investing in single family homes for the long term - Posted by AMITinSF

Posted by Ronald * Starr(in No CA) on July 13, 2003 at 10:43:18:


Thank you for the details of your thinking. This helps me talk to you better.

Given your thoughts about the situation and your thinking, I can see why you lean toward your view. And, I do not want to discourage you too much from your plans. They may work fine. The may be right on the money.

However, I think you are making some assumptions which are not the same as I make. I think, if you want to really compare your current plan with something more like what I am proposing that you should question a few of your views and test them by getting more information and data.

The truth is that I have not dug in to get exact detailed research numbers for what I say. But, I believe them because I have repeatedly heard information about what I am about to say and sometimes have seen some number in newspaper articles or other sources.

First: “i bet that there are plenty of apartment bldgs. that have not risen in appreciation, because there is more land nearby, and builders just build nicer, trendier places that rent for more, and the 70’s style places don;t rise in value.” This might be true in some places other than CA. There are a lot of places where this can be true. I think it is dead wrong for CA.

I don’t know how the appreciation will be in San Fran over the next 7-10 years. You might be right that it will be high. I’m not sure. I do have the very strong feeling that the appreciation will be high in other parts of CA over that time, and probably longer.

Look at population projects for the different states. CA has the highest projections of the absolute numbers of population increase between now and 2020 of any state. And, it has the highest RATE of population increase in projections. The number of people who be will moving into CA and born in CA over the next couple of decades is tremendous.

If there were plenty of housing being built to house the increased population, it is likely that the values of houses and apartments would not increase very greatly. However, for the past couple of decades, this has NOT been true. The number of units being built has greatly lagged the demand. There is, I believe, no sign of a great increase in building for the next five years, anyway.

I think that the trend for prices of California single family houses and apartment complexes is definately upward for the next decade, perhaps two decades.

And you do not have to buy apartment complexes, if you don’t want to do so. It is possible to get a break even or positive cash flow with some single family houses in some of the least expensive parts of CA. That is changing, as prices skyrocket these days. Look at the increases in values for single family houses in the Central Valley and in the “rim”–the foothills between about 2500-4000 foot elevation.

“i don’t really want to buy units in section 8 or depressed areas, as it just seems like a drag.” I see this as a typical middle-class prejudice and misunderstanding of lower income housing. It is not based on reality. The highest cash flow returns returns do come from lower-cost properties, for sure. And, in any one area of CA, the lower-cost properties will, over the longer term–say 10 years or more–appreciate, on a percentage basis, the same as the higher-priced properties. All statistics I have seen show this. I’ve done some analysis in Oakland. There are statistics published by the Northern CA Real Estate Research Councel for the North Bay and the East Bay that confirm this.

I have owned rental properties in the below-average neighbhoods of Oakland and the below-below average neighborhoods of Sacramento for many years. They are very good investments. Well-selected renters are not a “drag” as you put it. They do take a little more management skill than middle-income housing, I think. But it is possible to do that oneself or to find some property managers who can deal with it.

I think that investing in the “sunbelt” is probably the way to go if you want increasing property values. There is a movement of population from the colder climes in this country to the warmer. I have heard nobody claim that this trend will reverse.

For cash flow, the midwest and the southeast are the places to go for rentals. The returns there are dramatically better than for Coastal California. Combining the sunbelt and this information, I’d suggest that the places to invest, outside of CA, are the southeast and Texas. Perhaps New Mexico–the prices there are very low compared to Texas and Arizona, and I don’t know why; there may be a change in the future…worth checking out, in my opinion–and AZ and NV–which are the two fastest-growth states these days, I believe. However, there is a lot of flat land there for continued building, so appreciation may not be too good.

Now, you say that you will have about $1K a month positive cash flow on your condo if you refinance to help you buy a new property in which to live. You don’t mention how much equity you would have still in the property. However, I’ll assume that you will have about $200K after borrowing about $200K for the purchase of your new property at about $650K-700K.

In OK, which I know because I have properties there, With $200K you could buy in and near Oklahoma City four or five houses free and clear in the $40K to $50K price range. These are not the nicest houses in town, but they are far from the worst. You would achieve a net positive cash flow of about $300 a month on these properties. This would give you a better cash flow than your condo, although possibly at the expense of lower appreciation. Should you buy the properties with 20% down, you would be able to buy $1Mil in property value, or about 20 to 25 houses. Because of the loans on the properties, your cashflow would be reduced for each property. However, because you would have more properties, your cashflow would probably end up being about $3,500 to $6,500 a month. Does that look like a better cash flow than from the condo? Plus, you will still have your new property in San Fran. These houses just replace the condo.

