A plugged-in reader provides some great “phantom inventory” analysis for San Francisco:
I took a look over the weekend at MLS records that went to Expired or Withdrawn status since 2007. To get a unique count by address, I didn’t count multiple instances for the same address and then eliminated listings that sold or went Active (or Contingent or Pending) subsequent to the expired or withdrawal date. So the following counts show the number of expired or withdrawn listings since 2007 that have not subsequently been sold and are not currently active (or contingent or pending):
SFH: 1,327
Condo: 2,657
Total: 3,984
Compare these (or add them) to the Active count [shown below]:
SFH: 602 active
Condo: 1,046 active
Total: 1,648 active
This analysis indicates that for every current active listing there are more than two other properties that have been withdrawn from the market (and have not returned) in the past 2 years by discouraged sellers.
Of course listings have always been withdrawn for many reasons – but the total number since 2007 has been about 50% higher than the 2000 – 2006 period.
I agree…that there is a huge “phantom inventory” from discouraged [or] discretionary sellers in addition to those who haven’t yet put their properties on the market. Pent-up supply must surely exceed pent-up demand – at least from qualified potential buyers. The 3,984 properties from my analysis would take 20 months to be absorbed at the current sales pace.
Keep in mind that neither our listed count nor our reader’s “phantom” count includes unlisted developer inventory.
And at the risk of bringing up our Complete Inventory Index (we know, we know), add another 1500 to 2000 housing units of already constructed but as of yet unsold San Francisco inventory that also needs to be absorbed.
∙ SocketSite’s San Francisco Listed Housing Update: 3/16/09 [SocketSite]
∙ SocketSite’s Complete Inventory Index (Cii): Q1 2008 (San Francisco) [SocketSite]
Awesome. Just musing… but you can add another 5000 units if you could count the people that could/would sell at peak 2007/08 prices! Including most everyone that bought in 2006/07! 🙂
Don’t forget to add this year’s condo pipeline.
Let’s count the properties people have decided not to sell. Because they really would rather sell. And if they did, they would have to lower their prices. That would make wholescale price capitulation occur.
Um, no?
Different market = different market. Waiting it out = waiting it out. But again, “waiting it out” is not equivalent to “losing the house to REO or foreclosure.”
There were a lot of houses that were being rented in the early ’90’s that were sold during the subsequent boom (not to mention flats that went TIC), and it stands to reason that in slow times, many homeowners who can make money renting their homes(owing little and paying little in property taxes) will rent rather than sell, for now.
Homeowners that can make money renting their homes probably bought prior to the current boom, and certainly well below the peak. Generally speaking, most homeowners who have purchased within the last seven years or so would still do much better to sell then to rent, as the rental income is unlikely to cash flow positive.
I personally believe that this data in a vacuum is relatively worthless partly for anonn’s reasons.
A person either sells, want’s to sell but can’t, or doesn’t want to sell.
The “shadow inventory” number seems to be trying to look at the second category: those who want to sell but couldn’t.
to have meaning, we’d have to chart this over time to see if there is a variation. is this stat always like this in boom and bust times? does it worsen or improve during bust times? is the current stat high or low???? does it have any correlation (leading or lagging indicator) to previous RE cycles?
and so on.
I think it’s actually a pretty cool idea for data gathering. but it lacks CONTEXT.
(FWIW: I think this is more valuable than the whole “42 people bid on the Bernal Property showing pent up demand!” given the fact that this “shadow inventory” number can be tracked over time and methodology standardized… even though it will clearly have flaws as well).
Some of these withdraws might be sellers who wanted to move to a different house in the City, but since prices have fallen and buyers are shy, they have removed their house from the market and have decided to stay put.
“waiting it out” also means delaying a move-up purchase. This is part of how the lower end of the market collapses back and affects the upper end.
(Great information FSBO !)
About people renting their homes profitably during the 90s, we should remember that there was a “bit” of job creation in those years, especially in th Bay Area. This cycle is really not going to be anything like the cycles during the 1980s and 1990s.
Good luck to those trying to wait out the downturn by renting their places. Their willingness to sacrifice their capital through negative cash flow will be much appreciated by solvent renters.
Yeah, good luck to those fools who rent out places which cover mortgages. What a bunch of dopes they are.
LMRiM,
The worst off are recent buyers (2003-2009) being cash flow negative on rentals and NOT building equity through amortization. Like 100% financing, I/O that don’t even break even on the mortgage and pay property taxes, rental income taxes, maintenance and special assessments/repairs on the top of that. They are basically subsidizing renters. Probably a very bitter bunch in the making.
You realize you just said the exact same thing LMRiM, said, right?
Agreed, SFS, that that cohort is the worst off and will be the most bitter. I tend to think in terms of rental SFRs. For those, I’d say that the neg-cash flow crowd goes back even further in most desirable nabes. In Tiburon, for instance, even a 1999 purchase price won’t typically cash flow using reasonable assumptions. That’s also the case for the nicer parts of District 4 in SF that I am familiar with.
I bet that for flats/less desirable/lower pricepoint houses, early 200s would cash flow on reasonable assumptions. At least until rents fall some more 🙂
@FSBO:
I also thank you for this data.
we need someone to continue collecting and charting this data over time… I’m hoping someone will take the time to do it (hint).
as I said, in a vacuum the data may not mean much, but over time it may really be intersting.
It’s a shame this -data- isn’t more complete so that we could do some actual -analysis-.
Things that the OP mentioned but didn’t provide (or that SS didn’t pass along) include # of relistings for pulled properties, # of sales for pulled properties (w/o being on MLS), etc.
Based on this, we could calculate the % of this inventory that might actually still be competing in the market. While I don’t often agree with fluj (nee anonn), I do agree here; something materially less than 100% of pulled properties are actually active shadow inventory.
Well, anonn, let’s put some meat on some of the theoretical discussion here. Let’s look at a recent house in NV that has been in SS and also for rent, 4545 25th:
http://www.redfin.com/CA/San-Francisco/4545-25th-St-94114/home/1397566
He apparently can’t rent it out (they’ve been trying, most recently at $7800/mo). The taxes alone are $33K per year – almost 4 months at the wishing (and not getting) rent. Do you think this person has a prayer of covering the costs (to say nothing of the value decline that is coming – and it’s already down $100K from purchase)??
There are numerous other examples – no need to go through too many. If you think that even a 2003 purchase of a SFR can cash flow on reasonable assumptions, why don’t you post the address? As I said, I bet it might be possible at the lowest end/lowest pricepoints.
@ex SF-er
I agree the data is not nearly enough to make any concrete claims re: trends/etc, but the OP does say this is consistently 50% higher than the number seen during the 00-06 time period. That makes it somewhat more interesting.
In Tiburon, for instance, even a 1999 purchase price won’t typically cash flow using reasonable assumptions.
Being cash flow positive on ANY rental is a challenge if you do not fully own the place. Another challenge, easier to meet, is to be able to build capital/equity. Say you pay 3K interest+overall taxes and costs, the rent is 2500 and the mortgage principal payment is 1000. In that case, you’re cash negative 500 but that’s more than covered by the equity build.
