Originally posted by @Dan H.:
Originally posted by @Vaughn K.:
Originally posted by @Dan H.:
Originally posted by @Vaughn K.:
Originally posted by @Michael Haas:
@Vaughn K. are you calculating in the benefits of loan pay-down? Cashflow is king, but you are also still building long term wealth even without factoring in appreciation.
All of our properties in Seattle cash-flow- we put 5-20% down (no 3% loans), have always done moderate to significant repairs/rehabs, and buy in the nicer South Seattle neighboorhoods (North Beacon Hill, Admiral District of West Seattle, Central District). Although prices have caught up significantly, South Seattle is still a better rental market than North Seattle or the Eastside. Additionally, as these are single family homes we're buying and we weren't going FHA the properties still qualified for conventional.
I am definitely still seeing deals that are cash-flow neutral at 3-5% down and cash flow positive at 5-20% down. Set your MLS criteria to 5+ bedrooms and estimate rent at $800 a bedroom and you'll see 2-4 workable deals a month. Feel free to send me a direct message if you want me to alert you when one of these kinds of properties hits the market.
Hi Michael,
I think you're on the same page as I was before I decided to blow out of this whole area! I was in fact thinking either south Seattle, or Shoreline/Mountlake Terrace. I was going to do a large house, preferably 5 bedrooms maybe PLUS a convertible basement, and rent by the room. I was especially looking for one that already had an ADU or mother in law apartment. I haven't been keeping up on stuff around here, so don't know how the relative upside of north of Seattle vs south has changed, but back then they were comparable-ish.
I can totally believe you can still eek out the numbers you're talking about by:
1. Buying a rehab job, and getting it done on budget.
2. Renting by the room.
Thing is, that's all stuff you don't have to do in most of the USA to barely break even on cashflow. You can close your eyes and just point at a random house for sale on Zillow and cashflow that much almost everywhere geographically in the USA. In most of the country going through that amount of extra effort will net you like 2% rule or better!
It never ceases to amaze me how few people have heard of this before on here, but a major study that looked at something like a century (give or take) of RE data in the USA found that the overall rate of return in cash flow vs appreciation markets was basically identical over the long term. They were both 10 point something percent over the long haul I believe. They looked at cash flow, appreciation, pay down, basically all the major metrics one would think to cover to get a good picture. IIRC the study was done at some big university (Harvard maybe?) by a fancy economist. You can probably find it if you google.
The short version of the story is this: All the positive cash flow, instead of negative or minimal, allows you to reinvest in more properties faster. Also all appreciation markets are more volatile, seeing periods of rapid upswings, and down. Cash flow comes in steadily. Everybody focuses on the years where SF or Seattle goes up 10% a year, ignoring the flat or outright negative years in between. Once it's averaged out, it's not nearly as impressive. "Cash flow" markets also DO tend to appreciate, just not at amounts much higher than inflation... But when you have fixed debts, 2-3% a year still adds up a lot over decades. In truth, the risk adjusted return is actually higher in positive cash flow areas, as you don't have the volatility.
Main reason I don't want to invest in Seattle is because I don't want to live here anymore, and I'd prefer to invest in the general area where I will be moving to. Washington state, and Seattle in particular, are becoming RABIDLY anti business. That's the main reason I'm not sticking around this area. I don't trust Seattle to not pass some insane law that completely ruins my life. Also, other non financial laws are becoming far too oppressive around here too. I'm an American, some sides of my family have been on this continent since the 1600s, multiple fought in the Revolutionary War... I like my freedom. Washington in general, and Seattle in particular, are no longer good places to be for people who like freedom from government oppression.
Only reason I may live in Spokane when I go over there is because I can pack up and move the 15-30 minutes down I90 at the drop of a dime when it suits me if Washington state passes something too stupid to want to tolerate. By my rough calculations I'm still slightly better off financially in WA for the moment because of the lack of an income tax, but if that ever changes, or if incremental changes in other laws get too bad, ID will be right there waiting for me! And I won't have to completely upend my life, make new friends, learn a new area etc. Just live 15 minutes further down the road!
