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United Kingdom13775 Posts
On August 02 2021 15:46 RvB wrote:
But nobody buys a house with cash and interest rates have gone down as well. I don't think an equal rise in rent and housing prices makes much sense when that's the case.
Yeah, it'd be more reasonable to say that rent tracks with monthly cost of ownership (mortgage at current interest rates + other fees) than to straight cost of purchase. Paying monthly to own and paying monthly to rent are substitute goods in the very basic microeconomic sense, and it doesn't need to be much more complex than that.
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United States41671 Posts
Advice from 2007: “Hey guys you can get higher returns if you scale up your leveraged equity in a hot housing market.”
Yes, you can always increase the leverage for higher returns. That does not mean you should always.
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Bisutopia19143 Posts
On August 02 2021 01:00 LegalLord wrote:
Anything interesting happen for people over the past six months or so, housing-wise? I'm still sort-of in the market for buying, in that it'd be nice to have a house if the price is right but also in a position where the convenience of renting is useful. Casually watching the happenings in the housing market has been particularly interesting recently, though.
For most of the start of the year, it seemed like a mania akin to 06/07 - after a 10% increase in 2020, it looked like housing prices took another 10% rise in just a few months, and the stories of paying tens of thousands of dollars over asking price to win insane bidding wars were everywhere. In my market at least, it looks like those seem to have died down; prices are still quite elevated, but there seem to be a lot more houses available for sale, they're on the market for weeks rather than days before being sold, and some $5-50k price cuts are being made to get properties to move. Less desirable units like ugly and expensive townhouses are selling slowly rather than being picked up like everything else. Not really a crash, but at least a visible slowdown of the initial mania.
Rent prices seem to be going up. About time to renew my lease (or not), and they're raising the rate by 6% this time around. This after a 0% increase in 2020 due to the ongoing troubles with nonpayment, so a little more than I'd like, lol. What's interesting is they're offering longer term leases (18-24 months), which leads me to believe that they perceive a risk of falling rent prices in the near future.
Oh and of course we got the eviction moratorium in the US expiring - which made the big news lately. Making much fewer headlines is that it seems that the foreclosure moratorium is doing the same. The impact of those two things should be interesting.
Jacksonville, Fl prices have skyrocketed to insane values in the past 6 months. This past month, my house is valued $35k higher then it was previously. My previous home from 7 years ago was value at $135k, sold at 175k 2.5 years ago, is now valued at $300k. The number of available houses in the area is extremely low and you can't find anything with a decent lot size ( > 0.5 acre) for under a half million when 2 years ago there were dozens upon dozens below 500k for large lots. I was tempted to sell and downsize for a nice profit, but my family of four would have to be in a 3 bed room home with no yard if I wanted to make any profit. On the side, my wife and I restore old furniture so we are just sticking where we are so we don't have to sacrifice that business.
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United States41671 Posts
Is there some subject you’re an expert in? Please let me know so that I can argue with you about that subject. I feel the urge to post whatever random nonsense comes to mind just so you know what it feels like to be a highly qualified (and compensated) professional arguing with a layman who doesn’t understand the basics of the concepts they’re stumbling between.
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United States41671 Posts
Property value increases don't matter for the purpose of ROI calculations.
Let's say on 1/1/Y1 you have a $100k house and your planned return is an annual 4% increase in the property valuation and 3% of the capital returned in rental costs for a total 7% annual ROI. Rent is $3k/year.
If the house jumps to $150k valuation by 12/31/Y1 then that's obviously great for you, you planned $3k rent income and $4k appreciation but you got $3k rent and $50k appreciation. But the additional year 1 gains have already happened by 1/1/Y2, the starting date for year 2.
On 1/1/Y2 you have a $150k house and your planned return is still an annual 4% increase in property valuation and 3% rental. That means year 2 you're looking for $4.5k in rent. If you still charge $3k in rent then you're no longer planning a 7% return for year 2.
The fact that you had a great year 1 doesn't impact year 2 because on 1/1/Y2, just as 1/1/Y1, you have to make a choice between liquidating the asset for other investments or continuing to hold it. If the asset is not expected to meet the minimum required returns in Y2 (7% of the 1/1/Y1) then you would not hold it on the basis of the Y1 valuation.
The ability to leverage investments is irrelevant to this discussion. You could leverage any investment you wished. You could buy bitcoin with credit cards, you could use call options rather than holding stocks, whatever you want.
The decision on whether to continue to hold an investment depends entirely upon the expected return of the investment and the expected return of the alternative investment available (known as the opportunity cost). If the value of the investment jumps year on year then the expected return is required to have a proportionate increase for the investment to remain as good in Y2 as Y1.
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United States41671 Posts
You’re confusing the historical ROI used to measure the prior performance of an investment which you may track YTD, 1 year, 3 year, 5 year etc. with the expected future ROI used to assess whether you want to continue holding an investment. You would not include realized gains there. I’ll give a very simple example. Let’s say you buy a $10 scratcher and you win $100. The $100 you already won has no impact on the decision about whether to buy another scratcher. The only thing that impacts that is the cost of the scratcher and the prizes/odds. You would never say “if I buy another and I lose then the ROI on the second one was 500% because $100/$20 = 5”. The ROI calculation used to decide whether to continue renting out the house year 2 is like the ROI calculation for the second scratcher.