Most RE investments have lousy returns until they’re paid off in full. Are current RE rental investors aware of that when they sign their idiotic 30-Y mortgages or even I/O to buy a rental? (I never went over 5 years). In most instances they count on inflation/appreciation to get the numbers to eventually work. And numbers always work in the end, but sometimes it takes 10 years, other times it takes 20 or even 30 years. This is a long term game and most people living off rentals either inherited it, were patient enough or just timed it right (definitely did not buy in bubble years).
I’ll not post an address. (Are you freaking kidding me?) Here’s one, tho. Bernal. SFR. 2 br 2 ba. 620K mortgage @ 5.5%. Views. Very good yard. Garage. Extra rooms + laundry down. They get 3500 right now if they get a penny, and it’s real as can be. That equation works for scores of folks who bought with 20 percent down over the last several years. (If you tell me that’s not a realistic rent expectation the conversation is over for me, and I’ll let someone else tell you you’re wrong.)
620K @5.5% = $2840/mo
Property taxes are about $620/mo.
If insurance is more than $40 per month, or there is any maintenance or downtime between rentals, they’re screwed at 3500.
And here’s a listing just like it that’s 3 days old on Craigslist for $3000. Don’t know if this is considered Bernal Heights or near where you had in mind, and I don’t know rents in that area: just did a quick look up on CL.
http://sfbay.craigslist.org/sfc/apa/1073995518.html
Looks like you need *3* bedrooms in great condition to hit $3500.
http://sfbay.craigslist.org/sfc/apa/1070640347.html
LRMIM, I agree with you here.
It is insane to think you could be cash-flow positive on real estate with rentals, particularly in SF.
I own my place fully, and it would probably still be a BIG challenge.
Prop. 13 and high purchase prices ensure high costs. The only question is…rents?
Sort of an odd thing about SF real estate is how high priced 1BDs are. The amount of utility you could get is actually very small, but they are priced very very high. I go to these developments all the time and they tell me that there is huge demand for them because of corporate rental potential, but I CANNOT imagine any world where an 850K 1BD condo with obstructed views, generating rental income will ever be cash-flow positive.
Interesting statistic that quantifies what I think most market participants already know – that shadow inventory is larger now with the current slowdown. To be fair though, there is also shadow demand not showing up in the closed sales statistics – people who are ready to buy and are waiting out the current uncertainty or are making their finances stronger to qualify for a mortgage, etc. So, the conclusion of 20 months inventory at the current sales rate is not exactly an apples to apples comparison.
I’m spending more time looking at the rental market in SF and it is very clear that rents are down 10-20% in all areas and units are taking way longer to rent out. I’ve spoken to 5 different professionals who spend 100% of their time on rentals. In most cases, it’s taking close to 45 days and 1 or 2 price ‘adjustments’ to get the unit rented. Contrast this to the 7-10 day, 1 showing rental days of 2006-2008. Renters are low balling units as well. And owners are listening to low ball offers. So with rents falling it’s obviously making the economics of ownership more challenging.
[Editor’s Note: As noted in February: San Francisco Rental Market Weakness: SocketSite Readers Report.]
620K @5.5% = $2840/mo
Property taxes are about $620/mo.
If insurance is more than $40 per month, or there is any maintenance or downtime between rentals, they’re screwed at 3500.
I don’t know if this is a real property or if the rent is real, etc. So, this is kind of a fool’s errand, but here goes anyway:
In the old days, we used to have a thing called inflation. It meant that rents increased at some percentage, every year. With a fixed rate loan, you start out cash flow negative but it flips at some point down the road. Being $100/month negative in the first few years is hardly “screwed”. If you can’t handle a tiny tax deductible loss like that in the early days then you have no business investing in real estate.
“Dave”,
Yep, you described the way individuals have bought rentals in the past. And it can still work, provided you are not going anywhere in the next 30 years.
Comments:
– The 2840 figure is I/O. You might want to fully amortize a rental, otherwise you’re just renting the place from the bank (with a 20% security deposit!!) and re-renting it at a loss. For me the faster it is amortized the better, but everyone his own.
– Inflation works both ways. Maintenance, HOAs, repairs and insurance will go up.
– Rent control prevents you from closing gaps when needed. You cannot fund repairs with rent increases which means either you absorb the costs or you defer maintenance.
– Tax breaks for rentals. Pretty substantial and they should be taken into account. That can mean the difference between net profit or loss.
anon/fluj? wrote about an “investment” property with a $620K loan at 5.5% and rent at $3,500. There is no way you can get an loan at 5.5% for an investment property and $3.5K sounds a little high for Bernal. Even if you could get an I/O loan for $620K at 5.5% and rent for $3.5K by the time you back out a vacancy factor, management, insurance, taxes, maintiance and capital replacements you have no chance of having positive cash clow for a long time (I’m not a Realtor trying to sell homes to investors, just a guy who comes from a family that has been renting homes and apartments in the Bay Area since the 1960’s)…
anonn, do you have a better example? the mortgage payment alone is $3,520. Add property tax, maintenance etc. and the owner is definitely subsidizing the renter, as many have already pointed out. Not to pour salt in the wound, but the question arises naturally: is this the type of professional advice you give your clients?
Oh, yes, please can we all do the tired old rent-vs-buy analysis again? Can we, please?
Stop it. Its beyond tedious at this point.
And in addition to what FAB writes, I’d add that most discussions I’ve seen on the “tax benefits” of rental property for small-time operators almost always assume some measure of tax fraud: i.e., that the interest cost (and property taxes) on the property is used as an offset to active income elsewhere in the portfolio (say, income from a regular job). I never see any discussion on SS from anonn or others (not even lip service) to the passive loss rules, or how noncash depreciation expense cannot really be utilized when the rental income does not even exceed the cash expenses.
Owner occupied residential real estate is very tax efficient (but I’d argue that at these price levels, the valuations don’t make sense). However, turning a formerly owner occupied rental into an informal “rental business” to “wait out the downturn” often doesn’t work very well, unless your income is low enough under the passive loss rules and/or you just cheat and fail to declare the rental income, don’t take any depreciation expense (and so, no depreciation recapture or 1031 issues on sale), and continue to deduct mortgage interest and prop tax from active income.
Not that I have anything against that, btw. If the Obammy administration has demonstrated anything, it’s that tax cheating is not an impediment to success (almost seems like a prereqisite!) 🙂
Hard to imagine how this theoretical 2BD could be much nicer, in terms of either size, fixtures, or location, then this one:
http://sfbay.craigslist.org/sfc/apa/1073995518.html
The asking price is $3,000.
I question some of the math earlier. $620k at 5.5% should be $3520.29.
Property taxes should be $600/month.
All that being said, even at a rental rate of $3k per month the property should cash flow positive over a period of 5 years assuming they can manage a modest appreciation rate of 1% a year, and avoid any significant period of vacancy. Tax deductions will save the day.
Additional comments:
– Whether there will be *any* appreciation over five years is an open question, and the numbers change significantly if the home they bought for $775k is only worth $600k or so when they go to sell it. In that case they would have significantly benefited by selling as opposed to renting it out.
– Rent control would not apply to a single 2BR house.