I have read plenty of stats over the years, and IMO by the metrics I think are most important, there is just not much upside left in Seattle in the near to mid term. As an agent, were you aware that as neighborhoods in Seattle approached the 1 million dollar average sale price they almost all stopped going up a penny? Some of them peaked 4-5 YEARS ago and haven't budged since. What then happened is cheaper neighborhoods rapidly shot up. Why? Because even in flashy Seattle, high income tech people can STILL only afford to spend so much. That is essentially the upper bounds, there's no more blood to be squeezed from Seattle area residents. Look at the average price here, and the number of areas that are well below that. Maybe south Seattle has a tiny bit of room, but not another 10 years of 10% appreciation. How exactly is ANYBODY, including dual income 6 figure earners going to be able to spend 2 million or 3 million on a 3-4 bedroom house in 10 years? Because that's where it would have to land to see similar appreciation in percentage terms to what happened the last decade. It just isn't possible. No upside.
Also, being that the average prices here are way above what many traditional metrics say is sustainable, all it ever would have taken was for one little hiccup (A recession, Amazon shifting to hiring elsewhere, other cities getting more tech jobs in general... Oh wait, all of those are starting to happen! Uh oh!) to hit, and the prices have PLENTY of room to drop. So, little potential for the rapid and magical appreciation that has made the last several years a big money maker, and lots of potential to drop... Not good cash flow... Doesn't sound like the kind of place I want to put my money.
More power to people who want to live in a place like this, invest in their backyard, and jump the extra hoops to make it all work. I wish them all the best! But I don't want to be that guy. The only way I would ever invest here is if prices dropped like they did in '08, and then I would probably sell out within a few years of the bounce back and invest elsewhere. But even then with the anti landlord laws we have, and more inevitably to come, I don't know that I would even want to do it then.
Not trying to knock you since you're an agent around here, you have to try to sell houses, and it sounds like you're on point for making the best of the Seattle area situation for investors... But again, just not my cup of tea around here anymore. I wish it was. If you'd asked me 15 years ago I probably would have told you I'd live in Seattle for the rest of my life, but the way things have gone down since then that just ain't gonna happen.
>a major study that looked at something like a century (give or take) of RE data in the USA found that the overall rate of return in cash flow vs appreciation markets was basically identical over the long term.
Can you post a link to this study? It does not match what Case Shiller shows for this century which shows virtually all the top returns for buy n hold for this century are high appreciation markets. I have not looked at the data recently, but a couple years ago the top 3 were San Fran, Los Angeles, and San Diego.
The recent BP study that long duration was only 2010 to 2018 showed that the cash flow in high appreciation markets had passed many of the perceived high cash flow markets in just that length of study. What do you think it would have shown if the duration was 19 years (this century)? 25 years? 50 years? Then add the property appreciation to the cash flow return reflected.
I, therefore, am interested in seeing a reputable study that presents a different result than Case Shiller or the trend of the BP study.
Thanks
Hey. I'm not home right now, but will try to find it later when I am. I imagine a few variables alone could explain different outcomes.
1. I think the CS study only looked at buying and holding a given property. IIRC this other study assumed reinvestment. If you run positive cash flow day one you can go from 1 to 2 properties faster, 2 to 4 etc. Especially since you can continue this doing this during a down economy in cash flow markets, but won't be getting any cash out refis when values are down in SF.
2. Start and end time bias. Stock market returns from 1960-2007 look a lot better than from 1960-2009. This study was done a few years ago, so the last couple years may tweak numbers a bit... But I would suggest it'll all revert to a mean as the cycles continue.
I have other thoughts, but typing on the phone is too laborious :)
The issue with this thinking is that these studies show that cash flow is greater for the high appreciation markets over moderately long hold periods. So there is more cash flow to invest from the higher appreciation markets. Look at the BP 8 years Study (2010 to 2018). The high appreciation markets had better cash flow over those 8 years than many of the markets that had better initial cash flow. That was only 8 years what do you think it would have reflected for a longer period?
Actual Cash flow is not the initial cash flow. Actual cash flow is the cash flow achieved over the hold period. The appreciation markets historically have achieved outstanding cash flow over long hold periods.
