Rental Property Investor · Member since 2021 · 423 posts · 190 votes
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?
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?
Rent rates can't keep up with home appreciation, but that doesn't mean they won't catch up or that investing is doomed. I bought my first investment in 2004 and properties were appreciating faster than rent was increasing. I sold it eight years later, just two years after our local market tanked, and still managed to sell it for an incredible profit/return. All my current investments worked when I bought them and they will continue to work, even if rent rates stop rising for the next ten years.
If you think housing is forever doomed, you should find another investment vehicle that's more stable and proven. When you do, be sure to come back and let us know! ;)
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.
There is so much that is so wrong in this that I don't really know where to start....
Ok, the whole pipe-dream of "when appreciation stops". So far, in the entire history of North America as a settled land, that has never happened. Actually, in the entire history of every single country in existence today, that has never happened, so I am curious exactly why there is any consideration for something that very literally has never happened, ever?
Has there been momentary value impacts, yup, sure has, we just recently went through what was labeled one of the single largest collapses in all of human history in real estate, and all values were recouped in full within 10 years.
And this brings the notion of in any "dip" that somehow ones wealth is, what was it you said, "vaporized". Exactly how does that happen? Is there a "Dip-Genie" I am unaware of who comes and "vaporizes" things? It's not a complicated action, when prices are down DONT SELL. A gain or a loss is ONLY theory, until an action is taken to realize either. If a person bought in 2007 guess how much $ they lost as of today, ZERO if they didn't sell in the pit.
As a lost item, has everyone completely lost track of the entire metric of a tenant paying down ones mortgage? COC is just 1 revenue point, 1 of several. Myself, I endured a thorough lashing by my CPA on how I should have booked some more write-off's, acquired some book losses, yes I 100% would have LOVED to had some more deal with book losses. Would have saved me a mint. And if that makes no sense to you that only means you have a new item to research and find out why it would have been very profitable to have had some book-loss's.
We only have a few thousand years of real estate as a proven wealth center and defender but hey, sure, why not, now it's all going to go kaput and be worthless forever and ever and always, why not. It's on par with saying the world is just one giant frisbee and we live under a big glass dome. It's so out there in idiocy there is no point of even trying to wind that person back.
I would take cash negative flow at this point in a good location. I know it will eventually be cash flowing and it will appreciate even sooner. In part due to tremendous inflation.
@Allan Smith - there is a distinct difference between speculation and a sound investment, but it's not obvious. Not all cash flow positive deals are good - in fact, many are not, i.e. if capex exceeds cash flow over time (newbie trap).
I am okay to buy a quality property with marginal (today) cash flow, as long as I have solid principal pay down. The devaluation of our currency (Inflation) will grow the cash flow - even in normal times at a rate or 3% per year, currently a lot more. Appreciation is never guaranteed, but until we have ramped up new construction over the next 5 years very likely.
Also, look back in history and count how many "dips" you find outside of 2008. Neither recessions nor sharply rising rates have caused real estate values to dip significantly; worst case go sideways for a while. That's outside of a major black swan, but at that point who cares about cash flow..
@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.
we stumbled into this niche in vegas it works as described so far so good.. had to change out one ottomon that got a burn mark on it.. but with 5k dollar deposit we require we just took 500 and bought a new one.. different tenant all together plus we charge a one time cleaning fee of 500.00 which covers the maid service coming in and doing a full detail job on the unit.. sure beats the heck out of normal rentals were the tenants beat the crap out of the places LOL
Any investors who have been in the market for more than 2 years will have their own success stories with their properties and may be assuming those same successful deals could be had in the current environment.
I think the current reality is that the opportunities are still out there, but it's significantly harder than it used to be and takes a lot more digging than it used to (marketing, networking, branching out to new markets, etc.).
These stories of properties bought anywhere from 2010-2019 don't really hold water in the current market. It worked then, but that type of deal is much harder to find now. Not impossible, but much harder. Your 20-30% returns are (likely) helped dramatically by the drastic rise in rents and property values. Anyone getting into the market now probably won't see the same thing.
Good investors can and will make money in any market, but it's not as easy as it used to be.
Paul: to keep your story valid you need to remove the people who bought in 2020 as well, since they too are kicking butt. You’ll have to change it to people who bought this year aren’t kicking but, yet…
Landlords of the 70-90’s used to get 2-3% appreciation and 2-3% rent growth. And now people are complaining about 25-30% property appreciation but only 20-25% rent growth. They would shoot use to get these decals.
You do understand the property appreciation after you purchase is a good thing. I HOPE my properties appreciate more than my rent grows. (Since the alternative is they appreciate less.). Would you be happier if properties and rent were both going up 2% per year, nice and even?