Satchel — good point about tax deductions for small-time landlords. If your income exceeds $150k (married filing jointly), there are none, at least according to my accountant.
Someone please correct me if I’m wrong (and perhaps point to the pertinent tax codes).
I’ll amend my comments to say that I know next to nothing about the tax advantages/disadvantages to owning income property. I was just looking at it from the perspective of an owner occupied property, and assumed any tax differences would be marginal.
After reading LMRiM and AptBroker’s comments, I no longer have any confidence in that assumption, and now think I was looking at it over optimistically.
As a result, I retract my conclusion that the property could cash flow positive over five years. Indeed given the narrow margin of success based on my rosy view, I think it’s highly unlikely this property would cash flow positive at all without substantial assistance from inflation.
Oh, yes, please can we all do the tired old rent-vs-buy analysis again? Can we, please?
Stop it. Its beyond tedious at this point.
The rental market analysis is essential to understanding this thread. You cannot claim the “Phantom” inventory is an illusion using the argument that people can wait out the downturn simply because they can make money out of renting. That’s not always true.
what is your point? do you like living in the past or in a time where you can create your own reality? you know nothing!
Jimmy –
This will answer all your questions:
http://www.irs.gov/pub/irs-pdf/p925.pdf
Here is a simpler overview (I haven’t reviewed it in depth, though, so I can’t vouch for it but it seems right):
http://www.wwwebtax.com/deductions_z_other/passive_activity_losses.htm
I hope that helps you and others on the board thinking about renting out property. Of course, let me stress that almost everyone I have ever met who is engaged in small time landlording is cheating, except for the people whose families are actually doing this as a real business.
In addition to the depreciation/recapture/limitation on passive loss issues, also keep in mind that renting a property out will also generally complicate the $250K/$500K capital gains exclusion usually available for owner-occupied residences, which could be an issue for long time holds where there is a lot of equity (not going to be an issue for most properties purchased after 2003 or so – the $$ just aren’t going to be there anymore).
I don’t want to get into it. Do a search. Read the links. There are deferred deductions possible for over 150K AGI, there is depreciation, there are other moves a qualified tax attorney or accountant can clue people in on. (There’s also a real estate professional exception to the 25K 150K AGI rule.)I’m not a tax guy and I don’t play one on the Internet. I also don’t go around saying everyone cheats on their taxes and that I know how individual people do their taxes. LOL.
All the info you’d want (and then some) is right there in IRS Publication 925 that I linked, including the qualification that flujanonn references for a “Real Estate Professional” (middle of p.5). You’ll see that few “casual” landlords qualify, and few would qualify if they had a real W-2 job (the 750-hour per year test for real estate activities would be pretty tough to show, to say nothing of the greater than 50% requirement to be involved in real estate businesses).
Depreciation that flujanonn casually throws outwill need to be recaptured on sale at unfavorable recapture tax rates, unless the property is rolled through a 1031 exchange. The capital gains exclusion test (2 years out of previous 5) is also impacted by any decision to rent out property, again unless you cheat.
It’s not that hard to understand, if you just take the time to read the rules. You don’t have to be a tax attorney or to have gone to an Ivy League law school to figure it out well enough to understand the framework, but it helps 🙂
$3500 for a 2/2 in Bernal? Funny – CL’s highest listing for a 2 bdrm is $3000 (not to mention the only 2bdrm listing over $3k). Additionally – there are 7 listings b/w $2500 and $2990 for 2 bdrms.
Most of the tax cheating I’ve seen regarding small landlords is claiming the real estate professional status. I bet that very few people actually get caught doing this via an IRS audit.
Also, if you put a house into service as a rental, can you deduct the loss if you sell it for a loss later? I’ve been hearing a lot of talk of people renting out the houses they can’t sell for a year, then selling them & trying to deduct the loss as a business loss to soften the blow.
Query: would spending two hours a day on Socketsite count towards that 750 hours?:)
Waiting it out = Waiting for Godot
Sell now, next year is going to be worse…
Anono – I believe that it’s better to hold for 2 years to avoid arousing suspicion. Note, however, that the cost basis of the house must be computed as the lesser of the market value when you bought and when you converted to rental. E.g., if you bought in 2007 and converted to rental in 2009, you must use the 2009 price as the cost basis. Of course, since you didn’t actually sell in 2009, no one knows exactly what the sale price would have been, so I suspect that there is some room to fudge things.
Regarding the rent equation- it’s hard for most SFH’s in SF to break even prior to 2000-02 purchase prices. Agreed.
But you guys are barking up the wrong tree! Most small landlords in SF buy 2-6 units, and the equation there is much different than SFH. Until 2005 certain bldgs made sense with 20-25% down. Then the tic market took off, the lembis got drunk with stupidity and bid up everything. The elevated rents of 06-08 helped, but cashflow props were few and far between.
Back to SFHs and shadow market, this is tricky to guage accuratly. The folks who have to move (ie job reloc) will probably not hang on for more than 1-2 yrs with a large neg. But those who continue living in their props can do so at will.
Another good point was made WRT shadow buyers on hold, which is an offsetting factor. Finally, the shadow inventory should not effect upstram buyers because they will net a win. ie I’ll sell my $600k condo for a $50k loss but also score that now sfh for $1.2 instead of $1.4.
Btw, RE blogs definitely count as ‘time’ for my 750 work hours. As do my daily lunchtime walks checking out new developments in my hoods of interest. Of course this is all academic for my tax purposes as I have not been ‘doin’ w-2 time’ for over a decade. What else can I be but a professional RE investor. And BTW, accumulating passive losses is really sweet when the market rebounds and some serious capital appreciation comes my way again.
SFS is right, IMO, RE investing is a long term play. Once you have stabilized properties (in highly desireable mkts) and and not bleeding money, just wait the downtime out and play on socketsite, iphone, etc., as time will be your friend.
I totally agree with you, hipster, about small time landlords being mostly in multi-unit situations, and the economics are different there, as are the breakevens. For experts like you, there are I am sure profitable opportunities. Just like in financial markets for people like me.
But, in this thread, we really got started with Dan’s 10:23 am and anonn’s 10:52 am posts. Clearly, those are contemplating the situation I was describing: a hapless purchaser of an SFR who would like to sell now but can’t take the loss, and so wants to rent out the property “until the market comes back”. Those guys are not qualifying as “real estate professionals” and they are not coming within the income limitations of the passive activity loss rules. They’re just stuck, subsidizing renters who wisely chose not to purchase and now get to enjoy the same property at lower cost. We got a little off track in the posts – I was never talking about people who are in the business of rental real estate, and in any event few of those would have been dumb enough to purchase a rental SFR after 2000 or so I’d think!
The example I gave subsidizes no one, and is more in keeping with 45 Y.O.’s take on multi units.
Hi Lmrim- yes true, but please note that I did addr that situation too. The hapless owner who has to move out will have a finite capability to absorb the net cash flow, but oddly enough, this will be offset if they rent their new digs until they can sell and rebuy in the new market (sounds familiar?)
