Nearing point where it makes no sense to buy more rentals
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Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
9yI can only say what I would do personally if I were you. I would sell everything you have in Seattle now. Then either wait for the market to crash again, as you stated it eventually will, and buy at a discount at the bottom of the cycle. Or I would find another market to buy where you can get more property and a higher ROI.
Not only are prices inflated due to the tech sector, the state and local government policies are geared toward political emotions, not economics. This may get them votes, but unless mathematics work differently there, it will have an adverse effect on the economy
39 Replies
- Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes9y
I can only say what I would do personally if I were you. I would sell everything you have in Seattle now. Then either wait for the market to crash again, as you stated it eventually will, and buy at a discount at the bottom of the cycle. Or I would find another market to buy where you can get more property and a higher ROI.
Not only are prices inflated due to the tech sector, the state and local government policies are geared toward political emotions, not economics. This may get them votes, but unless mathematics work differently there, it will have an adverse effect on the economy
- Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes9y
@Jack B. We're in the same boat. Asset prices are too high to make sense to buy. I believe a correction is 12-24 months away and I am advising my clients to get dry powder ready for when the buying opportunities come.
I'm not predicting a crash. I think we are in better shape fundamentally than in 2008. But I do think that this cycle is really long in the tooth and people are starting to pull back rather than buy at inflated prices. Any shock, like rising interest rates, could tip it over the edge, in my humble view.
- 9yJack B.Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votesOP
Originally posted by @Anthony Dooley:
I can only say what I would do personally if I were you. I would sell everything you have in Seattle now. Then either wait for the market to crash again, as you stated it eventually will, and buy at a discount at the bottom of the cycle. Or I would find another market to buy where you can get more property and a higher ROI.
Not only are prices inflated due to the tech sector, the state and local government policies are geared toward political emotions, not economics. This may get them votes, but unless mathematics work differently there, it will have an adverse effect on the economy
I don't think a crash is that imminent. A small correction in a year or two (2018/2019) sure, but not as big as 2008. That's still a few years off. But even with that being a few years off, buying in the next year or so is going to leave me with such a short holding period that it's not worth it after factoring in transaction costs.
Selling now could protect equity, but also is an opportunity cost, not to mention the taxes owed. When I do sell, I will have to put the money into more real estate via 1031 exchange lest I owe hundreds of thousands in capital gains and depreciation recapture. The question would be what to invest in though that is protected from down turn? I've read that storage units fared well during the down turn.
- Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes9y
@Jack B. there are plenty of areas of the country that have better stability and are not over-inflated. I would do some research on other markets to see what the numbers look like. Even in WA state, but in sub-markets outside the large metros would be less affected by a correction.
You may not think a crash will happen, but when investors like yourself are choosing to stay on the sidelines and rookie investors are rushing to into real estate investment, it sounds like more than a correction is coming.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes9y
Originally posted by @Anthony Dooley:
Not only are prices inflated due to the tech sector, the state and local government policies are geared toward political emotions, not economics. This may get them votes, but unless mathematics work differently there, it will have an adverse effect on the economy
No one can say this with any certainty. Whatever your politics, it is not coincidence (in my opinion) that the highest real estate prices in the country are, and always have been, in the most progressive (gasp: liberal!) cities and states in this country. Take your own area: if not for Auburn, Fort Benning, and eco-tourism, Columbus would still be a 19th century backwater (some would say it still is!). Someone who sold all their Seattle holdings and bought in Columbus would be seriously kicking themselves in the *** 10 years from now. Not that I'm trying to pick on Columbus, or conservative areas, just making a general point. Cities and states that are on the forefront of forward-thinking are almost always going to attract the most talent, and hence the most tech-savvy companies, and considering that is where our economy is moving, I would be far more willing to bet on where Seattle will be in 10 years than where Columbus will be in 10 years.
Skyline Properties - 9yJack B.Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votesOP
Originally posted by @Anthony Dooley:
@Jack B. there are plenty of areas of the country that have better stability and are not over-inflated. I would do some research on other markets to see what the numbers look like. Even in WA state, but in sub-markets outside the large metros would be less affected by a correction.
You may not think a crash will happen, but when investors like yourself are choosing to stay on the sidelines and rookie investors are rushing to into real estate investment, it sounds like more than a correction is coming.
Micro-economic fundamentals of supply and demand determine the market, not conjecture. Supply is limited right now and demand is high. Your statement that investors are flocking to it is just more "proof" of more demand increasing while supply is limited. A small correction will happen in 2018 or 2019 but the market will chug along just fine after that again for a few years, as that correction will be based on a mild recession only, not a balance of supply and demand. Ivy league economists with PhD's have studied this stuff, there is a science behind it, and it doesn't involve guessing.
