Anyone Worried About Today's High Housing Prices?

Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes

Meaning, in my city, prices have moved forward so aggressively that they have made up for all of the 2008-2010 losses, and there is still somewhat low inventory. Two things kind of concern me - one, the way construction is happening - is that going to lead to overbuilding and sinking rents? Second, as you know, one should "buy low and sell high." So even though mortgage rates are currently low, is it a concern to buy now due to housing prices being relatively high? To clarify, I am planning on buying two or three SFDs as rentals to hold for the very long term. However, I'd kind of hate to see a dip in prices in 2014 or 2015. I suppose if it's cyclical, and the worst doesn't come to pass with the stock market or the jobs/wage situation or government debt causing a meltdown, then I can just weather the storm of a 3-4 year price drop because I would still be paying down debt on an annual basis (and inflation would be helping me).

Thoughts on this? Would you buy now if you were willing to be a landlord for 20 years, or wait until prices fall for whatever reason? I would also worry that if x or y happens causing the housing market to fall, that banks might tighten lending criteria as well, putting a mortgage out of reach for a self-employed person such as myself.

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Mike Hansen

Naperville, IL · Member since 2014 · 35 posts · 6 votes

12y

Hi Jason --

You're reading my mind I think about this all the time. We're doing buy-and-hold too. Right now my mindset is to see things in both the micro and macroeconomic, then pull the trigger. I'm thinking like this: First the Micro: How are MY target areas performing in terms of economic indicators? Is there job growth? New jobs moving into area? What's the unemployment rate? Better yet, any idea how many people are simply out of the job market or under employed? Is construction picking up? What's local media saying?

Then Macro: How is overall US economy? Where are people moving? What areas are under-performing? What's government doing? What's the media pumping out? And all the Qs from Micro too :)

I think you need to get an overall picture and then decide. For me, Chicago markets we're in are strong, growth is apparent, and home prices are not shooting up like in some parts of US. Construction is starting again: we have 2 large residential projects starting up, and the "Will build to suit" signs are starting to appear in the more expensive areas. We have low inventory levels too but 2014 already showing more life than this time in 2013.

I don't think we're out of the woods, but I'm bullish on things getting better, and now is a good time to buy here. I think it's all about keeping your eyes open...

Mike

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Mike Hansen
Naperville, IL · Member since 2014 · 35 posts · 6 votes
12y
Hi Jason --

You're reading my mind I think about this all the time. We're doing buy-and-hold too. Right now my mindset is to see things in both the micro and macroeconomic, then pull the trigger. I'm thinking like this: First the Micro: How are MY target areas performing in terms of economic indicators? Is there job growth? New jobs moving into area? What's the unemployment rate? Better yet, any idea how many people are simply out of the job market or under employed? Is construction picking up? What's local media saying?

Then Macro: How is overall US economy? Where are people moving? What areas are under-performing? What's government doing? What's the media pumping out? And all the Qs from Micro too :)

I think you need to get an overall picture and then decide. For me, Chicago markets we're in are strong, growth is apparent, and home prices are not shooting up like in some parts of US. Construction is starting again: we have 2 large residential projects starting up, and the "Will build to suit" signs are starting to appear in the more expensive areas. We have low inventory levels too but 2014 already showing more life than this time in 2013.

I don't think we're out of the woods, but I'm bullish on things getting better, and now is a good time to buy here. I think it's all about keeping your eyes open...

Mike
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Bill Briscoe
Accountant · Thornton, CO · Member since 2011 · 170 posts · 33 votes
12y
Yes, I would still buy now. But look for deals. How do you know prices are going to come down? How extreme has the run-up been in your area? $/SqFt?

But a dip in 2 years wont hurt you if you are going to hold for 20 years and IF rents don't fall off so much that you can't stay solvent.

If you are happy with the projected returns you can make at todays prices and your expected rents/price appreciation, then pull the trigger.

Of course, I say all this from my regional perspective. Our values have jumped some in OK as well, and there is new construction, but nothing seems that extreme given the oil and gas job growth and the normal population growth in the area. And I'm still not buying new construction. There are foreclosures to be had that offer instant equity if you manage the rehab costs right.