Also, about owning and living in a very high-priced property in San Fran. I have not done the numbers for your proposed new dwelling unit, but in general, it is economically better, in high-priced areas, to rent than to own. Then take the difference in the expense of owning vs renting and invest in low-cost areas for added cash flow and appreciation. Now, with the low interest rates available these days, especially for owner-occupied properties, this disparity of cost of living may be zero or even reversed, I suppose. And, there are emotional issues related to renting a property separate for the financial calculations. They include but may not be limited to having pets, decorating in any way you see fit, and psychic rewards of “owning my own place.”

So, my advice at this time would be the following: borrow against the condo and buy your own dwelling if you want to do so. Then convert the condo to a rental unit. Sometime in the future, sell the condo with a 1031 exchange and get into some higher-cash-flow rental properties.

Now, if I am right about being able to rent at a lower price than owning, and you were to thus rent your next place, I’d modify the advice this way. Refinance or get an equity loan on the condo and buy some better-return rental properties with it. Move into a rental dwelling. Rent out your condo for a while. Then sell the condo and do a 1031 exchange into still more rental properties.

You might well have a $8-10K a month positive cash flow on the rental properties at this juncture. If you wanted to buy a house at that time, you probably do so.

You have significant assets there in the condo. If my analysis is anywhere near correct, they could be deployed to produce greater return elsewhere.

Good InvestingRon Starr****

investing in single family homes for the long term - Posted by AMITinSF

Posted by AMITinSF on July 12, 2003 at 11:38:46:

i am about to buy my 2nd home, keeping the first as a rental (it cash flows very nicely.) i keep hearing speculation how the housing market is going to crash, etc. and i hear others saying that if the economy picks up, it will offset the run up in housing, and could prevent any major crash. checking a varity of sources, it seems to me the reviews are mixed. comments on this POV???

the thing is, with a buy and hold for appreciation strategy, this should not matter! sure, i’d love to see property values jump next year, but even if they go down 15%, and only come back to todays levels 5 years from now, if i am holding on for 10+ years, i’ll still come out ahead. especially as i am doing a 100% financing on the 2nd place. in addition, i’ll take out maximum possible cash with a 2nd on my present propery, thus being able to put ~ 40% down on the new place = instant equity if i want to leverage that out and buy a 3rd place in the future. maximizing the equity on my home seems to me a “no brainer”, as i will have equity in the new property. otherwise, i have to wait for appreciation or refinance my 1st home, as taking out a 3rd for the remaining equity on 1st home sounds difficult. and why would i want to refinance (again!) my 1st home, when i can lock in low fixed rates now? does this make good sense? (it sure seems so to me!)

another point, about timing. people may say, wait until the houses come down in price. yeah, but then the interest rates will certainly be higher as well. i think there is going to be a relationship (in the near term) between rates and home prices.) so, as long as that relationship does not slip out of balance significantly, why not buy now with killer low rates, if you find a good property? otherwise, you may save on the home cost, but then loose out on the low rates. i did a calculation that if a home ($650K) goes down by 11% BUT rates go up by 1%, the monthly cost is about the same. change that relationship and you either loose or gain by waiting on home prices vs. rates. again, i think that if i find the right place now, why risk it, might as well buy now. comments on this as well?

(this is a great board, btw, lots of good folks with ernest advise.)

investing in single family homes for the long term - Posted by Arthur

Posted by Arthur on July 12, 2003 at 18:41:57:

You have got the thinking right there.

I have been investing in property for 5 years or so in the UK, and one thing i have noticed with time is that prices are related to interest rates, at least in the UK.

Most homes sold these days are for owner occupiers, and the price they pay is the price they can afford, but thats on a monthly payment. So, like you said, interest rates go up, the prices go down and i think you will find that if you look over time, althoguh prices have gone up and down, monthly payments have more or less remained the same (taking into account inflation).

But heres another thing to throw into your thinking cap. Lets say you wait until the prices fall. Lets be realistic, if they did fall, how long do you think it would take? a year? 2? 3? Well, work out how much rental income you would have made over that time, and how much of the loan you would have paid off? And how much higher an interest rate would you be paying? (bet ya the payments would be more or less the same).