This is what I’m talking about when I say you don’t understand the basic concepts of the discussion. You’re applying the impact of realized gains in prospective ROI because you’ve confused it with historical ROI measurement (which is generally multi year).
If you’re familiar with sunk cost analysis then this is basically that, but sunk gain analysis.
If the prospective future gain does not increase in proportion to the capital sunk into the investment then the prospective investment ROI decreases. This is, as previously stated, basic maths.
You keep bringing up “what ifs” like taking capital out and buying a second home but those aren’t relevant to the calculation. Increasing leverage increases both the denominator and the numerator in the prospective ROI calculation, it does not change the %. If I sink $100k of my own cash into an investment and get $5k then that’s 5%. If I sunk $100k of my own cash and $900k borrowed capital and get $50k that’s still 5%. The number is higher, the percentage is not.
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United States41671 Posts
On August 03 2021 03:01 JimmiC wrote:
If someone came into your office and their costs on a house they had were 1100 a month, they could get 1200 a month in rent. It was worth 200k last year is worth 350 K this year. There costs did not change and now they were going to keep the rent the same. You would suggest they sell because their house is not guaranteed to go up enough and now they are not making on the rent end the same % as before and can't get 1800 a month? It wouldn't be wiser for them to get a second home?
Just to be clear, you are currently making the argument that if home prices are soaring and if rental income, as a proportion of home prices, is plummeting you would advise people to buy another home at the sky high prices and rent it out at low prices.
For the record, I would not advise that someone who is currently renting out a $350k house for $14,400k rental income less $12,200 costs for an annual profit of $1,200 on their $350k investment take equity out of their house and buy a second house as a rental property.
This shit is why not everyone can do what I do. In your counterpoint you're recommending that they use leverage to increase their exposure to market fluctuations in order to obtain a 0.3% return.
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United States41671 Posts
Nobody is saying that property value increases are a hardship to the property owners. I'm not inviting anyone to pity the poor landlords here. I'm saying that if rents remain the same and property values go up then the ROI on continuing to rent out the property goes down. It's absolutely incontrovertible. As I keep saying it is basic maths. If the denominator doubles and the numerator does not then the product goes down. There's no argument to be had, it just is. 2/10 > 2/20.
The good fortune of the landlord does not exempt the tenant from factors impacting market rates of rentals in the area, a key one of which is the required minimum ROI for landlords.
On August 03 2021 04:11 JimmiC wrote:
That does not make it logical and expected for their renter to gain 50% expense.
You're currently arguing that it is illogical that the rent for a $300k property is 50% higher than the rent for a $200k property.
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United States41671 Posts
Imagine two identical houses side by side. Both are rental properties owned by the same landlord. House A was bought a year ago for $200k. House B was bought today for $300k. Both are valued today at $300k. Please explain to us why the owner should list house A and B for different rates.
Now imagine two different houses, one much bigger and much nicer than the other. The nice house was bought a year ago for $200k but is now worth $300k. The adjacent bad house was bought today for $200k. My argument is that the rent for the house worth $300k should be more than the rent for the house worth $200k because it’s a much bigger, nicer, more valuable house. Your argument is that it should be the same because both landlords paid $200k for the houses and that the value of the house doesn’t matter.
Also leverage just isn’t relevant, you can keep bringing it up but each time you do I’ll repeat that multiplying the numerator and denominator of a fraction by the same number doesn’t change the product.
I don’t know why you choose to be this way whenever you see me post but I wish you’d stop. I really doubt you’d be here arguing against basic maths if it were anyone else but the moment you see it’s me who posted it you’re suddenly arguing against how fractions work.
$3k/$200k is greater than $3k/$300k and it always will be.
$6k/$600k is equal to $3k/$300k and it always will be.
It doesn’t matter who is saying it, it just is.
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I just want to thank Kwark for providing a simple financial framework to evaluate home purchases. Somehow I used this type of reasoning for all financial decisions, but couldn't extrapolate simply to home ownership.
Making smart financial choices is not right wing extremism. Some could claim it is though, given JimmiC political leanings do not allow him to understand that the past value of an asset does not determine the current smart decision to be taken in relation to that asset.
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United States41671 Posts
The decision regarding whether to leverage your investment is completely independent of the decision of whether or not to raise rent.
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United States41671 Posts
On August 04 2021 12:49 JimmiC wrote:Show nested quote +On August 04 2021 11:11 KwarK wrote:
The decision regarding whether to leverage your investment is completely independent of the decision of whether or not to raise rent. Your point? I'm independently picking to not raise rent and fuck over my renter because I got extremely fortunate. I'm also fine because my expenses didn't change and I have not increased my risk of losing my income stream and not replaced it. Then I'm independently choosing to leverage. But likely not only in real-estate.
You keep saying that leveraging the equity from the first house to get three and then renting all three out below market rate is better than raising rent while ignoring that the alternative isn't raising rent, it's raising rent and also leveraging the equity to get three houses.
Your entire argument that low rent is better than high rent is built on the leverage which is a completely unrelated factor that could equally be applied to both.
If I were to argue that Thai food is better than Chinese food because after I get Thai food I can go get ice cream you would rightly point out that
1) That has absolutely nothing to do with the Thai food
and
2) That's equally applicable to Chinese food
So when you're here arguing that charging below market rent is better than charging market rent because what if you leverage the equity I really have to wonder what the fuck you're talking about.
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EPT