However, if you have seen local values jump say, 25-30% or more YoY in your town, then I might look towards another area as something that extreme could indicate more of a bubble than a recovery.
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Jared Anderson
Real Estate Broker · Bradenton, FL · Member since 2014 · 48 posts · 16 votes
12y
My initial thought is if you are going to be holding for 20 years, then it's always a good time to buy with the right numbers.

Speculating where the market will be in 12-24 months is the most difficult question. From my perspective on the market there are several factors that recently occurred which will influence the market:
1. Dodd-Frank is changing it's affects on the market (This includes many loan related laws).
2. Mortgage Brokers were just handed a whole new batch of regulations through Fannie Mae, effective Jan. 1 (It's become more strict/difficult to get loans in some cases).
3. FHA just scaled back their loan limits. (This will limit buying power in some cases)
4. Bernanke is talking like quantitative easing is ending (This is what has been keeping the interest rates so artificially low).
With all of these major changes in the air it's hard to predict. I do know that once you limit borrowing resources for buyers, prices go down. I also know that when mortgage rates go up, prices go down. It looks like to me we will have both of these events occurring in the next 3 years.
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Rick BassettBusiness Member
Property Manager · Greater New Haven, CT · Member since 2010 · 377 posts · 434 votes
12y
While it is harder to get the numbers to work in our area (buy/rehab/rent/hold/rinse/repeat) than it was a few years ago, some deals are still popping up where they do work.

Our area is a strange one in that we really don't have any new building to speak of due to the lack of buildable land. We also have pockets of great affluence and great poverty that often butt up against each (ie...Woodbridge/New Haven) through our little State.

Great poverty usually translates to lessor quality school systems which in turn drives people with the means move to the more affluent areas in the burbs to put their kids in the better school systems thus keeping up or driving up the prices in burbs while flat lining the prices in the less affluent areas, the cities.
475-900-3100
Bassett Property Management5108 Reviews
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Jason Merchey
OP
Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes
12y
Originally posted by @Jared Anderson:
My initial thought is if you are going to be holding for 20 years, then it's always a good time to buy with the right numbers.

Speculating where the market will be in 12-24 months is the most difficult question. From my perspective on the market there are several factors that recently occurred which will influence the market:

Dodd-Frank is changing it's affects on the market (This includes many loan related laws).

Mortgage Brokers were just handed a whole new batch of regulations through Fannie Mae, effective Jan. 1 (It's become more strict/difficult to get loans in some cases).

FHA just scaled back their loan limits. (This will limit buying power in some cases)

Bernanke is talking like quantitative easing is ending (This is what has been keeping the interest rates so artificially low).

With all of these major changes in the air it's hard to predict. I do know that once you limit borrowing resources for buyers, prices go down. I also know that when mortgage rates go up, prices go down. It looks like to me we will have both of these events occurring in the next 3 years.
Those look like potent facts. I'd be interested to learn more about Dodd Frank.

I take from your post that there is a big difference between short and long term holding. I guess over 20 years it's nearly impossible to not see an uptick in value. Having said that though, if you are paying twice the value of a house to the bank for interest, you are seeing huge amounts of your potential equity leave your bank account. And that can best be justified if you're seeing a 2-4% increase in value annually over the long term. I get the idea of cash on cash returns, but if someone told you that you would see 1% in price gains over 20 years (in other words, a 20% gain), you'd have to ask yourself if that acceptably beats inflation and the cost of the interest on the mortgage, and I bet you'd decline to purchase if you had that crystal ball. Don't we need to see a 3% increase in value per year to beat inflation, and a 5% increase to beat the interest on the loan? Perhaps it all comes down to cash on cash returns, but I then wonder if that is somewhat of an artifact or illusion if prices aren't growing by 5% a year on average....
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Bill Briscoe
Accountant · Thornton, CO · Member since 2011 · 170 posts · 33 votes
12y
" And that can best be justified if you're seeing a 2-4% increase in value annually over the long term. I get the idea of cash on cash returns, but if someone told you that you would see 1% in price gains over 20 years (in other words, a 20% gain), you'd have to ask yourself if that acceptably beats inflation and the cost of the interest on the mortgage, and I bet you'd decline to purchase if you had that crystal ball. Don't we need to see a 3% increase in value per year to beat inflation, and a 5% increase to beat the interest on the loan? Perhaps it all comes down to cash on cash returns, but I then wonder if that is somewhat of an artifact or illusion if prices aren't growing by 5% a year on average.... "