Anonn- the important point you made, irregardless of the specific #’s of the bernal example, is that some homeowners who recently purchased can at least get by with a modest monthly negative. Especially if they brought for under $1 mil, and put at least 20% down. Or the upmarket buyers who rolled their previous home gain into the new place. It’s highly likely that some of the $2 mil buyers have a loan under $1 mil and can get, say $4000+ in rent for a mice 3+\2 home with prkg.
Add up all the likely scenarios and I’m sure that a significant number of SF homeowners can hold for 3-4 years without having to sell. Of course, there will also be ones who can’t and will need to sell at a loss. But they will not be in the majority, once all the creative personal situations get fleshed out.
@anonn
“I’ll not post an address. (Are you freaking kidding me?) Here’s one, tho. Bernal. SFR. 2 br 2 ba. 620K mortgage @ 5.5%. Views. Very good yard. Garage. Extra rooms + laundry down. They get 3500 right now if they get a penny, and it’s real as can be. That equation works for scores of folks who bought with 20 percent down over the last several years. ”
What about the lost opportunity costs on the down payment (compared to even low risk options like CDs/TIPS)? Do you consider the future value of the property in real or nominal terms in your hypothetical/anecdotal example?
“(If you tell me that’s not a realistic rent expectation the conversation is over for me, and I’ll let someone else tell you you’re wrong.)”
I’m still waiting for that someone to speak up, btw.
So in summarization: If we don’t believe your imaginary rent story, we’re wrong and you’re right, and regardless of what data or factual evidence any of the posters submit regarding your profitable investment scenario, you won’t reply anyway. Love Fluj
Classic….
this will be offset if they rent their new digs until they can sell and rebuy in the new market (sounds familiar?)
Only if they cheat on their taxes, which was my original point. Once they move out, they lose their owner occupied principal (or secondary) residence deduction. They also lose the ability to offset property taxes against active (W-2) income elsewhere. And they are subjected to taxation at their highest marginal rate on the rental income, while at the same time enjoying no deduction on the rent they are now paying in the new digs.
Of course, if they are running negative on the mortgage and property taxes versus rent received, they can offset any tax liability on the rent, and accrue losses on the difference. Ditto for depreciation on the structure. But of course, unless they meet the passive activity loss rules (in particular the $150K income limitation), they lose all current ability to use those losses to offset present taxable income, and in any event they are limited to a max of $25K in annual losses.
When they go to sell the property, they need to be careful of the 2 in 5 year year occupancy rule to exclude gains; assuming that there aren’t any gains (that’s why they are delaying the sale in our hypothetical and embarking on the business of being an “accidental landlord”) they need to be careful with regard to any depreciation taken that would reduce basis so as not to generate a negative tax event on sale.
It gets a little tricky, and it never works out as well as in the owner occupied situation. Which is why so many accidental landlords ime never claim the income, never tell the bank that it’s now a rental, never depreciate the asset, and just take their tax deductions for mortgage and property tax as if they still lived there 🙂
It IS a subsidy whenever an asset is rented at below its implicit carry costs. Sometimes, that subsidy is being partially provided through recent purchasers through prop 13 taxes. That is the case in my rental, for instance. I pay $2800/mo for a $1.2Mish SFR (its value is probably lower by now). The owner inherited the property free and clear, and pays $1500 per year in property tax.
The subsidy consists of the excess of the opportunity cost of the $1.2M (which could have been extracted tax free as the landlord inherited at stepped up basis), and which is significantly more than $2800/mo. Additionally, recent purchasers in the neighborhood in effect subsidize services (public schools, primarily) that I enjoy but don’t pay for. Last, as property values fall, that value fall lands on someone else’s balance sheet, which is another subsidy. Even if you don’t accept my premise that values are going to fall (they have been falling up here for over a year – and certainly since I got here in July 2008), surely you can see that I have laid off the risk of that happening onto someone else, and that is worth something. Amazingly, because the finance/opportunity and carrying costs of this place for me at my tax bracket (including the $15K+ property tax and maintenance + insurance) are so much more than $2800/mo, I am in effect being paid to not take the risk of price declines, a situation which is very rare in asset markets!
All this talk about “cash flows” sometimes obscures the economics. Sure, I could buy a $3M property for cash, and rent it out at property taxes + maintenance costs + $1, and claim to be “cash flow positive”. But take it from someone who has been fighting in asset markets (bull and bear) for a long time: that’s not a smart strategy 🙂 The real estate game has been one way in SF since the late 70s (sure, there were wiggles, but nothing compared to the situation I think we are facing now). Leave some room in your planning for the risk that you are wrong. I do! If prices doubled I could still afford to buy no problem. Could you afford your lifestyle if prices fell 50%? That’s the question I think real estate investors need to ask IMHO.
When I posted near the top of this thread about people renting, rather than selling, as people were doing in the early ’90’s (before selling in the late ’90’s or early ’00’s), I was thinking about people who’ve owned for many years. If one has a house that is paid off (or mostly so), and one is paying little in property tax (thanks to Prop. 13), it is not hard to be substantially cash-positive renting.
When I moved to SF in 1991, I looked at lots of houses for rent, as I was planning to rent with a friend who was moving to SF at the same time. I ended up renting a flat by myself, but my friend rented a house in Noe Valley until it sold in ’96, and then rented a house in Bernal, which she ended up buying from her landlord (before it ever went to market) in ’97 or ’98. For some, this is a way of getting a steady income, while having something to leave the kids in the will, or to sell later when the market picks up again.
This is a different thing entirely than buying a house right now for it to be cash positive renting it now.
What about ‘dem opportunity costs, angryman? Tell me all about them. Please. Fill up a page with your eloquent discourse. Be sure to include how everybody fared last year in 401Ks.
yes, a very good point about the ‘tax cheat’, which i’m sure most people in that position would do. and probably get away with it, since, it “temporary.” (if they are smart they will use a po box for their mailing addr, unless a friend is renting, and they can keep the orig home addie for taxes, and other proof of occupancy docs.)
why, oh why would your LL KEEP THAT STUPID THING! they could just cash out, sink the money into MM and probably make more than the positive they have now. or if they are ambitious, they could make a nice move into stocks or rental property. they probably wanted to keep it during the appreciation years of 04-07, and now are waiting it out. but the opportunity cost on a non leveraged asset is significant.
your rationale for renting is sound. it especially makes sense in high end bedroom communities, where investing in homes makes little to zero sense: expenseive homes at relatively low rents (and conversly, a good deal on the rent vs. buy equation.)
i appreciate your note on planning for risk. i think we’re all at risk in these uncertain times. even an equities portfolio must be carefully managed, and cash assets could also become liabilities in the event of future inflation. with my SF real estate holdings, i cannot see how values will decrease by 50% w/o a significant decline in rents. sure, i can take a significant hit on asset value, and just ride the net worth loss, but the cashflow is what needs to be carefully maintained. rental props are like running little businesses (excep you get appreciation and killer tax breaks:)
ultimately i just don’t see a long, deflationary cycle (which would be the real killer for investors.) IMO, government ultimately wins. treasury and fed have not even begun to flex their power. if things get much worse gov will ultimately buy (read: print money) their way out of this mess and long term inflation and it’s hedges will triump. $25 burritos anyone in, say 2015?!?
hey, have a nice nite (or morning, if you get this then 🙂
@anonn
“What about ‘dem opportunity costs, angryman? Tell me all about them. Please. Fill up a page with your eloquent discourse. Be sure to include how everybody fared last year in 401Ks.”
