Strange thing I noticed about the Real Estate market...

[red-beard]

When I was moving to San Diego in 2001, I owned a 3 unit apartment bldg, living in 50% of it. I wanted to do the same in So Cal, but it didn't make sense. I would have had negative cash flow. I would have been even if I had not lived in a unit. And the way it made the most sense was for me to live in the crappy "3rd" unit and rent out the 2 better ones!

This was not isolated, it was the case in every 3 family I checked.

In Houston, I was considering a 3 unit setup similar to before in one of the University areas. I think that is the only way it would work. You see, in Houston, houses are very inexpensive. The only people living in apartments are those that cannot get credit for a house! Or Students who don't want to own. Or those that don't know better.

We ended up not getting involved since at this time, the risks seem to be far more than the small reward.

[JeremyD]

I think that the Apt market is definitely a long term investments = Look at some of the major investors in that market (like TIA CREF)

I think the market that is really going to take a beating is the condo maket.

[on-ramp]

if it's your only residence, I just dont see how your house is a good investment.

if you enjoy where you live, the neighboorhood, the school system, the town and the location, who cares what your house is worth?

In our case, our house could tumble to 250K or appreciate to 10 million. Doesnt make a difference. If it went to 10 million, the only way to profit would be to sell and downsize. However, downsizing means downgrading the lifestyle. And how many people downgrade lifestyle. The point is to always "update" your lifestyle, buy more Porsches, have more space, have more toys and better choices.

sure you can sell your home here and rent an apt, "hoping" that homes come down drastically so you can get back in. but what if that doesnt happen? it's a gamble. you're daytrading your home, trying to time the market.

[pmajka]

Wayne, you both right and wrong.

However, the value of the return on investment (ROI) in the form of rents, has not increased. So, basically, apartment buildings have been increasing in value, with no specific financial reason for the increase.

The buildings are going up in value like all other Property in the area. But Rent does not go up right away. As Turnover in apartments happens, rent goes up. This rental catchup could be a 2 year cycle.

NOT all property is going up at the same time. Research alot and buy carefully.

My wife worked in sales at a cemetary for a little while. All of us have heard the term, "Pland for the Future, Buy Today!". The reason is Realestate on average goes up 10% a year...PERIOD! So cemetary plots also go up in value. The worst you can do with realestate is make a little money. (just ask my used porsche)

Its not for everyone (painting, Another toilet to fix, chasing rents). But I only put about 20 days worth of work in a year.

A friend of mine (cough) purchased a house 7yrs ago. Rents for a 2br apt was 525, its now 900 with people snatching at it. (results not typical, ymmv).

as for the term REAL Estate.

If you have a rich family member give you a sizable estate as part of his will, it doesnt mean you have a house, or building. Real estate means you need to fix a window or mow a lawn.

[turbo6bar]

Wayne, low ROI is the norm these days in all investments. Coporate bonds are trading at high prices and low yields. Commercial properties are trading at CAP rates as low as 5.5. I believe the Federal Reserve is increasing the number of dollars by 10% per year. That is creating a glut of cheap money and a lack of quality, paying investments. In addition, risk premiums are discounted. Folks believe assets will continue ascending.

So, you take cheap money and ignore risks, and you might feel comfortable with a 1-2% return, after expenses.

As far as apartments are concerned, I think things will get far worse before better. We have record high new home invesntories. We have near record high existing home invesntories. Rental vacancy rates peaked in fall 05. We have a large surplus of housing, nationwide. This isn't positive for rents, despite the fact rents have lagged all other indicators. Borrowing costs are also climbing. Warren Buffett says,"When the tide goes out, we'll see who was in the water without swimming trunks."

[pmajka]

With mixed emotions, I accept the fact that every year, there is a nother Generation of HS students Leaving home to strike out on their own. There will always be those in need of inexpensive housing.

[Don Plumley]

Wikipedia Definition

In law, the word real means relating to a thing (from Latin res, matter or thing), as distinguished from a person. Thus the law broadly distinguishes between real property (land and anything affixed to it) and personal property (everything else, e.g., clothing, furniture, money). The conceptual difference was between immovable property, which would transfer title along with the land, and movable property, which a person would retain title to.

So Real Estate = Immovable Property; The Land and anything permanently affixed to the land.

An important area of real immovable property are the definitions of estates in land. These are various interests that may limit the ownership rights one has over the land.

An estate in land is an interest in real property that is or may become possessory.

This should be distinguished from an "estate" as used in reference to an area of land, and "estate" as used to refer to property in general.

This is where we get into the forms of ownership, such as "Fee Simple".

(edit: expanded)

[jyl]

When risk premiums get too low, there is an accident coming.

Here is a Wall Street Journal article about the equity risk premium, it is undated but looks to be from the stock market bubble period - 1999-2000. People were confidently announcing the end of equity risk premia - and we know what happened hext.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/articles/riskprm1.htm

[JeremyD]

The world works in mysterious ways. All this attention on the "Hurricane States" the past few years - watch a big earth quake hit the los angeles area (god forbid) and tumble the markets. It's what you don't expect...