But you don't have to beat inflation to make an acceptable return. Price appreciation is just a bonus IF your rents cover debt service and expenses plus enough extra to pay a cash return on your equity invested. Look at how price appreciation works when combined with leverage:

Purchase $100K house with 20% down Interest Only (just for simplification) at 6%. Appreciation is 2%. Payment is $400/month interest only. After maintenance and vacancies, tax, insurance and expenses, you expect to make $600/month NOI from the rents. $400 goes to Debt Service leaving $200/mo Cash Flow. $2400/$20,000 cash invested is a 12% cash on cash return annually- which may be acceptable, but it ignores the appreciation.

If you sell the house at the end of year 1 (ignore transaction costs just for illustration) for $102K - up just 2%, that's $2000 of additional capital gains which boosts your total IRR by 10% up to 22% ($4400/20000 invested). That's what 5/1 leverage can do for you.
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Jason Merchey
OP
Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes
12y
I see what you mean. I would probably be expecting to make at least $150 a month on post-expense profits (cash flow). Well, assuming that I don't have vacancies of more than 4%, or that a new AC compressor isn't needed, or that a tenant didn't not pay the last month's rent and damage the place a bit. Though I acknowledge the strength of your scenario re: cash on cash returns, if in that year that you held it (forgetting about selling costs, as you suggest) the market leveled off, now inflation is beating you down by -2% and all the money you paid to the bank goes to interest, not principal. So in all, I see that leverage using a loan is like leverage using a level to unseat a boulder; however, if it's raining on you while you're prying the boulder free, yes you moved the boulder, which is useful, but you've also gotten all wet and it's 40 degrees outside, which is not good. A cash purchase would be a poor ROI due to the same inflation, yes, but you would be getting probably $600 a month in cash flows - which will be necessary when one of those negative occurrences I threw out occur, which they eventually will. Yes, due to inflation and the loss of money to the bank, leverage works well in an appreciating market, otherwise, the cash flow from a cash purchase is preferred.
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Bill Briscoe
Accountant · Thornton, CO · Member since 2011 · 170 posts · 33 votes
12y
"With all of these major changes in the air it's hard to predict. I do know that once you limit borrowing resources for buyers, prices go down. I also know that when mortgage rates go up, prices go down. It looks like to me we will have both of these events occurring in the next 3 years."

All directionally true, but consider magnitude. If we are talking fixed rate for 20-30 years with similar holding times, then I would expect that locking in at lower mortgage rates now even at somewhat higher purchase prices still results in a lower monthly payment and greater return than buying later at higher rates but lower prices.

If rates rose from 5% to 6%, we would have to see home prices drop by over 10% for mortgage payments to be lower in the future than they would be now at the 5% level and current prices. That seems pretty extreme to me - we aren't talking about Bonds here.
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Jared Anderson
Real Estate Broker · Bradenton, FL · Member since 2014 · 48 posts · 16 votes
12y
Originally posted by @Jason Merchey:

Those look like potent facts. I'd be interested to learn more about Dodd Frank.

I take from your post that there is a big difference between short and long term holding. I guess over 20 years it's nearly impossible to not see an uptick in value. Having said that though, if you are paying twice the value of a house to the bank for interest, you are seeing huge amounts of your potential equity leave your bank account. And that can best be justified if you're seeing a 2-4% increase in value annually over the long term. I get the idea of cash on cash returns, but if someone told you that you would see 1% in price gains over 20 years (in other words, a 20% gain), you'd have to ask yourself if that acceptably beats inflation and the cost of the interest on the mortgage, and I bet you'd decline to purchase if you had that crystal ball. Don't we need to see a 3% increase in value per year to beat inflation, and a 5% increase to beat the interest on the loan? Perhaps it all comes down to cash on cash returns, but I then wonder if that is somewhat of an artifact or illusion if prices aren't growing by 5% a year on average....

Another user, @Justin B., just posted this article, it's a good read on where our residential housing market is and what you are touching on:

http://charleshughsmith.blogspot.com/2014/01/after-seven-lean-years-part-1-us.html

I would keep in mind when buying real estate your purchase is a potential "hedge" against the risks you're talking about.