Then there is the appreciation reflected in @amir M. chart. In the last 7 years, the average home in San Fran has increased $800k. That is an average of $9.5k/month. That is the average increase, not an outstanding increase. Source https://abc7news.com/tech-bubb.... Maybe the last 7 years have been extraordinary but as you can see from the Amit’s posted chart, there are multiple similar increases since 1984. Per that chart, the current increase is only the 3rd best since 1984.
we are using the Case Shiller #1 rated buy n hold market for this century as the example. So it depicts an outstanding return.
Those that believe Seattle does not have good cash flow I suspect have not been invested in Seattle RE very long. Rent jungle shows average rent in Seattle has gone up almost $900 since 2011. So basically average rent has increase $100/month year over year over a 9 year period (max period on rent jungle). If 5 years ago an investor purchased a cash neutral RE in Seattle, the income would now be ~$500/month greater than at purchase. What do you suppose that has dome to the cash flow?
Seattle historically has produced a great return for buy n hold RE investors.
First let me start off by saying I am about ready to beat my head against a brick wall! Not from anything you said, but because I just spent more time than I care to admit trying to find that stupid study! Google (and DuckDuckGo) have both let me down! No matter what combo of keywords I tried all it kept kicking me out was generic news articles, blog posts, and other irrelevant click bait type nonsense that had the various keywords in their title. Bigger Pockets actually was close to the top with a few articles in all the searches. :) Interestingly the CS report didn't come up either. Google seems to have legitimately become a worse and worse search engine over the years as it tries to be more clever in choosing what it THINKS you should see...
So you can think I'm a jackass if you want, but I did see such a study a few years ago. I actually mentioned it once in a forum post and somebody else knew the one I was talking about, so I know I'm not crazy! I'm sorry I can't give you a link as it had some interesting stats in there. Sometimes I wish I was one of those guys who is OCD about bookmarking things or even downloading information.
IIRC the study showed both markets over the long term tended to bring overall returns of a little over 10%. I think technically the appreciation markets were a few tenths higher, like it was 10.1% vs 10.3% or something to that effect. Keep in mind one of the key things here is that this study assumed REINVESTMENT. Obviously buying only a single property and holding it would be better in an appreciation market, but that's not what investors tend to do, and structuring it like that actually removes one of the greatest advantages cash flow markets bestows to investors there: the ability to double down rapidly with minimal risk. So they assumed reinvestment. I think they may have even done a version of the math using leverage and one without IIRC.
But just to further the discussion without my awesome study, there are a few reasons for this one can think out logically. Most are common statements in the argument between the two strategies, but for n00bs I'll say them anyway. Plus I think I have a few semi novel thoughts.
Let me also say, I don't actually disagree with the idea of
investing with appreciation in mind... I think it's a good idea. It
would probably actually be better to say I don't believe the markets you
guys think will appreciate a ton going forward are going to be the ones
that actually do, in percentage terms at least. I'll circle back around
to this later.
A stat I saw a few years back was that the LONG TERM AVERAGE appreciation on California RE was 5.x percent (5.3 or 5.4 IIRC), vs around 3% nationally. That IS a big difference, especially compounded over decades. I will admit SF as a sub market is probably higher, but I don't know a figure for there off the top of my head, and am not going to try to find them because I'm angry at Google for failing me with finding that study!
People focus too much on the upswings, and not on the declines or slow rise years. Here's the thing though: If you buy in an area where you can nail the 1% rule (or even higher) vs the .5% (or lower) rule (this "rule" doesn't really exist, because it's a horrible rule!) in appreciation markets... You're potentially making an extra several percent a year in cash flow alone. There are mitigating circumstances that reduce that, like that toilets cost ABOUT the same nation wide etc. But it's easy to see how you can make up that 2.x% difference on an annual basis. That's one major point in comparing the two, and it's just simple math.
Further, as I already mentioned, "cash flow" markets don't NOT appreciate. Look at average home prices in such markets in 1970, 1980, 1990, 2000, 2010. Every single one of them has gone up considerably in nominal dollars over those decades, some perhaps not doing so during any given decade, but over the long haul they're all up plenty. When people back of napkin math things they always plug in 10% a year for fancy cities, and 0% a year for boring cities... When it's really 5.x% vs 3.x%, or something close to that. Rent growth likewise goes up just like in more expensive cities.