Sure, call me “angryman” to try to divert attention from your claims. Branding is dead, but nice try on an old marketing technique.
Not sure where you’re going with the 401K remark, but I don’t have access to the other posters’ financial records. Another straw man????
I converted to roughly 60% money market, 20% emerging market, and 20% US equities in Nov 2007 if you’re really interested. I’m down about 15% at the moment, which isn’t bad in my book. I missed a bit of the hit due to the timing of a transfer which worked out in my favor.
If I would have taken the equivalent in cash and used it as a 20% down payment on SF RE, I would be out 100%. So yes, I’m doing great. By the way, the rest of my savings were heavily weighted in low interest bearing cash accounts (about 3x my 401K holdings). With deflation running wild, I’m doing just fine.
Good, glad to hear that you’re doing wonderful being down only 15 percent and all. It couldn’t have happened to a more uplifting, giving and kind web persona than yours, angryman.
@anonn
I gave you an honest description of my investment strategy which probably mimics that of many posters on this site who saw this calamity coming down the pipe (probably worse than most in the know). If you feel it’s necessary to insult anyone who has done far better than DJIA/NSDQ/REIC in the past decade, knock yourself out. As an “outed” realtor on this site you don’t do yourself any favors by alienating so many people, but we’ve always known you can’t market worth a piss. If that makes me the “angryman”, I can certainly live with that.
Who is this fluj character?
Back to my original post, I agree with ex SF-er’s caveats about the withdrawn listings data. Here’s some raw data – total expired & withdrawn listings by year (for SFH & condos in SF):
2009: 586 YTD (seasonally-adj rate of 4,400)
2008: 3,449
2007: 2,680
2006: 3,045
2005: 2,049
2004: 1,653
2003: 2,170
2002: 2,499
2001: 2,579
2000: 1,477
The above figures are total listings in the MLS that went to a status of Expired or Withdrawn in the year shown.
In the analysis above, I took the 6,715 expired and withdrawn listings from 2007, 2008 & YTD 2009 and adjusted as follows:
Unique address count: 5,442 (ie 1,273 of the 6,715 were from addresses with more than one listing)
Deduct properties that were re-listed and sold subsequent to the last expired/withdrawn listing: (958)
Deduct properties that have been re-listed and now show as active or under contract: (500)
So 5,442 – 958 – 500 = 3,984. This is the count that I cited as listings (addresses) that were for sale in 2007-09 but never sold (at least per the MLS) and are not currently re-listed.
Despite the valid caveats, I think that we can at least say that there are a bunch of properties that didn’t get sold in the last couple years and that the pace of listings being withdrawn has been significantly higher in 08-09 than in previous years (not that this would be much of a surprise to any of us).
FSBO
It doesn’t matter if it is any surprise to us or not. Your excellent data removes the ability to hand wave, or attack assumptions. THe numbers do not lie. They may not be exactly spot on, but they are close enough, and they very clearly show a trend…
thanks for doing all of this – it is very helpful
@FSBO,
Sorry to distract from the thread…:(
By the way, you’ve been on fire the last few months. Your data analysis and reduction of the SF RE market is one of the biggest factors that keeps me coming back. SS would be wise to give you a guest column. Keep it coming either way.
J
why, oh why would your LL KEEP THAT STUPID THING! they could just cash out, sink the money into MM and probably make more than the positive they have now.
Yes and no. I understand the rationale, even if I think there is a more efficient path to maximizing wealth.
The house was only inherited in late 2007 upon the death of the parent. It was then remodeled a bit, and is actually a nice place (an 1800 sq ft 50s rancher is never going to be a palace, but it’s a perfectly livable space). It has an unobstructed view of the GG Bridge and the entire Richardson Bay and most of SF west of the Marina for one thing, and a pretty large lot for Tiburon.
The owner is interested in retaining the asset for their children, so that the grandfathered tax basis will remain at $1500 in perpetuity (ok, it will grow at 2% per annum, so in 15 years, the taxes will be $2,018/yr.). Like most Californians, they don’t believe that it is possible that the property will go down 30%+ in value and stay there for 10 years or more. Perhaps they’re right.
Meanwhile, I suspect that the $2800/mo or $33.6K per year is a nice annuity. After taxes and gardening services/light maintenance, they are probably clearing a bit more than $30K, or a little less than 3% on the fully valued property. I’m not sure if that income is being claimed 🙂 In any event, I can see how they would view retaining the asset as a fairly cheap option on having the ability to develop the property more extensively later. The GG view is not going to go away, and they are not leaving the area.
Similar situation (with prop 13 and grandfathered ability to inherit low tax bases) to the rental I had in Monterey Heights from 2002-2008 (3000 sq ft 4/4, remodeled kitchen and generally in nice shape, w/ 800 sq ft+ usable garage space under the house). Prop 13 has created great distortion in the housing markets in SF and desirable suburbs.
Now, if I am right and these values fall 20-30% and stay down there for a while (they are already down 20% from peak 2006 prices – don’t let anyone tell you otherwise), their bet will have turned out to be suboptimal, but like I said I can see the rationale. And let’s face it, as we see on SS all the time, most people are not very sophisticated in general in thinking through how to maximize wealth or allocate capital most efficiently.
Further kudos to FSBO. Excellent stuff. I’m sure there is some percentage (my guess very small) of those who list and pull who were just testing the waters to see if they could land some sucker at a 2006-07 price. And they don’t want or need to sell otherwise. But the growing trend certainly indicates there is a lot of unlisted inventory out there that will continue to discipline prices for a long time, and any turn-around in the SF decline is much further off than even the current 9-10 month MLS supply numbers would indicate. The vast majority of those who go through the trouble of lining up a realtor and listing their home for sale either want to or need to sell it. And if they haven’t sold it yet, they will try again sooner or later. We can see the numerator in the months-of-supply ratio (sales), and FSBO shows us that the denominator (available supply) is far larger than the current MLS listings — and we need to add pocket listings to that! This is what continues to drive prices down, and the decline is still accelerating in SF.
Again with the marketing thing. What is it with you, Jorge? Get off it. I am not promoting a single thing on here. I run from that concept on here. Clearly. You are always, and I mean every single time, coming at me with derisive and aggressive language. If you don’t expect me to react in kind I’m not certain why that is.
Also, your “opportunity cost” query? Where did I discuss cash flow, profit, or endgame? All I said was that people who can step out of the market and rent their properties and “cover the mortgage” are/were not foolish. That is all I said.
Why can’t you read what I have to say without seeing my name and going to rote derision? It’s tiresome.
Lmrim- I had to chuckle a bit reading that post, as it is more akin to something I’d write.
Sure your LL could be more ambitious, 1031 the home into a leveraged asset. Especially in these times, cash talks at distressed sales. Nut they probably don’t want to bother, and I understand that. They are probably also comfortable knowing that area, the quirks of the home etc.
