At some point the peak will be reached and many will be stuck with things that will crush them.... which I know all to well about. My advice is do your homework and don't feel pressure just to "do a deal" and make sure it makes good sense. You will find one eventually. Good luck. 

@Jeremy Turner, 

Ya, i have been very cautious with what i want to do with my savings, i have been kinda crushed a little lately with the downtrend in crypto as i had been investing that way and been doing great for over a year, but right now im just holding for the swing back up (hopely), most of my bitcoin was valued around the 9k mark so im down about 30%, but i do have some alt coins that are offsetting that amount greatly, so im nearly balanced out on what i have into crypto, so i could get out now and probably break even, but i have hopes of it heading north again. 

In regards to rentals, i took the last year and condensed my portfolio and sold off some rentals i had purchased before the recession that have been negative income for many many years now, so i am out of those positions with the equity at almost a break even, because i feel personally that the next few years the pricing movement isn't sustainable and its going to shake up the market again, idk if it could call for another recession, but i feel it needs some correction soon.

Im very tempted to just hold my cash now for the rates to rise in hopes of the prices to settle down and instead of leveraging my next deal, that i would just flat out pay for it in cash, because then i dont have to worry about the high price of mortgage interest eating into my passive income, i know this is against most, but i feel like investors in my area just pulling bullcrap deals together and rehabbing them for nearly no profit, just to stay busy. I know of 5 investors locally from the local RE meetups that have fallen into recent bad deals and eaten 100K+, because they didn't follow the 70% rule on pricing the purchases and trying to flip in volume for small profits vs a handful at reliable profits. 

Last thursday, i was talking to an investor at RE meetup who just finished 3 flips in May that all 3 required 50k+ in reno, when i asked him how they did for him in profits, he said he profited only 8k between all 3 houses, which blew my mind, risking that much money for such pitiful returns, but he told me thats been the norm for him this past 1.5 years.

Cam,

thanks for the info and counsel. I am also looking at 5/7/10 year ARM's in order to improve COC as well as ROI. The best times to buy on Marco are July/August. Slow selling season with minimal buyers on the island.

FRank

I live in Palm Beach County and wouldn't think of investing anywhere in my immediate area. The only way to find deals is to get extremely creative in finding off-market deals which isn't for everyone. Instead, I concentrate on up and coming areas of Florida on the west coast and north Florida such as the Jacksonville. I am hoping to close on a duplex soon in the Ft Meyers area!

DON'T be afraid to look outside your immediate area!

Originally posted by @Cam Robert :

'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%:

30-year-mortgage-rates-2012-2017.png

This was extremely low by historical standards:

fhfb_contract_rate.gif

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:

Screen Shot 2018-03-29 at 3.43.28 PM

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!

 If I could up-vote this post more, I would.  Excellent summary of the current market and likely future environment.

Originally posted by @Frank Tedesco :

Cam,

thanks for the info and counsel. I am also looking at 5/7/10 year ARM's in order to improve COC as well as ROI. The best times to buy on Marco are July/August. Slow selling season with minimal buyers on the island.

FRank

Nice - just be careful with those shorter term fixed rate loans. At the very least stagger the terms on those loans so everything doesn’t reset in the same year... this way you buy yourself a little time if future rates move against you.

thanks Cam!

Will keep you all posted. I think I found a good 2br/2bath unit, furnished with a long canal/bay view in a 10 unit complex. Direct access to the gulf too. It needs some renovations but I have a friend in the business who will do the work at very reasonable costs. Based on my analysis using the calculator, with moderate assumptions,  I think this is a reasonably good long term investment. I also have a annual renter teed up in October!

Frank