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johndoe

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Reply with quote  #31 
Quote:
Originally Posted by curious1
On the one hand people talk about abysmal risk premiums and low bond yields. On the other hand they predict a hard landing for housing. It doesn't take much of a "hard landing" in housing -- 25% ? -- to boost yields back up into attractive cash flow territory. Plus rents are up and the rental market is getting a lot stronger. Unless fixed income yields become much more attractive, concurrently, I think there is a point at which smart money starts flowing back into investment real estate.

A no/low maintenance condo in a well-built building is basically comparable (or superior) to an I-bond, as I see it.


Curious 1,

No offense, but you're both optimistic about the asset class and a bit naiive about what will happen with lending.

First off, there is no such thing as a no maintenance real estate. Even low maintenance is only by ensuring top-quality renters, which costs a premium to keep when buying comes back in range with renting as you're stating.

Secondly, smart money moves cautiously, they are generally not risk takers. If prices have just gone down 25%, smart money will not even be looking at it. After it has plateaued for several years or shown some return gains, then smart money will return. This is 5-6 years out... I hope you don't plan on holding cash-flow negative until then. There's a reason they call it a real estate cycle. Peak to peak is between 12-15 years.

Finally... I'm not even sure that you're following the discussion of risk premiums. When you state "
Unless fixed income yields become much more attractive, concurrently...", I'm not sure if you're yanking our collective chain or just not savvy enough to equate risk premiums with fixed income yields. In fact the formula for fixed income yields is the following:

Risk Free Return + Risk Premium = Fixed Income Yield

If risk premiums returned to historical levels, fixed income yields would be paying 2-3% higher than currently. In addition, loan rates would be 2-3% higher, and holding costs for new buyers would be substantially higher. You would be cash-flow positive if you are already, but then you are holding the bag with very few willing to catch a falling knife.

With Risk Free Returns increasing every 8 weeks or so and risk premiums at historically low levels, I only see fixed income yields going higher.

curious1

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Reply with quote  #32 
Johndoe, my point was that if rate hikes stop now, and housing prices decline, there is a point at which the return on a low-maintenance condo equals or exceeds in attractiveness the return on a fixed income investment like an I-Bond. What didn't you understand about that? Of course there is no such thing as no maintenance, but done properly, low maintenance is possible, and in my experience the tax advantages (not offered with fixed income) roughly cancel out the maintenance and trouble tenant costs over time. Would you rather own a condo in a professional area returning 6% + inflation or a bond returning 6% flat or an i-bond returning 3% + inflation? Maybe I'm not smart money but I would opt for the condo.
johndoe

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Reply with quote  #33 
Quote:
Originally Posted by curious1
Johndoe, my point was that if rate hikes stop now, and housing prices decline, there is a point at which the return on a low-maintenance condo equals or exceeds in attractiveness the return on a fixed income investment like an I-Bond. What didn't you understand about that? Of course there is no such thing as no maintenance, but done properly, low maintenance is possible, and in my experience the tax advantages (not offered with fixed income) roughly cancel out the maintenance and trouble tenant costs over time. Would you rather own a condo in a professional area returning 6% + inflation or a bond returning 6% flat or an i-bond returning 3% + inflation? Maybe I'm not smart money but I would opt for the condo.

Curious 1,
I certainly didn't miss your point, however it's still not clear to you that FED rate hikes could stop tomorrow, and bonds continue an upward ascent 2 or 3% more (just to return to historical averages, and could actually go 4% or more higher).  FED RATE CHANGES HAVE LITTLE IMPACT ON YIELDS...  This is what Greenspan referred to as a "conundrum" prior to leaving as chairman.

Also, there's no question about the desired return, but you're missing the point of cash premium.  For the past 5 years (and this corresponds with the entire investing lifetime of many currently in residential real estate investment), credit has been king.  There will come a time when cash is king, and bonds are a lot closer to cash than condos, especially highly leveraged condos.  Price declines can wipe out an entire equity position and then some, leaving one no option but foreclosure if unable to support the negative cash flow.