Their main investing rationale is future appreciation. Most would agree that a 3% return is not worth it on a ‘real’ asset with real liabilities (earthquake, slip n fall lawsuit etc).
The tax advantages are also wiped out, but they do have the sweet prop tax basis. So if they are like most people who own in more desiresble areas (myself incl) they are prepared to wait out this downturn for a few years.
But personally, I’d want to releverage that asset somewhat and take advantage of a distressed sale!
BTW regarding SF RE returns. I previously mentioned that SF has averaged ~ 4.4% nomimal return since WW II (~2.7% nominal nationally). So with an 80% loan you’re looking at a SF return north of 20% per amnum. Plus the tax breaks. Plus the cash flow. And as people get older they tend to keep their properties (maybe refinancing on occasion) just like in the 2 cases you mentioned. I think most of these longer term owners are prepared to accept a 20-30% asset decrease for a few years. Remember that most are still ahead of orig purchase price and just roll back their expectations to 2003-04 levels.
“So with an 80% loan you’re looking at a SF return north of 20% per amnum.”
Are your borrowing costs zero?
“Are your borrowing costs zero?”
There are borrowing costs, but they are offset by pride of ownership.
🙂
45yo,
4.4% SF appreciation vs. 2.7% national? I admit this difference seems reasonable. But you should not look in the rear view mirror to see where you’re going, especially since leverage works both ways. Watch out for that tree!
Always look for value. One of my rules of thumb is “would this purchase give me decent ROI without leverage?”
– If the answer is yes, then you’ve got yourself a pretty good deal. Sit back and enjoy the rents.
– If you need appreciation + leverage + tax breaks + some out of pocket cash every month to make it work, then that’s just like buying a regular business: you buy the place + have to work hard. The prospects have to be compelling enough to make it a good alternative to a day job.
The track record that enables you to speak in this assumed voice, that of a seasoned real estate veteran, consists of some places you told us you bought in France. You’ve never owned one thing here. Meanwhile, over the past year or so, you’ve made all sorts of comments that indicate a lack of knowledge regarding ownership benefits, housing nuts and bolts, and design. I for one am not having it. But hey have your fun, [Removed by Editor].
Seems to me you’re coming unhinged, anonn. This will all sort out sooner or later, try to keep a grip on reality in the meantime, bro.
hipster,
About that 4.7% CAGR for CA proprties post WWII, obviously there are all sorts of measurement issues, survivorship biases, etc. built into any available data. But let’s put that all aside.
I bet that if you dig into the data and split it into two periods – 1) post WWII until very early 1980s; and 2) early 1980s to present – I bet you’ll find a huge change in the CAGR. If you have that data, I’d love to see it!
IMO investors need to be aware of inflection points whenever they are investing based on reversion to mean principles and/or are extrapolating past performance.
I’d submit that two very important factors (among a host of other factors, of course) strongly changed the price trajectory of primo Cali. The first was the secular decline in interest rates and resulting credit inflation that really got atarted in the late 1970s/early 1980s (first, household credit began to be expanded, and then interest rates started declining from ’82 or so). The second was prop 13, the effects of which progressively restricted supply and increased willingness to pay for the “insurance value” inherent in fixed property taxes in a generally rising market. But the price effects of every distortion are ultimately unravelled (at least in real terms).
I think we are at an inflection point in SF and US property markets, and I would not be surprised to see zero nominal inflation in house prices for 10 years (I think they’ll go down, and then start to rise slowly) and negative real returns for perhaps a generation. Remember the late 90s when everyone thought huge outsize real returns to stock market assets were a give? We’re at least 14 or 15 years into negative real returns now (and maybe 11 or 12 years into flat nominal returns). Past performance is no guarantee of future performance!!
BTW, I don’t really think that wisely-chosen multi-unit investments are likely to fall 50%. However, you certainly wouldn’t need rents to fall 50% for that to occur. All you’d need would be a modest fall in nominal rent (say, 10-15%) combined with a trend move up in required cap rates (maybe a 25% move up??)/risk aversion, and you’d get the fall. Wildcards also could include a change in regulatory regime (say, removal of prop 13 from non-owner occupied properties) combined with some price inflation that ramps maintenance and insurance costs, and voila!
bank-chuck…umm, investment properties produce income (rent)to pay mortgage. di’cha forget??
SFS- i understand what you are saying. but keep in mind that the type of properties that produce a lucrative ROI on cash flow alone, have significant liabilities. example: one can buy a $2 mil,40 unit apartment bldg. in Anytown, TX (sic) for about $50k/unit. with 20-25% down, you can have a prop mgmt co manage it, and as long as you can keep most units rented most of the time, you will get a decent ROI on your down payment.
but consider: you now have 50 units to maintain; 50 blue collar tenants; loads of other generic apt bldgs to compete with; reliance on a long distance prop mgmt co (and it posters on this site bitch about RE agents, wait until they deal w/long range prop mgmt co’s!) and most importantly, the chance that this asset will appreciate is strictly based on the rent roll. your bldg will get outdated, other, nicer, more modern “townhomes” will get built on the next block as soon as growth occures again. this proposition is like managing a hard business with real work involved!
now compare that scenario to owning 2 solid $1 mil triplexes in SF. i am generalizing of course, but the TX prop will probably yield 40% greater cashflow than the 2 SF triplexes. but when you back out prop mgmt, added maint costs, and the higher (3%?) TX prop taxes (no prop 13 btw!), that cashflow, while still better than SF, does whittle down. but w/the triplexes, they are easy for you to manage, you control your tenants, and if you get bldgs that you can add value to design-wise, you can improve the units and rents. but most importantly, when RE appreciates again in SF, you now have a product that can be converted to ownership homes- tic’s and condos. that model can make you alot of appreciation.
sure, if you think we are in for a 10 year deflationary market, and that SF will be 50% off peak, than this model is not for you. personally i think that prediction is plain wrong, and am willing to bet on it with my asset base.
the bottomline wrt cashflow RE (at least in the usa): strong cashflow often equates with lower end properties, places that can boom/bust, where it’s easy for competitors to build loads more (nicer) units nearby, usually high prop taxes (w/o prop 13 benefit). this model is not for me.
i’m not sure what scenarios you have been able to find that are lucrative cash-flow-wise, and that will not have the potential to turn into the next dustbowl. but let me know!
45yo,
There are a few places in the US where you can get decent ROI without too much leverage or even any leverage.
for instance, do a MLS property search for Miami Beach, FL for sub-100K property and 600sf+.
http://www.realtor.com/realestateandhomes-search/Miami-Beach_FL/beds-1/price-na-100000/type-condo-townhome-row-home-co-op?sqft=2
Then look on CL for rentals in a similar segment
http://miami.craigslist.org/search/apa?query=miami+beach&minAsk=0&maxAsk=1200&bedrooms=1
To resume, you’ve got 80K property that could rent for 800-1000. HOA fees are the killer for this segment if they are over 250, but if you can get 800/month after HOA, that’s not a bad ROI. Leverage that at 60-70% and you’ve got a sustainable business model that does not rely on appreciation.
