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When big money chases rentals
Another interesting trend courtesy of the low interest rate environment created by the Federal Reserve is the feverish chase for yield. In a previous article we discussed that a large part of the higher rental prices were coming from a segment that had lost their homes via foreclosure. Since the housing bubble popped millions of Americans have lost their homes. As the report also found, many of those stayed within the same area but likely shifted to a single-family rental or an apartment. What we did not discuss however is how investors are playing a role in pushing up rental yields as well. As bigger blocks of large investors purchase distressed properties, many add value to the property and try to push rental prices upwards. I saw a presentation a few months ago of some local investors in Southern California purchasing older apartment buildings (some built in the 1970s) and upgrading them to more modern standards. Once the upgrades were complete, these investors pushed rents up by 7 to 10 percent. What impact is the flood of investors having on the market?
Shift from owning to renting
The drop in home ownership has largely come from the removal of two factors:
-1. The easy access toxic loans that provided leverage to anyone with a pulse
-2. The millions that have lost their home via foreclosure
Even with super low down payment loans like FHA insured products, many Americans simply cannot afford to purchase a home even in today’s low rate environment. Yet this low rate environment has had a big impact on rentals:
“BNP Paribas: - As investors seek returns, housing looks increasingly attractive. A lot of increased activity has come from cash buyers; the National Association of Realtors reports that the share of existing single-family home sales purchased by cash buyers has risen to just below 30% from 20% a few years ago. Private equity investors have also been reportedly buying blocks of homes for rental conversion.”
This is major shift. 30 percent of recent single-family home sales went to cash buyers. Private equity is now having a big impact on this market. The chase for yield is largely driving these investors and rental yields are favorable in many markets. Many investors have looked at markets that have been forgotten and jump in, buy up places in blocks, and try to push rents up because of the perceived added value of their upgrades. It is an interesting process but once again the Federal Reserve is largely pushing big money into a market that is impacting most Americans. At a time when incomes are stagnant higher rents stretch budgets even further.
Monthly payment versus price
The massive drop in mortgage rates is largely a method to keep home values inflated. Do not doubt this for one second. Even the Fed came out directly stating that QE3 was largely going to be a MBS program. You do not get more specific than that. They have an open commitment that is likely to buy nearly half a trillion in MBS within a 12 month period.
The impact is enormous here. For example, let us run a $500,000 mortgage from 2000 at 8 percent and one today at 3.5 percent:
Principal and interest @ 8%: $3,668
Principal and interest @ 3.5% $2,245
To get the monthly PI similar to what it is today with an 8 percent mortgage would require that $500,000 mortgage to be at $300,000. Even with a low rate people will be paying this much over the life of the loan only with principal and interest:
$500,000 mortgage PI @ 3.5% over 30 years: $808,000
Add in taxes, insurance, and maintenance and you are inching closer to $1 million for a $500,000 mortgage. The focus on the monthly payment is really driving a large part of the housing market today. That is why FHA insured loans have come in to plug the low down payment market left by the toxic mortgage debacle.
Thanks to these low rates, big investors are likely also bidding home prices up competing with families simply looking to buy a home. More unintended consequences. It is a fascinating trend seeing so many investors actually jumping into the rental game. Big money however is fickle and as quickly as the trend ends, it will quickly evaporate.
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Same thing here. Everyone and their grandmother is speculating on the shitbird end of housing... there are going to be MANY of these properties end up detroitified. Credit worthy renters are few and far between (just like credit worthy borrowers). As there are fewer and fewer of them, they get to dictate more for their money... and they will not be living in shitbird houses.
The only possible saving grace for the low end is government payments... which is a whole other ball of wax.
Section 8.5
It's hard to argue against buying a rental for full cash (no leverage/loan) and collecting the inflation indexed rents. Given money has to go somewhere and although PM's make great sense, only a fool puts all his eggs in one manipulated, likely tax troubled, asset that only a tiny % of "hoarders" own...Of course rising interest rates would destroy the value of rentals, the rents would still be collected and that seems to be why folks are primarily buying (yield vs. appreciation).
Can anyone make a good case why, if you have the cash (and likely already have some PM's) you wouldn't buy rentals??? Only reason I can surmise is that you believe the dollars purchasing power vis-a-vis housing will go up even while dollar weakens otherwise?
Becuase cap rates, at least here in the Bay Area, are less than 3%. I can buy NLY or if I'm in a high tax bracket NZH and receive a cap rate of over 6% without ever dealing with a single tenant or their many and frequent problems. Yes, the share price of both NZH and NLY will fall if rates rise, but then so will the value of that residential rental. The former is highly liquid the latter not. As soon as I see a shift toward higher rates, I can get out of NZH and NLY before there is much of a capital loss. Just try doing that with tenant-occuped real estate in a falling market.