Certainly you should sell if you can’t be convinced that a once in a lifetime nation-wide property value drop doesn’t mean there will be another one 15 years later. Don’t listed to a bunch of strangers on the internet calling themselves experts. But keep in mind you will probably never be able to buy at today’s prices again, so you may have to stay out of real estate forever unless you’re able to acknowledge it was just a very very expensive mistake and try to learn from it.
Of course I too could be wrong and you’ll be the national expert who saw it coming and maybe that will make up for all the real estate income lost, maybe. :-) GL either way.
I echo some of the sentiment here and why I think real estate is the best investment which is because it is localized. Obviously individuals and entities make decisions for many reasons which skew the numbers on a macro level but the small guy can still hustle and get great returns. Smaller markets allow for better returns, house hacking allows for a reduction in expenses which is a form of a return. Many ways to do it and still make money
Theres still lots of deals with some positive cashflow. It is not crazy returns but still beats stocks as a total return (appreciation+cashflow+mortgage paydown). Even since 7 years ago I haven't seen the crazy high cashflow outside higher crime/economically struggling areas. Still been lots of money to make in those 8 years.
Theres only so much desirable land and as populations increase real estate may become something only the wealthy own over time as majority of americans become renters. So it may become more and more of an appreciation play but will see. I'll be making money either way :)
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?
If it's not working in a location, invest elsewhere. 1%-2% rule is working for my clients with anywhere from a $500k - $2M investment.
@Mike Schorah - I am not sure if your subject line is just to get attention and start a good conversation or you are being serious haha
I don't think rental property investing will ever die, everyone will always need a place to live. Here in Chicago as @Henry Lazerow deal flow is high in Chicago and you can still find decent CoC returns.
What I will say for sure is that it is getting harder and harder to get into real estate if you are starting out.
Of all the clients I have worked with since the pandemic, not one has bought into a property with negative cash flow. Not saying I haven't seen some out there but they're still avoidable.
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.
Great point. Have some cach to invest. Do you recomend NE Austin area? Hutto, Taylor, etc?
@Mike Schorah the problem is that you are looking at cash on cash returns only, which is just one component of real estate returns, and not even the largest component. (See the chart below).
If you have a job where your income consists of wages, commission, bonus and stock options, would you consider just wages your total income? The other problem is that when people look at cash on cash returns, it is usually just a snap shot in time. You have to look at returns over the life of the investment. Mortgage expense makes up about 60-70% of total expenses on a typical rental property. With a 30 year fixed rate loan, that expense is fixed for the life of the investment. Although you say that rents have only increased 4.5%/yr since the Great Recession, that increase has a huge effect on total returns when yo consider that most of your expenses are fixed. If you're trying to decide whether real estate investment is still a good deal, look at total returns from income and equity over the long term, not just cash on cash return for one year.
Thanks for answering my question. Thanks for not simply regurgitating what I was saying or put some positive spin on it and completely avoid the point that I was getting at.
Chris Clothier - How much have depreciation schedules saved you and aren’t you worried about a future tax bill? What type of maintenance are you taking about? How do you achieve a lack of vacancy?
Jared Hottle - How can the small guy still hustle and get great returns? Do you have any examples of these smaller markets?
Hey @Mike Schorah - Where are you getting this data from? Just curious.
Definitely cash-flowing on my properties and even if I wasn't cashflowing that much, my long-term plan is to HOLD because can you imaging what will happen in 5-10 years? In my imagination, it's all equity gains and creating a cash cow.
I think it is better to focus on a very local area and specific rental property when assessing a rental property vs making broad assumptions on the rental"market." Each rental property is an individual business with its own potential, some times hidden value (or hidden money pit).
The responses are very encouraging. I'm glad to see that so many people understand that real estate returns come from several sources other than cash flow. In fact, cash flow is often not the largest source. Returns come from basically 4 sources: 1. Cash flow, 2. Mortgage paydown by the tenant, 3, Appreciation, And no, appreciation is not speculative. With the exception of a few markets, every market in the U.S. appreciates over time. The only time it is speculation is when you are trying to time appreciation in the short term. Ownership of rental properties is a long term strategy and over the course of several years, appreciation is a major contributor to total returns, even if it's a a modest 2-3% annually. 4. Depreciation, thanks to the IRS, depreciation lowers your taxable income. Another big mistake inexperienced investors make is looking at the short term. The majority of wealth comes from real estate and that wealth is built over time. New investors often look at COC on a 1 year year pro forma and decide that something isn't a good investment. That's like trying to predict the outcome of a football game based on the first quarter score. The chart below shows a 5 year projection from cash-flow and equity through mortgage paydown and appreciation. In this example, the first year return is project to be $9184, The 5th year projection is $11,421 which is a 24% increase.