SFS- thanks for taking the time to post specifics. I looked at that info. For starters, My first question is this- what is the best possible ROI for a rental property? Assume a Miami condo for $100k, and $1000 rent (generous assumption). Minus how, prop tax and Insur you have maybe $600. $7200 annualized for a 7.2% return sans loan.
Now I would bet that a 20-40 unit apartment bldg, at $50-60k per unit (no hoa) would yield double that, or ~ 14%. This is about the best you can expect wrt roi.
The problems: vacancy, maintenance, management and eventual capital expenses will definitely eat away at those returns. We’re assuming no substancial appreciation (as these are generic, lower income locations). So what do you have at the end of the day? Some decent rental income and a “little business” with big liability, IMO.
Now if you were looking at foreclosed homes closer by, maybe valeno or promising parts of Oakland, contra costs, I’d be more inclined. You will not get the great cashflow, maybe a modest ROI with 20% down, but at least you could manage thing yourself! Look, I’m a strong believer in staying as close as possible to your rentals. You need to lnow the hoods intimately, and be around them on a regular basis. It will help on so many levels. Managing by remote is risky IMO.
Now take the above model and apply it to even better hoods- solid middle class with reasonable school districts. Maybe you’ll break even with 20% down. But your tenets will be better, more stable = less vacancy and maint costs. And guess what? You also have a shot at future appreciation! Decent hoods go up, crappy ones, much less so.
Have you looked closer to home? I think there could be some real opportunities closer by, and if you can really spend the time and gain the micro/localized knowledge, you may be able to peg hoods that will not drive you crazy with rampant vacancies, and may offer future appreciation (as they gain in overall desireability.)
SFS-to summarize the above post.
viewed as a continuum, you can consider: A) low end props w/strong cash flow vs. B) props in better hoods w/less cashflow. ‘A’ offers potential strong returns, with more variance in vacancies and maint costs and little appreciation potential, while ‘B’ offers a better tenant base and better future appreciation.
one question you should be asking is, at what point along that continuum is it optimal to strike?
“bank-chuck…umm, investment properties produce income (rent)to pay mortgage. di’cha forget??”
I knew that, hipster 🙂 I also know that you know that it’s not the complete answer.
But excellent posts and I agree with everything you say. IMO rents are adjusting downwards and would continue to do so through this year and beyond. Prices, real and nominal, would continue to do so for a very long time. I would not count on any appreciation for a very long time (Think 10-15 years). In the other thread on 84 Anderson, I pointed out that that house depreciated 15% over 6 years from 1989 to 1995. And that was a minor recession compared to what we are going through. So if I wwere an investor in rental properties, I would pay very close attention to SFS’s words.
I have been following the rental investment market in San Rafael.
Here’s a list of 2/1’s priced between $125 to $175K and 3/1 and 3/2’s upto 200K.
http://www.redfin.com/search#lat=37.966463129093256&long=-122.50219345092773&market=sanfrancisco&max_price=200000&num_beds=2®ion_id=17518®ion_type=6&sf=1,2&status=3&uipt=3,2&v=4&zoomLevel=14
On Craigslist, 2 beds in San Rafael are starting at $1250 pm and 3 beds at $1800.
Love to hear any thoughts if you or anyone looks into any of this.
chuckie- that is interesting. maybe san rafel is another area (besides vallejo, contra costa, oakland) that has good rent #’s relative to asset cost. my comments:
1- i do not know any of these areas specifically. i would only invest in areas i put ‘feet on the groung’ knowledge to. but maybe you know them, and that’s what matters.
2- i’d also consider multi-units in that area. i’m sure the #’s are better. that has to be balanced with the potential future appreciation, as in general, condos will do better than multi-units in decent areas. but only if the condos are places homeowners would want to buy in, not defacto rental condos, which = apartment bldg (with HOA fees.)
also see my next post below.
Lmrim/SFS/chuckie (the whole enchilada 🙂
i wanted to address Lmrim’s above post on appreciation, which also relates to SFS/chuckies posts on investment property.
first, looking at already hard hit areas (like the cheap condos in miami and san rafael examples.) bottom line: assuming the usual RE caveats (you choose your prop/location well, manage well, etc.) these will throw out a decent cash on cash ROI. BUT, if you really believe that there will be no appreciation for 10+ years, i am not sure why you’d want to bother with RE in the first place. seriously. can’t one find some non real investment w/o the headaches? even with multi-family, if you can get a 12% ROI you’re kicking ass. but if you can manage half that return with paper assets, i’d take that in a hearbeat.
maybe i’m a disillusioned ‘primo’ californian, but i can’t see RE investing being worth a damn w/o equity build up via appreciation. because remember, value is ultimately tied to property income, and rising income is tied to appreciation. i just don’t see the value otherwise, and no one has gotten rich just from RE cashflow w/o appreciation.
in response to Lmrim’s “secular decline in interest rates/prop 13/But the price effects of every distortion are ultimately unravelled…” i don’t see the distortions. prop 13 will not be repelled (even for non owner occupied.) and the liberation of credit, while gone temporarily, will come back in a responsible and balanced manner (for there is lots of money to be made with this.)
in your writing there is an implicit argument that we need to get back to some old school fundamentals. i’m afraid you’re looking in the rear view mirror. liberating credit responsibly is part and parcel of an advanced capitalist democracy. this has occured in so many other nations over the past 15 years, from israel to cambodia, people can now take loans and buy properties. as example, israel was largely a cash based society in the 80’s (crazy inflation back then) and people brought houses mostly with cash. same in mexico. but now they can use loans. liberation of credit responsibly, is a benefit for society, and ushered global growth. sure credit and it’s checks and balances got out of whack, but why would you think it will not come back??? there is nothing to permamently unravel and reset.
also, even if this recession is as bad as what we had in the 80’s, the huge $$$ fed & treasury throw at the problem will eventually come back in inflated terms. and holding real assets with fixed loans will be very lucrative in that scenario. i just don’t see how a scenario will develop where we have prolonged deflation and housing prices stay down for 10+ years. you guys are welcome to ferret this argument out further…
“israel was largely a cash based society in the 80’s (crazy inflation back then)”
Why do you think the society was cash based? Inflation was too hard to predict and so no one would loan any money at terms acceptable to any borrower. If our inflation rate takes off, we’ll have the same problems. Imagine what that does to housing prices. I’m not talking about a scenario in which wages rise just as fast, like we had in the 70s, but one in which prices inflate because of a declining dollar of which too many have been printed, yet wages don’t rise nearly enough because there are more workers than work, so wages stay largely flat. No one is going to sign up for a loan that could go up 20% per year when wages are flat, and no one is going to loan someone the money in that scenario.
“i just don’t see how a scenario will develop where we have prolonged deflation and housing prices stay down for 10+ years.”
Perhaps you could translate that statement into Japanese and ask it again to Japanese economists? I suspect they’ll be able to provide you an answer.
45yo,
Indeed, with all this debt and the efforts to absorb it with tax dollar, it would be logical to think inflation would come to the rescue of the over-leveraged. But if this crisis is proving us something, it’s that the herd effect has been a very efficient way to “extract” wealth from the masses. With salaries stagnant, the majority was satisfied with the idea that their boring incomes were nicely compensated with increased net worth.