This is what I mean by a hedge: When inflation occurs, products cost more because the currency is not worth as much. For example, $.10 used to buy a burger, now it costs $1.00 to $6.00. This is because of inflation. Look at a house just like a truck load of goods: gasoline used to build it, wood, windows, materials, glue, nails, shingles, etc. If inflation occurs the cost of ALL THESE GOODS goes up and subsequently so does your house. When I look at long term investments I am looking for these areas of gain:
1. Appreciation (This typically ties to your land value. Several factors drive this value: scarcity is the greatest, thus location is the key).
2. Cash flow
3. Principal paid down (your tenants pay off the mortgage).
4. Hedge against inflation (your property price inflates with the economy, not just the cash you used.)
5. Purchase at a discount.
Maybe I am speaking to what you are getting at?
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Bill Briscoe
Accountant · Thornton, CO · Member since 2011 · 170 posts · 33 votes
12y
" Yes, due to inflation and the loss of money to the bank, leverage works well in an appreciating market, otherwise, the cash flow from a cash purchase is preferred. "

Yes leverage can certainly burn you - IF prices are actually dropping, it magnifies the damage. But I don't think appreciation vs inflation is the correct measure. Total IRR vs Inflation would be more relevant.

Lets look at the opposite scenario: pay all cash so your investment is $100K, we still clear $600/mo and pay no interest so cash flow is $7200 per year, however, your investment is much greater, so your cash on cash rate of return is only 7.2% (7200/100,000). Suppose the appreciation is still 2%, your total return if you sell is now $9200 and your IRR is $9200/100,000 or 9.2%.

The flip side of this scenario is that its nearly impossible to lose money unless the property value drops more than the cash flows from rents, but you have a lot invested and might not be beating inflation by that much - lower risk and lower returns.

Your breakeven point on the leverage scenario is $400/mo higher than without any leverage (cash purchase). So to actually lose money and see the compound leverage truly work against you your NOI plus appreciation would have to be below $4800 per year, and this scenario would equate to only 4.8% IRR for a cash purchase. If this is your likely worst case scenario, you may not want to purchase at all - with our without leverage.
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Jared Anderson
Real Estate Broker · Bradenton, FL · Member since 2014 · 48 posts · 16 votes
12y
Here is a spreadsheet I made/use to forecast gains on a property. I would be careful and use the most conservative numbers you find fit in your market. It's always nice to see where you could be in the end of an investment.

https://drive.google.com/file/d/0B6z8JyP-T5efaTJPSnByZTRMNGM/edit?usp=sharing

Let me know if you can't download the original copy. I don't typically share my docs this way.

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Justin B.
Lakewood, OH · Member since 2013 · 193 posts · 60 votes
12y
Take a piece of your rental income and invest in Silver, pay yourself first...
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Bill Briscoe
Accountant · Thornton, CO · Member since 2011 · 170 posts · 33 votes
12y
"
1. Appreciation (This typically ties to your land value. Several factors drive this value: scarcity is the greatest, thus location is the key).
2. Cash flow
3. Principal paid down (your tenants pay off the mortgage).
4. Hedge against inflation (your property price inflates with the economy, not just the cash you used.)
5. Purchase at a discount."
Great breakdown Jared. #3 is a big factor with long term investing. Your tenant pays off your mortgage for you. And yes, I ignored this piece in my IO scenarios above - showing that piece flowing thru to cash flow instead.

I find it interesting how to break out 1 vs 4. Leverage multiplies the return on equity. I guess #1 is tied to local supply and demand and #4 is tied more to commodity material/labor prices and costs to build new construction?

And #5 is my favorite. If you cant buy built-in equity, why even do the deal?
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Jared Anderson
Real Estate Broker · Bradenton, FL · Member since 2014 · 48 posts · 16 votes
12y
Originally posted by @Bill Briscoe:

Great breakdown Jared. #3 is a big factor with long term investing. Your tenant pays off your mortgage for you. And yes, I ignored this piece in my IO scenarios above - showing that piece flowing thru to cash flow instead.

I find it interesting how to break out 1 vs 4. Leverage multiplies the return on equity. I guess #1 is tied to local supply and demand and #4 is tied more to commodity material/labor prices and costs to build new construction?

