Is rental property investing forever doomed?

Podcast Guest on Show #222

26 Reply

Adam Martin

Rental Property Investor · Member since 2020 · 1k+ posts · 1k+ votes

4y

I think doomed may be a bit extreme here. People will always need a place to live and while past performance doesn't guarantee future results rental rates and home values have gone up and to the right over the long haul. Over time rents will continue to rise and will increase profit margins. Make sure you are investing in an area people want to live and employers want to invest and you should be fine. My real worry isn't about rising rates of homes, that just means my other ones are increasing in value as well as my net worth. My real concern is the skyrocketing interest rates which in my opinion is the biggest threat to real estate right now. I don't mind paying a couple hundred extra on the mortgage that is going to equity but it's a tough pill to swallow when it going to the bank in the form of higher interest rates.

7 Reply

Mark Cruse

Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes

4y

It seems like you are utilizing cookie cutter ideology and stats while applying it in a macro sense. There are tons of people defying everything you mentioned here. If you read topics in here, many would not waste their time on $200 in cash flow let alone $50. You have to take in consideration so many things (ie. region, property class, acquisition, operation). I know of areas where you will get well over 1k. Inflation will not be out of control forever but rents will always go up. The appreciation isnt that much of a factor and either way it benefits the landlord.

22 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

4y

Quote from @Adam Martin:

I think doomed may be a bit extreme here. People will always need a place to live and while past performance doesn't guarantee future results rental rates and home values have gone up and to the right over the long haul. Over time rents will continue to rise and will increase profit margins. Make sure you are investing in an area people want to live and employers want to invest and you should be fine. My real worry isn't about rising rates of homes, that just means my other ones are increasing in value as well as my net worth. My real concern is the skyrocketing interest rates which in my opinion is the biggest threat to real estate right now. I don't mind paying a couple hundred extra on the mortgage that is going to equity but it's a tough pill to swallow when it going to the bank in the form of higher interest rates.

simple solution landlords just pay cash .. returns are fine.. its the over reliance on OPM that will make returns go up or down.. when i started lending in 02 for turnkey model which was basically brand new. The reason investors flocked from West coast and east coast high priced markets is they had even cash flow or negative with minimum bank required down payments.. it was only the low priced markets where you could get 50 to 100 a month positive with minimum down or the BRRR strategy which is really just rate and term refit after rehab.. which is what I started my business providing the funding for out of area investors so they could do that strategy.. Prices of assets are going to go up why would we invest in real estate at all if we felt values would never rise.. just to make 200 a month risking 100k or more of your credit one could buy any number of small business's for those dollars and make 10X 200 a month .. we buy real estate for tax bene's and someone else paying your house off.. any positive cash flow is simply gravy.. its not appreciation is gravy its cash flow. But that narrative does not sell rentals in the cash flow market.

One just needs to put a little more down if they want to have money on top of what it takes to run the property or better yet in low priced markets simply buy them in cash then you get a very nice return even in high priced markets.

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Podcast Guest on Show #224

22 Reply

Marcus Auerbach

Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes

4y

You are missing the forst for the trees - yes the days of aquireing ATM's for cheap and travelling the world after buying 2 duplxes are comming to an end, but REI is not doomed. The new norm is that you actually need to "invest" something, which is a departure from the everyday to good to be true and money out of thin air days. It can still be done, but it's tougher to find these deals!

Inflation is your best friend and working in your benefit when you own leveraged assets, wages will follow with a lag, so will rents.

9 Reply

Conner Olsen

Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes

4y

@Mike Schorah I changed my strategy from traditional LTR to monthly furnished rentals. I doubled my rental revenue and am cash flowing in Austin, TX. It's a great strategy if you are in a rapidly appreciating area where the rents haven't caught up.

12 Reply

Keith Dunn

Real Estate Consultant · Detroit, MI · Member since 2010 · 23 posts · 11 votes

4y

Ok, If you're looking for a higher monthly cash flow from your rental homes, then you need to be where rentals are over 50% of the households in that city. And you're not going to find them in the burbs (suburbs).

Let me give you an example:

Low housing prices, rising home values and rent prices, and a large percentage of renter-occupied households are just a few of the many reasons to consider investing in Detroit this year.

Over the past year, the typical value of a mid-tier home in Detroit increased by nearly 34%, according to Zillow (through Dec. 2021). Realtor.com ranks Detroit as a buyer’s market, meaning that the supply of homes for sale is greater than the demand, offering a potential window of opportunity for buying investment property in Detroit.