- 9yJack B.Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votesOP
Originally posted by @JD Martin:
Originally posted by @Anthony Dooley:
Not only are prices inflated due to the tech sector, the state and local government policies are geared toward political emotions, not economics. This may get them votes, but unless mathematics work differently there, it will have an adverse effect on the economy
No one can say this with any certainty. Whatever your politics, it is not coincidence (in my opinion) that the highest real estate prices in the country are, and always have been, in the most progressive (gasp: liberal!) cities and states in this country. Take your own area: if not for Auburn, Fort Benning, and eco-tourism, Columbus would still be a 19th century backwater (some would say it still is!). Someone who sold all their Seattle holdings and bought in Columbus would be seriously kicking themselves in the *** 10 years from now. Not that I'm trying to pick on Columbus, or conservative areas, just making a general point. Cities and states that are on the forefront of forward-thinking are almost always going to attract the most talent, and hence the most tech-savvy companies, and considering that is where our economy is moving, I would be far more willing to bet on where Seattle will be in 10 years than where Columbus will be in 10 years.
That actually has little to do with politics, if it did, Detroit and Chicago would be super expensive, but they are not, just look at what Detroit has become, and more people are fleeing Illinois than coming in, due to the fact that the state is insolvent now. What it has to do with is supply and demand. The amount of habitable land in NY, CA, and Western WA cities such as Seattle is very minimal compared to say, Columbus Ohio. On top of that, these other cities are coastal hubs that were where most people migrated when there were no trains, cars or planes, just ships. Since most people never move from where they were born, it ends up that those settlers kids build huge populations in those areas, where the amount of land is limited but there is an abundance of people. It just so happened that as a result, that's where the opportunities in tech, finance, etc. arose, as that's where there were the most people, and statistically, a place with one million colonists is more likely to have a great idea that creates big business than a place where there is a tiny village of 100 people in the middle of the country. It's a matter of geographic access due to transportation at the time, human behavior and statistical probability, not politics...
- 9yThomas RutkowskiPro MemberFinancial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
@Jack B. - I am in total agreement with you. You should consider a monetized installment sale. This is a strategy whereby you can get cash at closing AND a 30-year tax deferral. Its not forcing you to sell high and buy higher like a 1031 exchange.
You can then put your money into safer, protected positions like private lending where you can protect your interest with a low LTV and still earn great returns. When the market presents good opportunities again, then you can jump back in.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes9y
^^I'm not saying that a "liberal" place will have expensive real estate (although Chicago *is* quite expensive) - what I'm saying is that when you look at the places that have expensive real estate, you will see that the vast majority of those places are progressive in nature. Certainly, geography - coastal, land-locked, etc - will play a significant factor - but I guarantee if someone plotted it they would see a significant correlation (I realize correlation is not causation). There's no real geographic advantage for Silicon Valley or Research Triangle, other than those areas have been nurtured by a pipeline of innovation through education and tech-friendly public policy. Lots of places grow population-wise but are, and will likely remain, low-priced housing areas. Look at Houston vs. Seattle. Houston is far bigger than Seattle, and is hemmed in by water just like Seattle. Leave out the MSA (though if you include it, it's even worse). Houston real estate per square foot is about $150. Seattle is $450. How about Jacksonville, also bigger than Seattle, hemmed in by water, another state, and swamps? $110 per SF. How about Denver, or Aurora, which can spread east? Both over $200/sf. Meanwhile, Colorado Springs, just an hour away from a smoking hot Denver market? 140 per SF. Now look at the political climates of all these places, and the economic drivers.
Skyline Properties - Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes9y
@JD Martin No need for mud slingin.' I am just taking the man at his word that the Seattle market is not worth buying. You could be right in your assumption that over the next 10 years "forward thinking" areas may appreciate more in value. But over that same 10 years, Columbus, GA investors are enjoying over 20% cash on cash returns lower taxes. I am just suggesting there are better markets, not trying to sell him on Columbus, GA. Less competition for me.
- Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes9y
Houston has been building more inventory over the last 10 years to the point of oversupply. There are less restrictions and lower building costs there as compared to Seattle. Seattle can only grow toward the East. Houston is growing in all directions. Not apples to apples.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes9y
Originally posted by @Anthony Dooley:
@JD Martin No need for mud slingin.' I am just taking the man at his word that the Seattle market is not worth buying. You could be right in your assumption that over the next 10 years "forward thinking" areas may appreciate more in value. But over that same 10 years, Columbus, GA investors are enjoying over 20% cash on cash returns lower taxes. I am just suggesting there are better markets, not trying to sell him on Columbus, GA. Less competition for me.
Sorry, I wasn't mud slinging, or at least didn't mean to give the impression that I was. I actually have been through Columbus and other than it being hotter than hell in the summer it's really not a bad place to be. I could have easily picked a hundred other places but just used it for illustration. And I agree, one can do well in conservative areas (I live in one, and I have done well) - but being realistic about the kind of appreciation we are going to realize. Even if all of my houses double in 5 years - and we are growing, so they just might - dollar for dollar Jack B is going to smoke me in appreciation. That's just the nature of the market. But I live where I live, so I play in my sandbox. Jack has to play in his sandbox.
Skyline Properties - Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes9y
Originally posted by @Anthony Dooley:
Houston has been building more inventory over the last 10 years to the point of oversupply. There are less restrictions and lower building costs there as compared to Seattle. Seattle can only grow toward the East. Houston is growing in all directions. Not apples to apples.
