Cash still chasing yield...

For decades or even centuries, investors have purchased multifamily, commercial, and office properties for the purpose of generating positive yield from renters. Such multi-unit properties offered economies of scale because servicing multiple tenants in close proximity to one another is manageable with just a few employees, property managers, or maintenance professionals.

Several posters have mentioned that both REITs and private equity have been buying up single-family residential properties across the nation for the purpose of becoming landlords (and possibly eventual slumlords if properties are not maintained adequately). I have personally observed this on a broad scale in the sub-$300,000 price category of “starter homes” and townhouses whenever new units are built in areas with strong rental demand.

Suburban and exurban (semi-rural) single-family homes are not usually as economical to manage as multi-family and commercial properties might be, because single units require more employees or agents per unit to achieve a high level of attention to maintaining cashflow.

My “back-of-the-envelope math” calculations reveal that the new home developments I have seen purchased in bulk are located in exurban (far suburban) areas where average rent for a 3BR 2BA home is at least $1,800/mo for a $300,000 property. Purchases of such properties produce a starting yield of 7%+ before taxes, insurance, maintenance, HOA fees, and rental agent commissions.

More recently, the demand for income-producing real estate has progressed from exurban starter or move-up homes by institutional purchasers to luxury properties being acquired by individual investors in suburban areas with good schools. Obviously, investors and rich individuals are sitting on so much cash that there are few options for generating yields anywhere near the inflation rate.

In my own gated neighborhood, a 5,500 SF home was recently purchased by an individual for $1.14 million and promptly put on the rental market for $5,500/month. The purchaser of this property will realize a yield of a little less than 5.8% before taxes, insurance, maintenance, HOA Fees, and rental agent commissions.

With today’s 8% inflation, the landlord will be losing purchasing power, but my guess is they are expecting price appreciation to make their investment break even with inflation or to do better.

Having experienced a few of my own “tenants from he11” in single-family rentals, I sincerely hope the institutional and individual owners of these houses have taken the risk of cash flow interruption into account.

If the economy falters, then single-family home investors should include in their pro forma calculations the cost of attorney fees, eviction, and collection from intransigent tenants who fail to pay their rent or who abuse properties, causing an interruption in cashflow and substantial out-of-pocket costs for repairs and restoration of damage caused by bad tenants.

There’s still an awful lot of cash chasing yield.

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Note,

In the medium term you are correct.

Excellent post.

In the long run you are wrong. Possibly. Or in many instances.

Will the market plunge? We just do not know.

I have been told I am a very bad person trying to time the markets. With your post in hand I would not be a buyer right now. I want to thank the wise for their caring about my morals.

“There oughta be a law…” this just exacerbates the affordable housing problems in this country, making it worse and worse for the 98%.

Around here, a desirable exurb / nice semi-rural area / whatever it’s called, an hour north of Boston, with minimum 1 or 2 acre zoning - anything under $700K is immediately snapped up / bid up / rented up unless it’s a true dump. No new teachers, 20-somethings, service workers, or couples starting out families without nearly 6 figure jobs, can come close to moving here and affording what’s coming on the market or what’s being built. Builders sell each half of a 2000sf 1.5 story condex for $400K. People can’t even downsize & pay off the mortgage because of such behavior.

People shouldn’t be forced to compete with the .1% or hedge funds or REITs for a decent place to live at a rate that won’t crush their finances. A 2br 1 ba condo in a 150 year old New Englander in a rural town 30 minutes from anywhere - for $1,800 a month rent? Wow.

Move to a ‘cheap’ part of the country? Sure, an option, if we had to - and move a thousand miles away from friends, family, social groups, starting over. This area is a great place to live - I am blessed to have been able to get married and buy here in the 90s - but the distortions are becoming ridiculous.

FC

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People shouldn’t be forced to compete with the .1% or hedge funds or REITs for a decent place to live at a rate that won’t crush their finances. A 2br 1 ba condo in a 150 year old New Englander in a rural town 30 minutes from anywhere - for $1,800 a month rent? Wow.
Move to a ‘cheap’ part of the country? Sure, an option, if we had to - and move a thousand miles away from friends, family, social groups, starting over. This area is a great place to live - I am blessed to have been able to get married and buy here in the 90s - but the distortions are becoming ridiculous.

FlyingCircus,

If you think $1,800 for a 2BR 1Ba exurban condo is expensive, consider the situation in high-tax areas like Los Angeles or New York City.

My Email inbox included a story this morning reporting that the current price for a 1BR 1Ba Manhattan apartment is $5,100.