And thats just assuming the prices will come down.

I’m impressed with your thinking. - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on July 12, 2003 at 13:18:01:


Nice to talk to you again.

I have been impressed with your clear thinking. Not only on this post but on your earlier posts and responses to others to your posts. I am guessing you are a holder of a PhD. Right?

I think your analysis is fine. That “wait until prices come down” argument is hooey. What if they never come down? Then you never buy and you lose on all the future appreciation, plus possible other investment return.

You can only buy now, not in the past. And, while you can buy in the future, you don’t know what the circumstances will be. You might not want to buy then. You might have personal matters intefer with buying then. No, don’t figure on buying in the future as a strategy. Buy now. Or don’t buy, if you feel that you cannot get a satisfactory deal. If you can get a satisfactory deal, buy now.

Maybe, if prices were trending down, you might hold out for a still better deal in the future. However, it is difficult to figure out the low until it has passed, in my opinion. So, if you can make a satisfactory purchase, even when prices are on a downtrend, it might still make sense to buy. Especially if you could buy at a discount to current market value.

You never did answer my question about whether you have accuracy calculated the cash flow should you rent out your current property. However, given the impressive thinking you have shown, I am less concerned about that now. I will assume that you are correct about the amount of cash flow you can get.

Then there is still the question: could you get even greater return if you were to sell the property and invest the cash in other investments? I suspect that you could do so.

The financial benefits of real estate investing can be put into three categories: C, A, and T–Cash flow, Appreciation, Tax benefits. Appreciation and tax benefits are greatest when you own the most property. To own the most property with the cash that you have, you want to have as big of loans on the properties as are reasonable. That is, provide a cash flow which is acceptable to you.

While you will have a new loan on your current property, you are limited in how much value you have there to appreciate and depreciate. It is worth what it is worth. If you could buy properties with greater value elsewhere with the money from the sale of the condo; you might get better cash flow than from the condo, you might get better appreciation because you have more value to appreciate; and you might get greater tax benefits, because you have more structure value to depreciate–assuming that your taxable income is less than $150K so you can take advantage of the tax benefits.

Good InvestingRon Starr******

Re: I’m impressed with your thinking. - Posted by AMITinSF

Posted by AMITinSF on July 12, 2003 at 22:23:44:

thanks for the compliments ron (but no, i don’t have a PhD! just an undergrad degree from berkeley.)

as for the cash flow on my present condo, i think i have the cash flow pretty accurate. this property is not a typical condo, in a big complex with HOA dues. rather it’s one of 2 units in a fixed up victorian. so it shows itself more like a single family home. i know the maintenace and repair situation very well, as i lived here for the past 10 years. and i have good neighborhood comps for rent rates. i included a small vacancy rate and some money for maintenance.

as for leveraging my money on a larger property (i.e. rental units), i keep flirting with the idea, but i cannot seem to find anything that makes sense. even sacramento area is expensive! and the bay area is GRM of 14 and above (closer o 19 for 3-4 untis in SF.) if i keep my condo, i pull about $1000/month positive, and i can still take out an equity loan to finance a new home.

the only possibility i see with units, is if i went out of state (or elsewhere in CA) where GRM’s are reasonable, and the area has growth potential. i don’t really want to buy units in section 8 or depressed areas, as it just seems like a drag. and i’ll need a property manager for anything outside of the immediate bay area. i also don’t know these areas well (i have a comfort factor of knowledge locally, of course) and i don’t really know if the areas will appreciate in the future. i bet that there are plenty of apartment bldgs. that have not risen in appreciation, because there is more land nearby, and builders just build nicer, trendier places that rent for more, and the 70’s style places don;t rise in value.

my present thinking is that the new home i buy (actiually an old victorian, but fixed up nicely) with the inlaw unit, stands a good chance of appreciating in the next 7-10 years (or maybe much sooner), and as rents go up, it could cash flow or break even at that time as well (just as my condo does now.) combined, both properties are worth about 1.2 million in today’s market, so it seems like a pretty sizeable base for appreciation. i have about $350k equity in my condo, so i am leveraging nicely, i think. i don’t know if i could (or would want to) try and buy 10-15 units with this money elsewhere (for a similiar $1 mil+ appreciaiton base), as it seems to be a totally different aninmal- many units to manage- need property manager; out of my area, and not sue about long term appreciation. but i’m still open to suggestions, ot different ways of thinking on this matter.