Now I know what you thinking (Oh Hell NO) DETROIT! Yep, Detroit the numbers don't lie.

Corktown is located just west of the Financial District near the Detroit River. The neighborhood has an urban feel with a lot of bars and restaurants:

Population: 3,108
Median sale price: $615,000
Change in the sales price (year over year): 10.7%
Days on market: 123
Median rent: $1,187
Re
RENTER-occupied households: 67%
Median household income: $62,325
ZIP codes: 48216, 48226, 48201
How about Lafayette Park is located just east of the Financial District within walking distance of the West River Walk and William G. Milliken State Park and Harbor. The neighborhood is popular with renters, has a dense urban feel:
- Population: 5,933
- Median sale price: $147,500
- Change in the sales price (year over year): -1.0%
- Days on market: 58
- Median rent: $859
- RENTER-occupied households: 79%
- Median household income: $32,734
- ZIP code: 48207, 48226
- The numbers don't lie. Detroit, the Rental Capital of the Mid-West!
- Want to know more let me know.

5 Reply

Chris ClothierBusiness Member

Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes

4y

Quote from @Marcus Auerbach:

You are missing the forst for the trees - yes the days of aquireing ATM's for cheap and travelling the world after buying 2 duplxes are comming to an end, but REI is not doomed. The new norm is that you actually need to "invest" something, which is a departure from the everyday to good to be true and money out of thin air days. It can still be done, but it's tougher to find these deals!

Inflation is your best friend and working in your benefit when you own leveraged assets, wages will follow with a lag, so will rents.

I laughed at the buy 2 duplexes and travel the world analogy! There are actually people who sell that vision and remarkably there have been some who have bought into that belief.

I also appreciate the points that leverage used properly is an incredible tool especially when you understand that rents lag values. They trail home values and do not typically rise at the sane rate when they do grow. Of course, every single market is different - anyone who makes declarations about the US housing market may not fully understand that point.

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Jordan MoorheadBusiness Member

Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes

4y

Cash on cash is not the only measure. My average annual returns far exceed 20%. People brag about an 8% total return in the stock market.

I'll take a 6.5% CoC with 10% appreciation, loan paydown, tax benefits and control any day of the week over an 8% return that can be thrown off by a tweet by someone influential.

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25 Reply

Eric Bilderback

Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes

4y

It takes a degree of speculation these days. I bought a 4 plex last year that I had to put 100k down on and it only Cashflowed 200 a month. My bet which is so far so good is that the rents will increase over time. Rents in my area have doubled over the past 5or six years. The deals investors bought then were pretty tight, today those suckers are killing it. My theory is buy a place you can afford to keep no matter what and in 10 years I will be very happy I did.

”don’t wait to buy real estate, buy real estate and wait”

18 Reply

Ryan KellyBusiness Member

Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes

4y

@Mike Schorah just remember, housing prices and rent growth are not supposed to match. People can borrow money to purchase homes which can have numerous benefits from cash flow, appreciation, depreciation, tax benefits, etc. Tenants cannot borrow money to pay their rent. They have to have income and job growth. The SALES and RENTAL markets are completely different, even in the same market. The key is to look at the big picture and understand the total return you get from real estate. As many have mentioned, cash flow is ideally used to maintain the property, not to create an instant take-home paycheck.

Ryan Kelly Group - Keller Williams5110 Reviews

Bruce D. Kowal

Metro NY + New Bedford · Member since 2022 · 294 posts · 216 votes

4y

Quote from @Jay Hinrichs:

Quote from @Adam Martin:

I think doomed may be a bit extreme here. People will always need a place to live and while past performance doesn't guarantee future results rental rates and home values have gone up and to the right over the long haul. Over time rents will continue to rise and will increase profit margins. Make sure you are investing in an area people want to live and employers want to invest and you should be fine. My real worry isn't about rising rates of homes, that just means my other ones are increasing in value as well as my net worth. My real concern is the skyrocketing interest rates which in my opinion is the biggest threat to real estate right now. I don't mind paying a couple hundred extra on the mortgage that is going to equity but it's a tough pill to swallow when it going to the bank in the form of higher interest rates.

simple solution landlords just pay cash .. returns are fine.. its the over reliance on OPM that will make returns go up or down.. when i started lending in 02 for turnkey model which was basically brand new. The reason investors flocked from West coast and east coast high priced markets is they had even cash flow or negative with minimum bank required down payments.. it was only the low priced markets where you could get 50 to 100 a month positive with minimum down or the BRRR strategy which is really just rate and term refit after rehab.. which is what I started my business providing the funding for out of area investors so they could do that strategy.. Prices of assets are going to go up why would we invest in real estate at all if we felt values would never rise.. just to make 200 a month risking 100k or more of your credit one could buy any number of small business's for those dollars and make 10X 200 a month .. we buy real estate for tax bene's and someone else paying your house off.. any positive cash flow is simply gravy.. its not appreciation is gravy its cash flow. But that narrative does not sell rentals in the cash flow market.