The "investors" buying SFR as rental properties are going to discover in the next recession just how difficult it is to control a landlord's costs in renting a home. Apartments are much more cost efficient to operate. Tenants for SFR hardly ever care for the landscaping, and the loss of a 50 year old tree through neglect can reduce the value of the home by thousands of dollars overnight. Then there is the ability of tenants to do things to your property that you only discover long after they have left, like the meth lab my neighbor discovered after her tenants left a stand of blackened, dead trees. Or the yahoo who replaced his own toilet but reused the compression valve (they only work once). The owner came by to check on the house while the tenant was on vacation and found a flood of water coming out the front door. The entire hardwood floor had to be replaced with cheap laminate.
Rental houses only make sense for contractor/handyman landlords who buy a home they can watch in their own neighborhood.
As a 23 yr "slumlord" the above statement is key to succeeding in the single family rental business. The other thing that's important is buying the property at the right price. It has worked for me.
As a hedge against hyperinflation.
Income producing RE is as good as it gets for indexed fixed Income to complement your PM's and Commodities.
I agree that buying rentals can be a good deal for the investor, particularly the individual investor. It does take some time devoted to management of the property, however.
Using leverage at a 50% LTV or so, given the very low 3.5% rates, seems to be a very good option. Eventually there will be two paid off rentals, not just the original one unit. Cost of capital must be at least 80% of the cost of operating in the rental business. Locking much of that in at 3.5% for 30 years is pretty appealing. If the property is an all equity pruchase, how long will it be before the accumulated rents will allow another purchase (increase in business size) and what will that additional unit cost? All of that can be fixed today in the current favorable environment by employing some degree of low cost leverage. Since it appears that the days of low rental rates with returns comming from price increases is over, and that current rental rates will reflect actual current costs and returns, rental rates may continue to increase. I expect it would require a at least a 1/3 decline in rents before the 50% leverage deal would become difficult to carry. that seems unlikely to me, particularly when using moderately priced units.
Can anyone make a good case why, if you have the cash (and likely already have some PM's) you wouldn't buy rentals??
Liquidity.
Because buying housing in a reach for yield is like picking up nickels in front of a steamroller. The potential capital loss on the underlying house could dwarf all of the income realized from the rents if real interest rates rise.
@Thisson:
"capital loss on the underlying house" How so? Buying at market peak in 2006 or valley at 2012?
My uncle, self-made millionaire many times over: "by real estate and stay away from banks!"
The other big unknown variable is what the property taxes will be in the future. One thing for sure, they certainly will not go down.
Bingo. We know there is a loss coming. The only question is how large of a loss. Speculators are betting that this loss/deterioration is far enough away or small enough to be offset by the profit from rents. However, under our monetary policy, all prudent actions shall be punished and all value shall be stolen or destroyed.
Really, what everyone is saying, is that there isn't a better alternative. I can agree with that, presuming the purchaser's portfolio is otherwise well balanced. At some point, after the farmland bubble bursts, it will be time to pick it up... and a lot of it... but for now it's only a good idea for hobby farm/personal use.... unless you just can't find something else to tax free exchange out of.
Agreed there is no "good" investment at this time...it's only a matter of frontrunning some policy or action that is attempting to offset the natural deleveraging we should be experiencing with reflationary steps (ie, PM's and stocks up due to money printing; RE up due to tax policies, low interest rates). This is simply among the least bad.
location
location
location
Things are going according to plan
Private equity could be your next landlord
QEternity in reality = Unlimited MONEY for Wall St. Cronies at a HUGE Bargain even the LameStreamMedia is conceding that fact (see this post for more info) but as I pointed out several times on site this was planned months ago for connected insiders like warren buffoon and obamas pal and supporter life long democrat lloyd blankfein.
Not only is the prosperity of the United States threatened, its very existence is threatened.
An acquaintance of mine in coastal California, who’s in his early 50s and last year married a friend of mine, recently had a triple by-pass. Unfortunately, he had no health insurance and now his three-story house has been placed in foreclosure to pay the bill. Heath "care" has become a weapon to extract all of one's assets, including one's financial future and happiness.
Several other friends of mine, all professionals here in coastal California, have had their rents increased recently not by $100 a month but by $300 a month, or more; many are having to move out of their apartments and seek cheaper living accommodations.
I have to call BS on the first example.