Then there's the fallacy of timing again... YES, if you invested in SF in 2010 vs Kansas City you will probably have made better returns to now... But what about over the next 30 years? I suspect the reversion to the mean will put the figures a LOT closer. You can't make an argument that stocks perform better than RE by using examples of buying at every low in the Dow, and selling right before it crashes every time. Nobody can time things like that, yet it's always what people do when they argue for appreciation in RE being the bees knees.
Also, the 80s and beyond in and of itself is a bit of an overheated super cycle for fancy pants coastal city RE, and is NOT the historical norm from before that period. So an intelligent person must ask ones self will that new and anomalous trend continue for much longer? Remember major/hip US cities have NEVER been as unaffordable as they are RIGHT NOW in all of history, barring the couple years right before the last bust. We're in uncharted territory. And it's not just that some cities went from being lame to cool, that can be a legitimate transformation, it's that the cities that have ALWAYS been cool are insanely more expensive than they ever were.
At any point in all of history a white collar professional could comfortably buy a house in any major US city, including NYC or SF, without killing them self financially. That is no longer true. Heck, even middle-middle class people could generally afford to buy without much trouble in ANY city in the USA up until recently. Was NYC not a super hip, ultra cool, world class city in 1995, or 1975, or 1955? So what validates the difference in income to price ratios between the two eras? How long can a situation where doctors, lawyers, engineers, can't even buy a mediocre house go on for? There's a reason people talk about a crisis of affordability, and it's because the math bears out that recent times have been completely out of whack with historical norms. I myself am a microcosm for people saying "Screw this BS, I'm moving." There are MANY people like me... When does that segment of the population become enough to crash the never ending growth?
I think the real key difference between the two though is one that is always mentioned by pro cash flow guys: You can continue to expand EASILY during a down market if you have the cash flow. It's very much a tortoise vs the hare situation. The hare leaps ahead every time it goes for a sprint, but then has to rest in between sprints. The tortoise just keeps plugging away at a steady pace the whole time, and at the end of the day you're essentially crossing the finishing line at about the same time.
How many appreciation investors lost their rear ends in 2008? How many guys that were in cash flow markets? Who was better positioned to take advantage of the aftermath of 2008, the guy upside down AND running negative cash flow, or the guy putting tons of cash in his pocket every month? Anybody who doesn't see the risk adjusted difference between the two situations isn't thinking clearly. Your example of having better cash flow in appreciation markets is 100% relying on the timing (2010 through 2018, talk about cherry picking start and end dates to prove a point! Not that it's your fault that's the period they used, but honestly it's just not a useful set of numbers for long term planning.), which would be not true during many other randomly selected periods.
Circling back to my not actually being against investing for appreciation: I'm not. Look at my post above though towards the end. Let's say Seattle CAN have $2.5 million 3 bedroom houses. Sweet! Can a 3 bedroom be $5 million? $10 mil? $20 friggin' million dollars??? When does it become sooooooo out of line that it just breaks? Do you really think the average income is going to be $500K a year in SF in several years, or a million a year in a decade and a half or two? I can't imagine such a situation materializing under ANY circumstances. Past performance is not indicative of future performance.
In Seattle as neighborhoods hit the $1 million mark, they have completely flat lined, and the growth moved to the next most desirable areas that then shot up crazy fast. Rinse and repeat. That seems to indicate to me that around $1 million is a breaking point for the local market, at least for now. In all fairness Seattle is running behind SF, and potentially has more room to inflate... But whatever amount of headroom either markets have, I would suggest SF has less headroom than us overall because their average income is barely higher than Seattle.
This exact same trend has been playing out over the years with whole cities. Not that many years ago Seattle was a 2nd rate also ran in most peoples eyes... It blew up because SF, and other traditionally cool coastal cities, were getting too crazy, and we were a pressure release valve for their growth. In relative terms we were "cheap" back then, and pretty cool to boot! Then we started to spill over ourselves as we got some of the same problems that drove people out of the earlier cool cities, and you ended up with the rapid ascendance of Denver, Austin, etc. Now you're seeing Nashville and the next round of places shooting up rapidly. It seems to me that the next round of cities always start to blow up before the previous round have even fully peaked, so there's always some place in different phases of "blowing up" so to speak at any given time. IMO SF and Seattle are in the "mature" phase where there isn't much more blood to be squeezed out of the turnip. Austin/Denver/etc are in kind of a middle phase, places like Boise, Nashville etc are more early phase.