One just needs to put a little more down if they want to have money on top of what it takes to run the property or better yet in low priced markets simply buy them in cash then you get a very nice return even in high priced markets.

The really large fortunes in real estate occur when mortgages are payed off. But you need to be thinking generationally, what you are going to give your heirs.

Podcast Guest on Show #224

Kelly Asmus

Real Estate Broker · Portland, OR · Member since 2018 · 123 posts · 71 votes

4y

People always need a place to live. Those that cannot buy must rent. Institutional investors and now large builders with a for rent model are pouring into the SF rental market. It's part of the reason we have such a competitive market as local buyers are getting beat out by cash, out of town, investors who then put a tenant in the property. So no, rentals aren't dead, nor will they ever be. Your return may be different, maybe you need to change markets or do STR vs LTRs. There are always so many ways to be creative with a property. Think outside the box and add value by increasing unit count with an ADU or any number of other ways to increase revenue.

1 Reply

Tony Kim

Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes

4y

Quote from @Jordan Moorhead:

Cash on cash is not the only measure. My average annual returns far exceed 20%. People brag about an 8% total return in the stock market.

I'll take a 6.5% CoC with 10% appreciation, loan paydown, tax benefits and control any day of the week over an 8% return that can be thrown off by a tweet by someone influential.

I get what you're saying, but seriously....who brags about getting an 8%? I've heard of many folks bragging about making 7-8 figure gains from investing in things like Tesla, cryptos, etc. but 8%? I'd laugh right in their face if I ever heard something like that. 😁

I agree that the benefits of investing in RE are numerous, but I don't think talking down investing in public equities makes your case any stronger. If you're going to use recent history as the benchmark for your 20% gains, that's actually not all that much better than what you would have earned from investing in in an index fund and not lifting a finger otherwise. Plus, these unrealized gains in public stocks would be largely tax free also. Of course, 2022 the market is down a bit, but when averaging over the past 5-7 years, the returns aren't all that different. Also, it would be foolish to think the current run up in RE prices will continue for the forseeable future.

When comparing stocks and RE, it's not a zero sum game. There is a place for RE investing and there is also a place for investing in stocks and I think the smart investor would take advantage of both.

5 Reply

Chris ClothierBusiness Member

Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes

4y

Quote from @Mike Schorah:

Rent growth has not kept the pace of home appreciation.

- In the largest 588 cities in the U.S., the average (unweighted) cash-on-cash return is -6.5%.

- Since the Great Recession 10 years ago, you got a growth rate of 7.4% for home prices, compared to a growth rate of just 4.54% for rents.

- It was easy to profit $200/mo in cash flow 10 years ago whereas now it’s a struggle to make $50/mo in cash flow.

- The average cash remaining after just two expenses – P&I and taxes—was about three times greater 10 years ago compared to now.

Unfortunately, this dynamic is accelerating of late as well. Since the beginning of 2020 and the COVID-19-induced craziness in the housing market, home prices have gone up on average 12.8% in the U.S., while rent growth rates are less than half at 6.1%.

Stagnating wages in the U.S. limit rent growth. Wage growth has not recovered from the financial crisis. Experts recommend that renters spend no more than 30% of their income on rent. If their income does not rise, the total dollars renters can/should spend on rent does not rise.

The 2% rule became the 1% rule which became the .8% rule. From what I’ve seen in most cases, you need to manage the property yourself to have positive cash flow at .8%. So since the trend is that it’s going to dip further and further, are you ready to start taking on negative cash flowing properties?

You've shared a lot of data on here. Some of it is view point, but other data you've shared as fact. Would love it if you shared your sources. I'd like to see what other data is in those sources as a counter balance.

One thing that is factual, is that there is no U.S. housing market. There are always peaks and troughs in alternating cities at the same time and some markets are up and hot while other markets are down and cooling. It is impossible to paint the national market in specific data because it is so broad and varied. There is opportunity for every investor to hit their particular expectations in every market. It often takes understanding and patience.