[onewhippedpuppy]

Maybe those in the know are passing, and those purchasing properties are new to investing, tempted by recent low borrowing costs and new lending strategies that encourage people to borrow. That seems to be the issue in the residential market, lots of people buying houses that are too expensive on interest only loans, expecting the insane appreciation to continue.

[turbo6bar]

Originally posted by Wayne at Pelican Parts
True, true. But, you can get an after-tax (non AMT) yield of about 6-7% by buying tax-free munis (with AAA ratings), that will produce a better investment, with almost zero risk. Compare that to buying an apartment building that returns 1-2% and the risks that accompany them (tenants, insurance, mortgage, etc.)

Exactly. The risk premium is virtually nonexistant. Investment grade corporate bonds yield the same as Treasury bonds. Junk bonds yield a few points more. Investors are willing to accept nominal returns on RE because they perceive appreciation will juice the return. Across the spectrum, we see a greater number of dollars chasing investments, and the end result is reduced yields. This could go on for years or decades, but when things go bad, it will be terrible.

You're absolutely right. It doesn't make sense. The only rational action is to take some profits off the table, and invest to preserve capital. Investing success may eventually be measured not by how much you make, but by how much you don't lose.

The tech bubble 2000 was a cruel teacher to moi.
jurgen

[motion]

I think a lot of it is 1031 money. Buyers are willing to "lose" quite a bit on their purchases, in order to avoid 24% long-term, or much larger short-term taxes on gains. Once you factor in the tax savings, an apartment building with a 5.5% cap rate doesn't look that bad at all.

Also, pmajka, has it right with regards to rents. They will increase as buyers are squeezed out of the purchase market. They always do. Rents have been depressed for a few years now. Many buyers (myself included), purchase with long-term goals, assuming rents will increase over time. I'm positive with my cash flow (barely), but am counting on increased rents over time.

[fintstone]

I think a lot of the opinions here regarding rental properties are based on areas where the home prices have risen so much in the last few years and have outpaced rentals. I would have no problem finding rentals with immediate positive cash flow in other areas of the country. Even if you only break even, there is always appreciation (even if slow and small), tax write-off and eventually the loan pays off.
IMHO, the depressed rents will significantly increase once the lure of purchasing for quick appreciation dies out. There will be more folks in the rental market and fewer folks willing to pay the price of the newly appreciated homes. I have had rental property for many years and still consider it a great investment....even though I have not really participated in the big appreciation markets as some have. I guess getting rich slowly is better than not getting rich at all.

[onewhippedpuppy]

flintstone makes a good point, all of my comments were in regards to bubble markets such as CA, NY, etc. In areas such as Wichita the low loan rates have created increased demand for homes, especially new ones, but there hasn't been the feeding frenzy real estate action as in other markets. In areas such as mine rentals seem to be pretty well a constant, supply and demand are well matched as rentals are available, but seem to fill quickly. Pretty safe investment, and one I plan to get into once I have the spare cash.

[onewhippedpuppy]

Should be some good deals to be had when the bottom falls out.

[dad911]

I hope so. (1989) Bought some nice properties in the early 90's from the banks, liquidated last year, and expect to do the same in a few years.

[turbo6bar]

Originally posted by SoCal911SC
I think it's 1989 all over again, but much more extreme this time.

Yep. You can buy high and wait for inflation to make your investment grow, or you can buy low and boost your returns. Either way is fine, but I know which route I'd take.

There is still some value in despressed areas, but I know those deals can definitely be better. Some folks just think they're getting good deals. One guy was bragging about his good buy for $200k and how Mississippi is so much cheaper than SoCal. Plus, his returns are padded by the monthly rent of $1000. Holy freakin' mother. What a deal!

[RoninLB]

I know a guy that has 4 condos in S Fla he can't even get buyers to look at.

Another friend said a new condo in S Fla dropped from selling at $325k a few months ago to $225k today.

[turbo6bar]

Condo/townhome market is collapsing in FL, and every other state will follow. Last to rise is first to fall. Greed blinds many.

Coverage of FL. It is not pretty.
Buyers control market

Home flippers' investments flop

For flippers, the only impact on the market is increased inventory. For homeowners who wish to sell, we see a domino effect. Homeowners can't buy a new home if their old home doesn't sell. This has a financial impact on lenders, builders, realtors, title companies, and real estate attorneys.

Corus Bankshares (CORS) is a potential short candidate. They are heavy into condominium financing. Except from Yahoo! Finance page on CORS:
"The bank principally provides commercial real estate lending with primary focus on condominium projects comprising construction of new projects and conversion of existing apartments into condominiums."
"The bank’s primary lending market consists of various metropolitan areas in Florida and California, New York City, and the Washington, D.C."

I am not a broker and this is not advice. I'm just saying.

[Porsche-O-Phile]

The lack of common sense on the part of flippers (for whom I have no sympathy) staggers me. If someone tells me, "invest in this and you'll make a lot of money" (or even a little money), my response is usually, "well then, why aren't YOU doing so if you're so sure? Why are you so hell-bent on investing in ME, who you don't know, and probably represents a riskier and lower-return investment for you?"

I have yet to get a good answer to that one. Hence, I'm still renting.