What does this mean? With math requiring $10-20 million dollar 3 bedroom houses in just a couple decades to continue the appreciation levels in percentage terms seen in SF and other trendy places, and other cities being a lot cheaper right now, but clearly poised for getting hipster-ized... I'm gonna have to say that there's no way in hell SF has $10-20 million dollar 1500 square foot 3 bedrooms in not that many years, BUT that Nashville may well have $1 million dollar ones. Because math. And common sense. Apple or Google would have been some of the best investments to make over the last decade or two... But I highly doubt they will be the best to own over the NEXT decade or two. They'll probably do okay, like a GE or Exxon or Coca Cola usually does... But not the same percentage growth they've seen. This is a known thing in stock investing (past rapid growth companies are rarely future rapid growth companies), and I don't see why RE people always assume the exact opposite.
So you see I'm not necessarily against trying to invest in the next hot spot, especially if getting in reasonably early... But I think the thinking is very flawed that sees ZERO limit in how long LA, NYC, SF can keep doubling every few years. Maybe we haven't hit that limit yet, but there IS a limit. Personally I think we're one major hiccup away (Covid anybody? We'll see...) from those markets getting a good haircut, and maybe not recovering from it for quite a long time.
Also, what about macro trends? SF and Seattle have exploded EXCLUSIVELY because of the tech explosion... But big tech is FINALLY wising up and realizing they can trim operational costs by opening up offices in more than a couple cities in the whole USA, especially less expensive ones. If Big Tech starts doing 50% of their expansion (Not firing anybody at HQ even mind you, just expansion!) outside of traditional tech centers, what does that do to the Bay Area and other tech cities? It's all a house of cards depending on ever more rapid growth, and once something goes wrong it has the potential to fall apart rapidly. Amazon HQ2 alone will probably make a sizable dent in pricing in Seattle vs if they'd hired all those people in this region.
You know where else was a city build almost entirely on the back of a single incredibly lucrative industry? A city that had a higher average income than NYC at it's peak? A city that thought it could do no wrong with it's overbearing government policies? Detroit. What, you didn't know Detroit was once a richer city than NYC per capita? Gotta buff up on history man! I bet if you looked at the numbers, Detroit was probably the A #1 BEST city to invest in real estate in from maybe 1900-1960... And one of the worst ones after that. Now SF probably won't become Detroit, but it could very well stabilize and become something more like a Chicago that just kind of teeters at about the same population and income levels, or perhaps goes to slow growth, vs growing insanely fast as SF has the last couple decades.
Honestly, I still believe that by applying a little logic, and basic math, it's pretty easy to see how cash flow markets can be comparable over the long haul... The one exception to that would be if you correctly time your entry into up and coming markets. However I don't think that the top performing cities of the last couple decades will be the top performing cities of the NEXT few decades. There's just not enough room in the math for them to keep doubling the way they have been. This isn't to say they will "crash," maybe they won't... But I don't think we'll be seeing generic nothing special 3 bedrooms in the BA selling for 7.5 million in a decade.
I really don't care about trying to "convert" anybody to the cash flow religion... Although I will post a quote from a thread that came up when I was trying to find that study. It was in regard to somebody asking why some people choose appreciation investing vs cash flow investing.
"99% of appreciation investors do so because that is the economics of their local area and they primarily invest in SFHs, no other reasons. Investors in high appreciation areas like CA have few options investing locally. It is natural for them to create justification for their decision to invest for appreciation. They will promote it because it is what is available to them. Highly unlikely you will find many OOS investors choosing to invest in CA. CA investors are faith investors for obvious reasons. If you already have plenty of money you can park it in real estate till you decide to cash out and reap the benefits (maybe). The principal works until it doesn't work."
I think it really explains a lot of people... They live in areas where they are faced with what most metrics say are not good investments, so people try to explain away all the issues with investing in such properties. They've been lucky for so long thanks to no effort or brilliance of their own (Thanks Google! Thanks Facebook!), and take it on faith that it will magically continue, even with much evidence to the contrary. If I wanted to invest for appreciation, I'd look at ANY other cities than the ones that have gone up the most over the last decade, that's all I'm sayin'!