Lastly, I have been buying negative cash flowing properties for the past half decade. I have been purchasing some that make a positive cash flow with leverage and others that do not. Depreciation schedules, rising rents, lack of deferred maintenance and lack of vacancy - all meticulously planned - have all led to a reversal of negative cash flow over time and enormous gains through both rising demand and inflation. Negative cash-flow properties, for some investors, are absolute gold mines and often have little competition. If you know what you're doing and have a plan to follow, cash flow is not even on the list of necessary requirements to invest in real estate.

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Michael Deering

Rental Property Investor · Lehigh Valley, PA · Member since 2017 · 200 posts · 191 votes

4y

First point- remove the 100 largest cities and what is the cash flow. I am happy with a 2% in the cities (because of appreciation) but won't get into anything under 15% in my area

Second point- can't compare Great Recession (GR) to today. The GR was due to lax lending, today the bank's books are tight

The rest of the points seem subjective. It's a tough business, one has to grind, network, look for value.

2 Reply

Lynn Berg

Rental Property Investor · South Amboy, NJ · Member since 2014 · 34 posts · 23 votes

4y

@Mark Cruse

Hi Mark,

I just read your response and I’m wondering where you find 1k? That’s a great number!

0 Reply

Jordan MoorheadBusiness Member

Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes

4y

@Tony Kim I do. I'll take all the 8% deals I can find!

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Matt M.

Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes

4y

@Mike Schorah

So wait, you struggle to CF $50/month? I don’t know what market you’re in, but rental growth in my market is crazy. Aug 2019 was my last purchase. when I was getting my commercial loan, I valued the rent at $1250/month for the pro-forma. By the time I completely rehabbed it and got it rented was May 2020, for $1450. Total cash invested $30k, purchase $60k, $15k rehab. If I lost my tenant tomorrow I could rent it for $1650.

Podcast Guest on Show #222

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

4y

Quote from @Matt M.:

@Mike Schorah

So wait, you struggle to CF $50/month? I don’t know what market you’re in, but rental growth in my market is crazy. Aug 2019 was my last purchase. when I was getting my commercial loan, I valued the rent at $1250/month for the pro-forma. By the time I completely rehabbed it and got it rented was May 2020, for $1450. Total cash invested $30k, purchase $60k, $15k rehab. If I lost my tenant tomorrow I could rent it for $1650.

Yahtzee there are still markets like this but far and few between and very tough for passive non hands on investors for sure.. I just funded one for one of my folks 65k all in 1250 rent and that closes next week.. so its not something that was a few years ago.

JLH Capital Partners51 Review

2 Reply

Mark Cruse

Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes

4y

Quote from @Lynn Berg:

@Mark Cruse

Hi Mark,

I just read your response and I’m wondering where you find 1k? That’s a great number!

Many of the deals that can net that much are either great multi family acquisitions secured by a wholesaler or the very risk adverse areas that many are unable or unwilling to operate in. I purchased a row house in Brooklyn MD, class d community. Its very unstable and I was able to pick it up for 28k. I put in maybe 20k to get it rent ready. It was a double unit and before I booted the tenants, the upstairs unit was pulling $775 and the bottom $875. Its all in the numbers and the ability to manage the operations.

2 Reply

Malcomb StapelPro Member

Investor · Topeka, KS · Member since 2020 · 669 posts · 488 votes

4y

Quote from @Matt M.:

@Mike Schorah

So wait, you struggle to CF $50/month? I don’t know what market you’re in, but rental growth in my market is crazy. Aug 2019 was my last purchase. when I was getting my commercial loan, I valued the rent at $1250/month for the pro-forma. By the time I completely rehabbed it and got it rented was May 2020, for $1450. Total cash invested $30k, purchase $60k, $15k rehab. If I lost my tenant tomorrow I could rent it for $1650.

Seeing similar in my market. Rent growth and demand for SFR has grown to the point that 3 of my units are now drastically under rented after coming off of one year leases. They could easily make another $500 in pure cashflow between them.

0 Reply

Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

4y

Find a place where the numbers work. Remember rent prices will go up each year. Other costs like insurance and taxes will as well, not so much your mortgage payments. Also if house prices go up, so too does your investment when you sell it down the road.

1 Reply

Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

4y

Increases in the value of the asset is why we invest! It beats the heck out the alternative.

Allan Smith

Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes

4y

So everyone is basically saying to look past CoC return. I get that appreciation makes way more wealth than cash flow, but what happens when the music stops and appreciation stops or even reverses? How is that not now a dog property with negative cash flow? Plus, much of that "wealth" vaporizes with a dip in the market.

Are the investors saying veterans or new since last recession? I'm new (2015) but to me it sounds risky to bet all on rental increases and appreciation.