Depending on tax advantages to even out your return is only for small-time investors, not full-time since one needs to have alternative sources of income to take advantage of the tax losses.  If you have no other sources of income to offset, there is no tax advantage.
curious1

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Reply with quote  #34 
John, how many times do you read the word 'hyperinflation' on the internet today. Cash is NEVER king. People feel great earning 10% on a CD but their real rate of return is the same as it was when they were earning 5%. There is no free lunch. If rates go to 10% it will depress prices even more and make me and other smart money want to buy. Buy a house for 12% financing with a small monthly loss. Refinance to 6% within 5 years and all of a sudden you're looking at a nice cash flow. Plus you're hedged against inflation. I miss the 80s. How old are you exactly? Have you been through a cycle before?
johndoe

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Reply with quote  #35 
Quote:
Originally Posted by curious1
John, how many times do you read the word 'hyperinflation' on the internet today. Cash is NEVER king. People feel great earning 10% on a CD but their real rate of return is the same as it was when they were earning 5%. There is no free lunch. If rates go to 10% it will depress prices even more and make me and other smart money want to buy. Buy a house for 12% financing with a small monthly loss. Refinance to 6% within 5 years and all of a sudden you're looking at a nice cash flow. Plus you're hedged against inflation. I miss the 80s. How old are you exactly? Have you been through a cycle before?


Misdirection.  You're avoiding the point.  There is no guarantee rates will go down in 5 years, or 10 years, or 30 years for that matter.  They didn't reach near 1964 rates until 2004.

Let me turn it around.  How old are you that you need to question the age of the writer, and not the logic of the argument?

Lots of people miss the 80's...heroin addicts, sex offenders, Bo and Luke Duke, and Flock of Seagulls.  Those were not "the good ol days", any more than today will be.

The only people who believe cash is never king is those who don't have it when it is really needed.

You're coming off as schizophrenic.  One minute, you're not smart money, the next you are.  Which is it?  If you are, why not post some of your "smart money" investments from the 80's to show us.
curious1

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Reply with quote  #36 
John, sure, I bought two SFHs in San Diego in 1982 with financing at 12%. Nothing was moving so the prices were great also. I refinanced in 1986 to under 8% and had significant positive cash flow on the rental (lived in the other). I did the same thing in the last decade buying at 7% and refinancing down to 5%. I'm not trying to brag, just showing that my experience has been it's great to buy when rates are high. If I didn't address your point head on, it's because I didn't totally understand it. You're saying that if prices decline 25% then smart money still won't be buying. I disagree with you, smart money is still buying now, just very selectively. At a 25% decline (whether I am smart money or not) I would be buying in the markets I like. You're saying that the risk premium will increase on bonds, driving the yields higher even if the fed stops after hiking 50 more bps. I disagree with you, there is still way too much liquidity in the system, chasing down returns globally. China still needs to balance the trade deficit. You're saying that with similar yields, real estate is not as attractive an investment to people as bonds or other fixed income. I disagree with you, I know plenty of people who prefer and feel safer in real estate, and feel they can make more money in it (which is why this board exists).

People like to say, I won't buy until the rent I can collect will equal the PITI, ensuring at least cash flow neutrality. In the last 40 years, I can't remember that ever really being possible without a fat down payment, in any market (the midwest or California), unless you get lucky and are able to buy a nice property at a discount. So if they are waiting around for that, it will never happen. If you want to talk about where the market equilibrium for pricing is, that is an interesting discussion, and I am saying I think it is about 25% down from the current prices, in San Diego and most other inflated areas.

taddyangle

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Reply with quote  #37 

Quote:
Originally Posted by curious1


People like to say, I won't buy until the rent I can collect will equal the PITI, ensuring at least cash flow neutrality. In the last 40 years, I can't remember that ever really being possible without a fat down payment, in any market (the midwest or California), unless you get lucky and are able to buy a nice property at a discount. So if they are waiting around for that, it will never happen. If you want to talk about where the market equilibrium for pricing is, that is an interesting discussion, and I am saying I think it is about 25% down from the current prices, in San Diego and most other inflated areas.

 

I have many properties that are cash flow positive or break even that have been purchased within the last three years with 10% or 20% down only.

 

In the current market the risk is too great to buy SFH, as most don't cash flow, and prices are flat and/or declining.

 

I can appreciate your argument that you can buy when rates are high and when you refi as rates decline you get an extra bonus, so to speak.  The reality is that home prices have increased so great the last 5 years that I have a hard time believing this scenario will play out.  If you buy in San Diego, even if prices decrease 25% the negative cash flow is still too high to offset the risk.

 

I think there will be a time again when you can buy negative cash flowing property and make a great profit due to appreciation, but I also think many will soon learn that there are better options to make money than buying property that does not cash flow.  This will stick with many as time goes on.

 

 

 

 


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curious1

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Reply with quote  #38 
Proposition 13 and fast appreciation has screwed up the California market.  As I've said before, the only reason I haven't sold houses in San Diego is because of an obscenely low property tax basis.  I know there are other people in this situation as well.
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