Hey @Mike Schorah - Where are you getting this data from? Just curious.
Definitely cash-flowing on my properties and even if I wasn't cashflowing that much, my long-term plan is to HOLD because can you imaging what will happen in 5-10 years? In my imagination, it's all equity gains and creating a cash cow.
I'm curious as well @Eudith Vacio @Mike Schorah I am focusing on STRs because they give the best returns. The market is just getting increasingly better. Even our clients are doing STR in Charlotte and cash flowing 12-18%.
Thanks for answering my question. Thanks for not simply regurgitating what I was saying or put some positive spin on it and completely avoid the point that I was getting at.
Chris Clothier - How much have depreciation schedules saved you and aren’t you worried about a future tax bill? What type of maintenance are you taking about? How do you achieve a lack of vacancy?
Jared Hottle - How can the small guy still hustle and get great returns? Do you have any examples of these smaller markets?
Mike,
As for depreciation, I am a full-time real estate professional. So my schedules and tax advantages may look slightly different than a passive investor or a filer who is not a real estate professional. I am not worried at all about future tax bills. Whether it is the 1031 exchange provision or the fact that I would offset a tax bill with other tax write-offs, worrying about how to handle the future is something I surround myself with a good lawyer and CPA for. Of course we have an eye toward the future, but it has never kept us from taking action.
As for maintenance and vacancy, it is a fallacy for investors to buy into the myth that you cannot control these costs. Lazy management companies and lazy investors lead to increased maintenance costs and higher vacancies. There is no secret here. Do not defer maintenance. I am a partner and owner of by far the largest and longest actively operating turnkey company in the country. When we started managing property we had zero experience which means zero bad habits. We do not run from the fact that we weren't very good at renovating or managing when we first started. But we quickly realized that the only true way to build a future was to insure the experience of our passive investors. They wanted a truly turnkey experience and the entire industry was failing to provide that in our opinion (including us).
Once we focused on performing higher quality renovations and addressing long-term maintenance issues such as removing mature trees that interfere with drain lines as an example and addressing issues in advance even if it drove up the initial price of an investment property, we were able to drive down long-term annual maintenance costs. As a company, the median percentage of annual rent spent by owners on maintenance does not cross the 4% threshold until year 8 in our Memphis management office and year 6 in our Dallas management office and then just barely. It does not cross the 1% threshold until after year 3 in either office. So, an investor can have a reasonable expectation of not spending more than a couple of percentage points in maintenance annually for the first three years and then several more before they reach even 4%.
As far as vacancy is concerned, we have driven the number of investment properties that experience a move-out annually down so far below industry average that most other companies find it hard to believe. How? By focusing on delivering a better home that is owned by a passive investor who actually cares about the quality of their property and then delivering an experience to the resident that they never expected to find at a management company. We answer resident calls for maintenance. We dispatch in a timely manner and call residents back after the work is completed to make sure they are satisfied. We speak with our residents on a routine basis to insure their happiness and that we are meeting their expectations. We have not outsourced communication to an easy-button piece of software that has not shot at building a relationship with the paying resident. We survey every resident and when a resident lists an experience that is less than excellent, we dispatch our team with cookies and flowers at our expense to address issues and make sure they know they are being heard. Do you know what that has led to?
Less than 14% of our properties experience 1 month of vacancy a year. The average number of days a property is vacant once it does goes vacant is less than 40. That is move-out to new resident moving in. The average length of time a resident spends in one of our managed properties is over 7 years! The resident loves the experience they have and appreciates the responsiveness. The investment owner loves the fact that their investment, while maybe costing more on the front end, outperforms their expectations and the fact that extended occupancy also leads to increased rents in most cases. So their income goes up while their expected holding costs go down.
This is not rocket science, but can be made much more difficult when interests are not aligned. If the average long-term, passive investor is looking for a 5-7 year or even 7-10 year investment and they know that they can achieve average to above average appreciation, relatively low to no vacancy and move-out costs, zero deferred and zero to near zero cap expenses, then what the interest rates, rent growth rates or even wages are doing won't matter much. In the end, their returns will exceed their expectations.
FYI, we are managing over 7,500 properties and growing in 12 cities with a value just under $2 billion, so this is not conceptual thinking. This is happening real-time today and across all markets and price points. Our way of doing things is not the only way and nothing I state here is meant to be disrespectful to other companies or other ways of thinking as fas as turnkey, renovations or management are concerned. We just happen to be true believers in our process and it's why I can make the earlier comments about why I'm optimistic about the future or investing.