And #5 is my favorite. If you cant buy built-in equity, why even do the deal?

I would agree on #5. If you know you aren't winning in the beginning look for something else. I broke #1 v. #4 apart because I primarily had land appreciation in mind with #1, which is market specific. #4 I had more of a general economy in mind with the cost of goods and national inflation. Not trying to make it more complicated!
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Jason Merchey
OP
Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes
12y
Originally posted by @Jared Anderson:
My initial thought is if you are going to be holding for 20 years, then it's always a good time to buy with the right numbers.

Speculating where the market will be in 12-24 months is the most difficult question. From my perspective on the market there are several factors that recently occurred which will influence the market:

Dodd-Frank is changing it's affects on the market (This includes many loan related laws).

Mortgage Brokers were just handed a whole new batch of regulations through Fannie Mae, effective Jan. 1 (It's become more strict/difficult to get loans in some cases).

FHA just scaled back their loan limits. (This will limit buying power in some cases)

Bernanke is talking like quantitative easing is ending (This is what has been keeping the interest rates so artificially low).

With all of these major changes in the air it's hard to predict. I do know that once you limit borrowing resources for buyers, prices go down. I also know that when mortgage rates go up, prices go down. It looks like to me we will have both of these events occurring in the next 3 years.
I read an interesting blog from the website on real estate trends Keeping Current Matters (as in, "keeping current with your information does indeed matter") and he noted that five times in the last thirty or so years mortgage rates have jumped, and it actually led to an increase in buying. Like, it scares people into acting, or something. I get that you can buy less house, but I think a lot of folks just settle for less house but get in the game. If he is right in his analysis. Also, though, the middle class is under a lot of pressure these days. They consume at least a third, maybe a half of American products. The aging population is less likely to buy homes I would guess. I did confirm with my banker what you said in #s 1 and 2, so that was good news. I think all these things can't be *helpful* for the market (though perhaps helpful in making some homeowners be under greater pressure to sell)
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Jason Merchey
OP
Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes
12y
Originally posted by @Bill Briscoe:
"

Appreciation (This typically ties to your land value. Several factors drive this value: scarcity is the greatest, thus location is the key).

Cash flow

Principal paid down (your tenants pay off the mortgage).

Hedge against inflation (your property price inflates with the economy, not just the cash you used.)

Purchase at a discount."

And #5 is my favorite. If you cant buy built-in equity, why even do the deal?
I agree in principal, but it's just not feasible to get the perfect deal in my market. Like the old saying about construction: "you can get it done quickly, cheaply, and well - choose two." In other words, if you choose a house that is 1) likely to appreciate, 2) delivers cash flow based on rent vs. expenses vs. mortgage, 3) buy from a person who will accept your loan as the funding source 4) no major outlays due in the near future (HVAC for example) and one of my faves 5) is very rentable (based on how the price relates to the median house price, the location, the amenities, condition, etc) (which is a way to secure the cash flow even in times of economic downturn or perhaps in times of rent depreciation) then I don't really see getting a deal. The saying in this case would be "Buy a house that rents well even in tough times, appreciates well (beats inflation), is in good condition (and will probably be for a decade), the buyer accepts your contract that uses a loan as the funds (instead of giving it to a competitor who has cash), and for under market value (because they are distressed or very motivated) - choose four." Maaaybe in December?? But often, good condition and right pricing and location leads to a sale, not leads to a feeling of distress.
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Bill Briscoe
Accountant · Thornton, CO · Member since 2011 · 170 posts · 33 votes
12y
" 1) likely to appreciate, 2) delivers cash flow based on rent vs. expenses vs. mortgage, 3) buy from a person who will accept your loan as the funding source 4) no major outlays due in the near future (HVAC for example) and one of my faves 5) is very rentable "

Nice list. I agree that you can't often have it all and still get a deal. For me, #1 and #4 are the least important. Granted, I'm not going to buy in a war zone where I'll likely see negative appreciation relative to surrounding areas. I just want to buy in an area where long term appreciation will be average, as I see price appreciation as kind of a bonus.