CBS News cites Douglas Elliman’s recent rent report that a one-bedroom reached a record average of $5,058 in June, and it went up even more in July to $5,113. That’s $1,000 more than a year ago.

“I’ve never seen these prices, and also the desperation for people to really find somewhere to live,” Douglas Elliman agent Melinda Sicari said…

If you are looking for a discount, experts say… [a]verage rental in Brooklyn was $3,883 in July while it was $3,426 in Queens.

Two men were too busy moving out to stop and talk but said with the rents sky high, they’re going back home to live with their parents.

https://www.cbsnews.com/newyork/news/manhattan-record-high-r…

My seminal post in this thread describes how investors are buying and renting 5,500 SF suburban McMansions in high-ranked school districts for $5,500 per month in parts of the Southeast. You point out that sub-1,000 SF suburban condos rent for $1,800 in good school districts of the Northeast.

The Orange County Register reports Southern California rents, $2,400 and climbing, surge amid booming apartment demand. With some of the lowest vacancy rates in two decades, landlords have leverage to raise prices.

https://www.ocregister.com/2022/08/05/southern-california-re…

My back-of-the-envelope math says that you need an income approaching $200,000 per year to afford rent in excess of $60,000 per year, especially in areas like New York City or Los Angeles, where state income taxes can exceed 5% and sales taxes can exceed 8%, over and above federal income taxes of around 15% to 20% paid to the IRS.

With a July, 2022 US inflation rate of 8.5%, it doesn’t take a math degree to figure out that a Califonia or New York family earning $200,000 per year is going to go broke trying to pay for taxes, housing, groceries, transportation, clothing, and entertainment - not even including out-of-pocket costs for medicine, health insurance, or unexpected expenses. Vacation travel and family gifts could become out-of-the-question with that kind of cashflow demand on an average household earning $200,000 per year.

Just imagine if you are so poor as to be a single male or female with an income of only $50,000 to $150,000. There’s no way on earth you’re going to feel confident starting a family (or pursuing a romantic relationship) in a high-rent and high-tax area.

No wonder ambitious, intelligent people with a reasonable grasp of math are moving to low-tax, high-growth areas like Florida, Texas, Tennessee, Nevada, and Washington state.

Over an extended period of time, even the functionally illiterate or demonstrably innumerate segment of US society*** will realize that high inflation, high rent, and high taxes will impact their lifestyles.

One can at least take heart in knowing that the cure for high prices is high prices.

https://www.adamsmith.org/blog/the-cure-for-high-prices-is-h…

***According to the 2015 test data compiled by the Pew Research Center:

Fifty-five percent (55%) of Americans were unable to do things like:

Calculate the total cost of ordering office supplies, using a page from a catalog and an order form.
Determine whether a car had enough gas to get to the next gas station, based on a gas gauge, the distance to the next station, and the car’s gas mileage.
Twenty-two percent (22%) of Americans in the ‘below basic’ group could not answers questions requiring them to do things like:

Calculate the weekly salary for a job, based on hourly wages in an ad.
Calculate the cost of a salad and a sandwich, using prices from a menu.

https://bridgebizstem.wordpress.com/2018/03/20/numbers-ameri…

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Fifty-five percent (55%) of Americans were unable to do things like:

Determine whether a car had enough gas to get to the next gas station, based on a gas gauge, the distance to the next station, and the car’s gas mileage.

That is incorrect. 100% can’t do that.

Now if they also know the fuel tank capacity and how accurate and linear the gas gauge is…

Or if they know how far the vehicle typically goes on a full tank, and how accurate and linear the gas gauge is…

(I used to have a vehicle where the last quarter of the gas tank - according to the gauge - was about half as many gallons as the top quarter. In other words, going from the “full” mark to 3/4 was about 120 miles but going from 1/4 to “empty” was only about 60.)

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I consider rental homes as the bond section of my portfolio. As an early retiree… whose goal it is to average 5% or more annualized - homes in metro areas play a part. My jam has always been lower-end townhomes, in otherwise affluent Progressive areas. My tenants enjoy the schools and amenities - and ‘others’ get to pay the higher property and income taxes to subsidize it and I collect a modest income - everyone gets what they deserve. Said units I’ve had for about 10 years - 3 units to be exact.

I’ve only had 1 semi issue and it costed my $1800 in lost rent and about $5500 in repairs. However.,for each unit I accrue $2500 a year for remodels, etc and I also accrue for 1 month vacancy every 2 years so it was fine.