What if inflation actually picks up? Countries and funds who lend us the cash that keep the lights on will want higher interest rates for our lower dollars. If you think RE doesn’t sell due to high prices, wait to see how it fares with 8-10-12% interest rates… It will be a game of salaries catching up on the housing costs and current ow(n)ers will be bailed out. In SF, the effect would be tremendous on rent-controlled landlords, with many stopping some maintenance due to the lousy returns. Many will be enticed to sell if they cannot increase rents, cushioning the mechanical increase due to inflation. But there will be many other effects, both mitigating and accelerating.
About your comments, I hear you. I am 7000 miles away from 2 rentals and they are fine. My choice was to do corporate rental for one for maximum returns with a property management company, and the other is with someone I know. The rent is lower than market therefore the tenant accepts to do many things himself. Both places were paid off in full over 5 years. All gravy. MB is a bit closer therefore I am not too worried.
True I’d like closer investments, but MB is pretty attractive in terms of weather 4-6 months of the year. Tourists will always flock there and you’ll always find renters if the price is right. 1000/m is a bit high, I agree.
My target will be in the range of 800 rent to keep up with the local wages. Which is why 60K would make a decent striking point. Combine this with a 60-70% financing.
The math speaks for itself even for one unit: 20K down, 40K in a 7 Year mortgage at 6-7% and the monthly payment will be in the range of 600/m. And because the duration is very short, the principal payment will be 350-400 right off the bat and getting better every month. Of course, multi-unit will lower the costs, there might be renovation costs and you need someone you can trust on site. It’s only one location, but there are plenty of good deals around the US I think and probably in the BA too as you point out.
About your comment on “Decent hoods go up, crappy ones, much less so”. There has been a multiplier effect from the priced out crowd that has lifted all the bad areas during the bubble. Of course, a lot of it is gentrification, but some is pure financial ripple effect. I think worse-off nabes have lower low, higher highs, which is why the middle class is so frustrated right now at prices in primo SF not following subprime’s declines if only temporarily.
hipster,
I hear you on a lot of your ideas. I just think this cycle is quite a bit different than the “cycles” from 1980 through 2005-7. Asset appreciation in those years was primarily a result of disinflation – a trend lowering of price inflation and inflation expectations. Which led to lower interest rates and therefore higher asset valuation. If you think we are tending towards a period of rising inflation expectations (and you seem to think that, and so do I but only on a medium- to long-term basis), valuations on leveraged assets will fall.
Real estate can still make sense even without appreciation, of course depending on your entry price. My personal opinion is that real estate investors will make their money (if they do – most will simply wash out) in the next 10-20 years through gradually rising cash flow (from rising nominal rents) that outstrips nominal fixed debt service undertaken in a low interest rate environment. As rates rise, I wouldn’t count on appreciation of the asset as the exit strategy, but of course there will always be room for smart investors to add value – it’s just that the tailwinds of asset appreciation over the past 25 years will turn into headwinds of depreciation of asset values (first in nominal terms as we are seeing now, and then in real terms as price inflation picks up and asset values stay relatively flat because of rising financing costs).
Abut prop 13, that’s a larger discussion. In short, I don;t think that you need repeal of prop 13 to unwind its effects. As people realize that prices are no longer rising (or rising as quickly as they did), the apparent insurance value of prop 13 progressively is dismantled, turning the prop 13 valuation boost “tailwind” into a headwind. It’s only been a little over a generation since the effects of prop 13 started to become incorporated into the pricing structure, and I suspect that the part of SF real estate valuation that represents the prop 13 boost will not survive the generational turnover. It’s not a light switch that goes on or off, just another factor that influences valuation.
@ SFS – if you are looking in MB, I’d suggest putting a phony ad in craigslist listing a prospective property (easy to find pics to throw up) with a range of rents. You could even do it successively over weeks at different prices. Then you can gauge responses to your ad and get some sense of the true demand curve out there. Friends of mine who have done this have found that there is very little apparent demand for most condos at rental rates that made any sense of a cash flow basis. They did this last year, though, so perhaps the prices/rent ratio has moved enough to make the experiment worth trying again? Also, they were looking at slightly more higher end properties ($150-250K in places like Las Olas, WPB on the beach, Biscayne, and a bit in MB proper). Let us know if you try it!
Lmrim/SFS//tripster- I think we can all agree that there are alot of moving parts when trying to determine the myraid effects and offsets of potential future inflation vis a vis property values. And you all provided plenty of food for thought!
But I’d like to shift this inflation question: under what circumstances does inflation begin to benefit existing property owners? We know that it comes later in the curve (for eventually real assets become positive assets in inflated terms), but by what circumstances?
shoadow inventory – meet quanititative easing
this should get interesting as the Fed is now putting its printing press into high gear to drop mortgage rates…
http://www.federalreserve.gov/newsevents/press/monetary/20090318a.htm
45yo
Simple enough. Wage increase will bail you out of a high mortgage, which is why small time rent-controlled landlording is pretty risky if you do not have a good day job to compensate.
My parents bought a house in 1970 and were mortgaged to the gills. Didn’t take a vacation for 4 years. Inflation started picking up in 73-74 and went full throttle until the mid 80s.
Originally, the main mortgage ate 35% of their net salary, plus another second mortgage ate around 15%. By 1978 the mortgages were less than 25% of net. In 1984 it was about 10% (2nd mortgage was paid off). Of course part of this bailout went from career path raises.
But you catch my drift. If salaries triple due to inflation, your mortgage mechanically decreases compared to your salary. Of course, if you own the place 100%, then too bad. No soup for you.
LMRiM,
I have done some price fishing for sales before but never though about it for rentals. Good suggestion.
i agree wrt wage inflation. and i’d put forth that you cannot have sustained high inflation w/o it. there would be revolt on the streets, ala paris in the 70’s!
if you can weather the lag, a landlord will be able to raise rents, in step with wages and inflation. the LL’s with rent control…that will be interesting, at least they get 60% of cpi now, which is still something with the higher inflation #’s.
SFS,
Provided we don’t have wage/price controls again…
Policy-makers know that the price-wage spiral causes inflation to really take wings, they will try putting walls up if it gets really bad.
45yo,
there would be revolt on the streets, ala paris in the 70’s!
An image sticks to my mind: big demonstrations in the streets of Paris (with signs saying 1978 = 1789) and trash collector strikes. Such messy years.
at least they get 60% of cpi now
Glass 60% full, but still 40% empty. That will hurt slowly but surely. Rent control is 30 years old and it did create a huge imbalance over time all over town.
jessep,
With 1T extra dollars just announced today injected into the clogged pipes of the economy, the Feds are really pushing for inflation. The first effect for me: Euro went from 1.31 to over 1.34 in a few minutes. Some investors fled the USD and went either into stocks or other currencies.
http://finance.yahoo.com/echarts?s=EURUSD=X#symbol=EURUSD=X;range=5d
Good suggestion. But see some of these withdraws might be sellers who wanted to move to a different house in the City, but since prices have fallen and buyers are shy, they have removed their house from the market and have decided to stay put.And I dont feel anyother cause.