That, said, I try to create my own appreciation by targeting foreclosures at large discounts to comps. You can still probably find some of these in your area, it just requires more work after closing. Of course, I have to ignore item #4 - there will be major outlays immediately, but I can finance that with a construction loan then refi for the long term. And if you are buying and holding, I don't think you have to find such a PERFECT deal on a foreclosure/rehab as you do when you are trying to flip immediately. If you can build in even 10K of sweat equity on a buy and hold deal, you are coming out ahead of buying at retail. But many flippers will say that's not worth their time. And the most important thing - manage costs - do the rehab cheaper than the next guy who uses a General Contractor or Angie's List for every single item.

Also, don't put granite or Trane HVAC or Subzero appliances in a rental that you want to be competitive in any economy.
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Jason Merchey
OP
Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes
12y
@Bill Briscoe You speak intelligently and convincingly on this topic.

I haven't thought of getting a construction loan. Should I look up a particular thread to discover more about the ins and outs?

Does paying 2x what you bought the house for over 30 years in interest (or even worse if it's a 30 year loan used for just 10 years - mostly interest) bother you? I was on this website, may have even been BofA or something, and it had a simple pie graph showing how much of your payments over 30 years were principal, interest, tax and insurance. The interest was massive. Yes I get that your tenant is paying that, but by the same token, you see money slip through your fingers like dry sand on it's way to the bank. I should mention I pretty much dislike banks on principal. When I switched to a 15 year term, which would cost a percent less as you know, the interest was cut substantially. It seemed more "palatable," and though the cash flow would be $0 in some cases, the total sum of payments was less, and you still get some leverage. I paired that thinking with putting more money down - which I"m sure you don't quite like due to the hit to C on C return, but it did bring my cash flow up to a positive number. As you know, the 16th, 17th, and 18th years (and so on) are flush in such a scenario because your loan disappears. If the place was kept up and the neighborhood didn't degrade, you could see the next 15 years be 60-70% pure profit. What thoughts do you have?
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Bill Briscoe
Accountant · Thornton, CO · Member since 2011 · 170 posts · 33 votes
12y
To put it bluntly, no the interest doesn't bother me. But I don't necessarily plan to hold my current properties for all 30 years either. As long as I'm cash flow positive by enough to cover the risk of investment, I'm better off than if I hadn't made the investment at all, so I'm happy.

Is a 15 year loan a better option? It could be depending on your situation. However - this is what happened to me several years ago. I bought a primary residence at 7.875% on a 15 year loan in 2000, then refinanced a couple years later to around 5.5% over 10 years. The balance was only $47 or $48K but the payment, including tax and insurance was over $600, because of the short loan term. We moved out of that house when we bought a bigger house but kept it as a rental - this was in a small rural town that wasn't growing. We got it rented for $700/mo but it took a couple of months of vacancy which wiped out most of our reserves. We weren't making any cash flow, but the tenants were paying down our mortgage - fairly quickly - until they stopped paying altogether. It turns out they had several indoor cats that shouldn't have been there, so we ended up with about $2K in carpet repairs and $2-3K in lost rents/bad debt before it was re-occupied. I did get half the bad debt back from small claims court.

The next three tenants were slightly better (read: less expensive) but none stayed a full year and we kept facing vacancies and missed rent payments. I kept trying to sell the house, but couldn't in that market for about 3 years. My loan was too small to refi back to a 30 yr without paying close to 8% of the loan value in closing fees. I ended up working 2-3 jobs just to keep my investment solvent until it sold (we did finally make a bit of a profit on sale).

What we learned was that personally, I always want to structure the financing to be cash flow positive. Otherwise, I will inevitably have to make up the difference out of pocket when things go south. (We learned a lot of other things too, like doing credit checks, no pets, don't live 45 minutes from your properties, etc. ) So for me that means a 30 year loan. If we accumulate enough excess cash, that can always go to pay down the principal early, or it can be reinvested in another property.

However, a 15 year loan does have a big advantage or two, IF you have enough reserves to stay solvent without positive cash flow to fuel your reserves. First is the rate break - depending on conditions, you can sometimes get a 15 year for 63-75 basis points lower than than the 30. The second would be the "forced savings" of putting that extra amount to principle every month - just remember that can work both ways.