I like bricks. I also like having diversification from “Strong buy!!!” “Intrinsic values!!!” - shouting by people who never ran a business. Yes long term stock returns are superior thus I am vested in them. But I just like having a modicum of non-paper assets and frankly - an asset that most need and want.

My most recent buy was halfway thru the pandemic housing craze. 3bed/2.5b Townhome in a bedroom community of Atlanta. All in paid $250k. After ALL expenses the OP mentioned, plus setting money aside for unexpected problems…the rental income nets me 3.5%. My hope is there’s a long term appreciation average of 3.5% - and I’m elated to make 7% in something that diversifies me out of paper assets just a bit. I fully realize to many - 7% is disgustingly low…but again- if I can just make 5% from here till when I croak - all is well.

Some investors do simple math and don’t count HOA, insurance, plumbers and AC repairs. Countertops and paint and carpets. Vacancies, etc. I account for all of it to a fault to the point where it probably prevented me from buying a unit or two I should have bought.

Also tenant selection is crucial. In business I believed in ‘hire slowly, fire quickly’. Ditto partially here: I’ll take my sweet time and only sign a tenant I feel I’d leave my kids with for a day if I had an emergency. If a repair is needed my property manager is empowered to handle it INSTANTLY- with good quality replacements or repairs and that negates tenants getting mad or having justification to leave early or not pay.

Sure, if the economy gets bad - even good tenants lose jobs and I’ll have a problem. But that same day the stock market people will be on the blogs saying “I took a tax loss, I’m so smart” so I’ll be in good company.

Everyone’s situation is different - thus far for me these have been a steady Eddie type of deal. I never have tried to hit home runs - just like to get on base.

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eweppl,

Also tenant selection is crucial.

No kidding! I see that you are in ATL. My wife and I reside in MA and have owned rental property (both residential and commercial) over the years. It was profitable, but also had it’s headaches.

Here in MA, it’s very difficult to get a bad tenant to leave. There are many consumer protections that are not landlord friendly. We were not slumlords by any chance of the imagination, but once my wife and i progressed financially, and moved to a new single family home, our long-term tenants started to realize that they were paying for our progress, and they demanded more from us, and expected more from us.

It got so bad that one long term tenant (7 years maybe) had a “slip and fall” incident where she claimed to also have a miscarriage. We actually went to court on that, and during the lunch break at trail, the tenant and our insurance company decided to settle. Never knew how much they got, but from then on, my wife and I said we would never own a piece of rental property in MA again.

I’d like to own rental property again, but definitely not in MA.
'38Packard

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I’d like to own rental property again, but definitely not in MA.

And take a look at city- and county-level laws regarding residential rentals, too. You don’t want to own residential housing in Seattle either.

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Thanks for sharing.

Long story short - my businesses were in Virginia and NJ. I live in suburban Philly. My original rentals were in VA – good property manager, nice lower priced units - my only regret is I didn’t go all in and buy any more units back when I started this. Anyway- the man is good. We talk on occasion and I said I want to buy properties in either Atlanta or Raleigh. (I preferred Raleigh cause that’s like Atlanta - just without the crime numbers). I told him that if I had a contact like him in one of those cities I’d do it. Well get this - he tells me that his son - is in the SAME business as him and learned it from him and after graduating Georgia tech - he became a broker and property manager in Metro Atlanta - same name even! So I met the guy - his Wife - an attorney - works with him too. Since then I’be bought 2 rental units thru him without even seeing them live - Ive had those just over a year now - and the sole issue I had was one payment was 4 days late - and frankly I was fine with the $25 fee :slight_smile:

I really want to rehab a house - make a small profit. Would help my financial plan so much if I could do just 1-2 of those a year but I have little expertise. So I pick out listings and send them to my Atlanta guy — and at least HALF the time he vetoes them - gives me his reasons. That reassures me he’s not just trying to write a deal. Cobb County, GA is landlord friendly - which in my book merely means - not landlord hostile. I feel if a property owner has fulfilled what he was supposed to, provided all amenities, prompt fixes, etc- then property misuse or non payment of rent should be allowed to be dealt with swiftly.

I keep waiting for this “soft” market. Yeah it’s not as frothy - but geez I’ve made offers on perhaps 4 rehab houses*under 250K lately - and got beat on all of them - 3 of them over asking price.

I want to thank the wise for their caring about my morals.

Morals? You’ve got morals? Where can I go to buy some morals?

I’ve already got sincerity*!*

Once you can fake sincerity you’ve got it made.

Cash is king!

Desert (small, unmarked bills) Dave

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