First - he could have negotiated the medical bill AFTER the fact. That is, he could have negotiated with the medical provider to pay a deeply discounted amount of the bill. I work in law in Southern California and negotiate the liens after a personal injury case has settled. Most of the time, I write a letter with a release offering 20-30% of the ORIGINAL amount of the bill along with a release. The releases come back signed from the medical provider without any negotiation about 80% of the time. I clear about 95% with a couple of phone calls.
Or he could have went bankruptcy, and kept the equity in his house up to a certain extent.
There is no way for the house to be put in foreclosure to pay the bill. You would need a judgement of the court and it would then have to be enforced - they would wait until the house was sold (voluntarily to enforce the judgment) assuming no other assets.
Last point - yeah - let's feel sorry for "Professional people" living on the coast in California that can't afford $200 more a month. Pleeeeze.
I tried that for my own bill. I was taken to the hospital unconscious in a diabetic coma. I have no insurance, but there was an old insurance card in my wallet so they used that to admit me. The ERT had given me a glucogen injection before dropping me off in the ER. The ER just put me on a guerney in the hallway until I regained consciousness and then I called a friend for a ride home.
I paid the doctor and the ambulance, but told the hospitial I would pay them the amount they would have been paid by the insurance company had I been insured. They refused. Instead, they billed me over 3750 for doing nothing. When I refused to pay, they sued.
At the first hearing, I offered (in front of the judge) to pay them the amount they would have been paid if I had insurance. They told the judge they couldn't disclose that amount. The judge said that because I was unconscious, they had no breach of contract claim, only a "quantum meruit" claim, i.e., the value of their services. He said that if they wouldn't disclose the amount an insurance company would pay for their services, he would have to value those services at zero.
When they still refused, and then later failed to show at the next hearing, the judge dismissed their complaint.
Love it.
Your judgment on what “professionals” are enjoying on the coast makes one wonder about your take on the medical bill opinion.
Some of these “professionals” you disparage have a difficult time making ends meet when their below $90,000 salaries compete with $700,000+ 2-bedroom houses in the area.
According to Jeremy Vohwinkle. a Chartered Retirement Planning Counselor, a study conducted by The American Journal of Medicine, shows around 60% of personal bankruptcies are caused by overwhelming medical bills.
As Vohwinkle says, “The good news is that patients can actually negotiate their medical bills, but many never do. The amount that you are originally billed is not always the amount that you absolutely must pay. While negotiating won’t work in every case, the majority of patients can negotiate their bill.”
However, as he says: “Sometimes there really is nothing that can be done to reduce the price of your bill,” and according to a commenter who has experience with these sharks, “hospitals don't seem to negotiate at all.”
Nonetheless, I hope you are right and will inform my friend.
http://genxfinance.com/how-to-negotiate-your-medical-bills/
“In California, as elsewhere, you can’t place a lien against someone’s property until you’ve proved to the court that he owes you money. However, after you’ve sued him in civil court for the debt he owes you, and if the court awards you a judgment against him, you can use it to potentially collect from him. The judgment allows you to create a lien against his property and to have your local sheriff take that property and sell it on your behalf so you can recover the debt he owes you.” –eHow money
Read more: Property Liens - How To Information | eHow.com http://www.ehow.com/property-liens/#ixzz27nPaahtQ
Not to apply logic to this situation or anything ... but ... if I was a salaried professional ... renting ... and worth two shits in the market place I would MOVE. There are plenty of states in the union with cities who have strong economies, good opportunities, and affordable real estate.
Now, if someone chooses to live in these situations, and is willing to pay the extra 200/mo, then it sounds like Mr Market setting rates to me ...
Regards,
Cooter
Has been this way since the begining of time. All about power and control. Want to control people? Have them perceive that you can provide them with food, shelter, health, or security. If you can insure these things for yourself, the sociopaths and kleptocrats that bought your representation lose all their power and that is what this is really all about.
Two good obsrvations.
The fellow would be more able to pay that bill, given some time, if the bills were priced out to him at the same rate that the insurance companies have negotiated. If I were able to make a change in "healthcare" regulations, it would be to require that providers can not charge more than a 20% differential between any customer. I recently had some normal tests run for a checkup. Bills shows regular price of $950 vs. insurance billed price of $150, which the insurance company paid.
Now, as to the increased rental rates, consider that the tennant will always pay the costs of purchase plus financing. That is why it is a falicy to state that rental can be cheaper in the long run. those who will be living in a home for more than 5 years should consider buying. there is a great deal of friction costs in exchanging houses. However, a paid off home has no payments other than taxes and modest maintenance.
The lower the rent the worse the hood gets... Keep those rental prices up!!
Maybe those trying to sell may have a chance
The massive drop in mortgage rates is largely a method to keep home values inflated. Do not doubt this for one second.