Another thing to consider is the amount of interest vs principal you pay over the life of the loan is entirely dependent on your interest rate. For a 100K loan at 4% (if you could still find one) over 30 years, the total interest would be only $71,870, less that 3/4 of the principal amount.
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Bill Briscoe
Accountant · Thornton, CO · Member since 2011 · 170 posts · 33 votes
12y
Regarding the construction loan - ask around at small local banks and see what kind of products they can offer. Mine was arranged by a mortgage banker at a bigger national lending company, but the construction loan piece came from a 1 branch bank, then it was refi'd when my rehab was complete by the mortgage banker.

On the construction loan, they did an appraisal and estimated ARV based on the items I said I would fix/update, etc. They gave me a credit line of purchase price + repair costs and I had to buy a CD at their bank which was about 15% of the credit line as collateral. I paid for the house out of the credit line, then wrote checks from the credit line to my contractors after showing the receipts to the banker. The prearranged Refi was at 75% of ARV, which paid off all but 3K of the construction loan balance, I paid off the last 3K from the collateral CD then got the remainder back.
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Zach Zepp
Edmond, OK · Member since 2013 · 15 posts · 7 votes
12y
Originally posted by @Jason Merchey:

Does paying 2x what you bought the house for over 30 years in interest (or even worse if it's a 30 year loan used for just 10 years - mostly interest) bother you?

Think about your return on investment. Say you pay 20k into a project (downpayment, rehab, fees, etc) the first year.

Then you are able to rent out the property for 750 a month with expenses (mortgage, maintenance, insurance, vacancy, etc) at 600 a month.

150 a month over a year is 1800 cash return (not including tax benefits.)

This 1800 cash return is a return on investment of 9% (1800/20k). Again, this return doesn't take tax benefits, mortgage paydown, or appreciation into account.

Compare that 9% return to the stock market that averages 7-9% over the long haul.

Then start to add in the tax benefits, mortgage paydown, rent increases, and appreciation into account.

Your mortgage payment will be locked in for 30 years (on a 30 year note). Your other expenses such as repairs will increase with inflation, but that mortgage won't. As time goes on, the cash flow will increase as rent increases. Each consecutive year your return on your initial investment will increase.

Are you paying more over the 30 year mortgage? Yes.

Are you making more over the 30 year mortgage? Yes.

Does the difference in what you pay and what you make add up to a bigger margin than what you would make in another investment? Most people on BP would say yes.

By investing in rental properties you are taking the risk and letting the tenants pay a premium (rent) for keeping their risk level low.

In short, I might pay double the amount in interest alone... but over the course of the mortage, I'm making way more than the interest payment. Pay more to make more.
0 Reply
David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
12y
@Jason Merchey

I can't tell you or anybody else to buy property now, but I am. I bought 23 in 2013 and have already also bought in 2014.

If you are buying for the long term, and own for 20 years, what happens in the intervening cycles of up and down have no effect on you. If you are positive cash flow and there is no reason not to be, then the market fluctuations are irrelevant.

I'm buying because I'm liking the prices now and if there is high inflation then the prices of real estate will increase. Many of the purchases are at 33% or so of the peak prices in 2008. In this area its still a buyer's market and there are still deals. Not every property is a deal and not every property is selling for 66% off, more typical are retail prices 20% off of peak. But there are still a lot of people sitting on the sidelines, which is another indicator to me that its now time for me to buy.
1 Reply
Jason Merchey
OP
Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes
12y
Good stuff. Zach, I'm honored to have been mentioned in your first EVER post ;)
0 Reply
Ryan Cameron
Investor · Philadelphia, PA · Member since 2014 · 351 posts · 80 votes
12y
Great post. The housing prices in my area are not "high", but more important is if we experience another market "slide" and lenders start to tighten up the lending criteria. As a new investor, I am not cash strong so I need financing for my deals.
0 Reply
Scott Hershberger
Real Estate Investor · Hickory Corners, MI · Member since 2013 · 9 posts · 5 votes
12y
A bit of doom and gloom for 2014, but the author makes some very compelling points:

http://www.zerohedge.com/news/2014-02-03/guest-post-warped-distorted-manipulated-flipped-housing-market

It also discusses the rise in flipping and cash real estate transactions.

Like others have said, if you buy low and hold it's hard to lose money; plus real assets are far better than paper when things start to slip =)
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