Thanks to these low rates, big investors are likely also bidding home prices up competing with families simply looking to buy a home. More unintended consequences.
Well, make up your mind - is driving up home prices intended or unintended?
When a housing bubble bursts more people will naturally be driven to the rental market if they can no longer secure the means to but a house. In fact, this is where the marginal buyers came from in the first place to nudge home ownership rates up to historic highs. There are really only two options here unless two or more potential renter/buyers cohabitate together instead.
But if anything artificially low rates are retarding this shift, not enabling it as at least some distressed homeowners will forestall dumping their houses in favor of the rental market because they are able to benefit from lower mortgage payments.
Sounds like the best "small money" trade here, if you have any kind of capital to deploy, is to take advantage of both low rates and high rents by buying a rental property, maybe take further advantage of owner/occupied status benefits and become a landlord.
Only if you can get good title.Forget the current title insurance,not worth the paper its
written on.Up to you if you want to sink capital ,time and effort on house where the
former owner reclaims it because of fraudclosure.
You could be up shit creek without a paddle.
Plenty of work for the lawyers,they always win.
Totally agree with Mercury. Very few investment opportunities today offer inflation indexed cash flow with limited downside risk like US Housing does. Everything is being manipulated by the FED, but at least with housing, we know the bottom has already fallen out - unlike the S&P... even Gold could get crushed should any one of the house of cards that is the global financial system crater. At least with housing you can lock in a 30 year mortgage and enjoy positive cash flow. Even if the shadow inventory of foreclosures comes back on the market and/or private equity decides to take an about turn and sell everything, what else can you buy at historically low levels with relatively high security of ownership and zero counter party risk? The only way you lose is if rents drop from here, but they would have to drop a lot to remove positive cash flow. Assuming of course you buy right, in a good location, but that is Real Estate 101. 20 years from now (or 2 years, depending on your take on things), those $100k homes will be worth $1M and a gallon of gas will be $50.
Well, you could also lose if increasingly desperate municipal governments start to really sock it to you in property related taxes.
correct.
I've got a strong feeling several of these people know nothing of investment property financing. The first clue is speaking of a 30yr mortgage or a 3.5% rate.
I've got a good friend that just paid exactly 6.5% for a rental with 15% down. Another 5% down would have saved 1% interest.
Bank I've got mine financed through is running a special rate of 4.6% on a 15 year. Both of these loans are a 3 or 5 year balloon. Fixed rate investment lending is non existant unless we are speaking of $250k+ purchases. I've got a warehouse with a fixed 15yr at right under 5%.
People who are buying owner occupied homes aren't going to want to move 10 years from now when/if a 30 yr is back up to 8%, which is where it needs to be. It will get all these rookies out of investment property. I know people who can't use a screwdriver and here they are purchasing rental property. I wish them luck and I hope to buy it from them in a couple years when they get tired of losing money.
Renting real estate is NOT for neophytes.
Consider:
o High transaction costs
o Maintenance cost and "management headaches"
o Higher property taxes.
o Lower wages = lower rents with the possibility of rent control
o A non-liquid investment
o A higher profile for lawsuits
Rents fell from 1930 to 1955, if you think it cannot happen.
And you'll pay through the nose for desirable areas.
Also remember that you HAVE to depreciate the house so don't think this is a short term investment. And, remember depreciation is nothing more than tax deferral thus you are subject to recapture rates of 25%. So, if your effective tax bracket is below 25% then recapture will eat you alive.
That and not only will rents necessarily decrease due to wage stagnation/deterioration, but the prices of the homes/rental properties will follow suit. The other issue is conversion of commercial property into residential rental property... adding to competition.
I think it's a decent play for the time being in markets that have not been overbought or are presently not shedding jobs and do not have out of control municipalities. However, it's something that you might want to keep the trigger finger on and bail out at the first sign of trouble. It might be possible to transition/1031 into farmland around this time because that bubble will/should have burst as well.
I'll also say that in order to not have a nightmare from renters and in maintenance, you probably don't want to aim for the bottom of the barrel... there are a LOT of potential pitfalls... and more people trying to sell them to you. caveat emptor.
Now take that chart and superimpose the money creation or money supply over it for the last 35 years. Should be interesting. In otherwords, shit has gotten so freaking expensive when it comes to property in general that the only way to support prices and keep the banking system from imploding is to keep rates at zero till people bail out of the currency.
Buy low, sell high, not the other way around. As a landlord I can say that good rentals generate good income, but do require actual work to maintain and they will depreciate over time, just like the "humanity" that inhabits them.