It's apples to apples when you leave out the MSA, which is why I did that specifically; let's only talk about the inside hub, the "city" as it were. You could say the same thing about NYC, but if I were discussing it I would be referring only to Manhattan, or maybe the 5 boroughs.
Skyline Properties - Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes9y
Even inside the city. Jack said there is limited supply. Houston is building beautiful high rise apartment buildings down there and it has kept rent and values lower vs no new inventory in Seattle. The video link below shows an inside look at the Houston market. If I had a million in cash, I would invest in the market that I know best.
https://www.youtube.com/watch?v=aF-1iyaj6AQ
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @JD Martin:
Originally posted by @Anthony Dooley:
Not only are prices inflated due to the tech sector, the state and local government policies are geared toward political emotions, not economics. This may get them votes, but unless mathematics work differently there, it will have an adverse effect on the economy
No one can say this with any certainty. Whatever your politics, it is not coincidence (in my opinion) that the highest real estate prices in the country are, and always have been, in the most progressive (gasp: liberal!) cities and states in this country. Take your own area: if not for Auburn, Fort Benning, and eco-tourism, Columbus would still be a 19th century backwater (some would say it still is!). Someone who sold all their Seattle holdings and bought in Columbus would be seriously kicking themselves in the *** 10 years from now. Not that I'm trying to pick on Columbus, or conservative areas, just making a general point. Cities and states that are on the forefront of forward-thinking are almost always going to attract the most talent, and hence the most tech-savvy companies, and considering that is where our economy is moving, I would be far more willing to bet on where Seattle will be in 10 years than where Columbus will be in 10 years.
You make a good argument on the demand side ... I would also add that these types of more liberal markets tend to also put in more restrictive building regulations, which also reduces the supply side for a double whammy. Then as prices rise, they put in place rent control, which further restricts supply and IMO and experience has the opposite effect that it is intended to over the long run. The downside of course is that the cash flow in the short term can be tough, and an investor needs to learn and get skilled at navigating all of the extra regulation, so there is never any free lunch ...
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes9y
Originally posted by @David Faulkner:
Originally posted by @JD Martin:
Originally posted by @Anthony Dooley:
Not only are prices inflated due to the tech sector, the state and local government policies are geared toward political emotions, not economics. This may get them votes, but unless mathematics work differently there, it will have an adverse effect on the economy
No one can say this with any certainty. Whatever your politics, it is not coincidence (in my opinion) that the highest real estate prices in the country are, and always have been, in the most progressive (gasp: liberal!) cities and states in this country. Take your own area: if not for Auburn, Fort Benning, and eco-tourism, Columbus would still be a 19th century backwater (some would say it still is!). Someone who sold all their Seattle holdings and bought in Columbus would be seriously kicking themselves in the *** 10 years from now. Not that I'm trying to pick on Columbus, or conservative areas, just making a general point. Cities and states that are on the forefront of forward-thinking are almost always going to attract the most talent, and hence the most tech-savvy companies, and considering that is where our economy is moving, I would be far more willing to bet on where Seattle will be in 10 years than where Columbus will be in 10 years.
You make a good argument on the demand side ... I would also add that these types of more liberal markets tend to also put in more restrictive building regulations, which also reduces the supply side for a double whammy. Then as prices rise, they put in place rent control, which further restricts supply and IMO and experience has the opposite effect that it is intended to over the long run. The downside of course is that the cash flow in the short term can be tough, and an investor needs to learn and get skilled at navigating all of the extra regulation, so there is never any free lunch ...
Agree 100%. Lots of times the cures have completely unintended consequences. Proving that if enough people demand a market, there's going to be little, short of directly owning and providing the housing at subsidized rates, that a local government can do to decrease the cost of housing. It's probably more effective for said government to put its efforts towards maintaining and attracting high-salary businesses than to interfere too heavily in the price of housing. The problem is eventually self-solving anyway; if a place becomes too expensive for the lowest-paid workers to stay, then businesses will either have to raise salaries to attract workers from further away or they will close up shop, starting a chain that drives down demand and makes housing more affordable.
Skyline Properties - Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
I think it depends on your time horizon Jack. I would agree that in the short term, we are likely closer to the top than the bottom on most of the West Coast and many other RE markets. So, in the short term I would not expect continued appreciation rates like we have seen the last few years, and may even see some decline though not as much as the great recession IMO. So, if your time horizon is 1-2 years, then yes it may make sense to sell now and lock in your gains.
However, if your time horizon is 10-20 years, then I think it makes sense to hold if you are willing and able. Though there may not be much juice left in this current cycle, I still believe in the long term fundamentals of high demand and perpetually limited supply are still going to average out to a very nice return in the long run (with some short term volatility.
To illustrate this point, I have a story for you. My parents bought a triplex in the 70's for $75k and sold it several years later for $150k because they had a lot of appreciation and thought that there was no way it could go up more ... they were right in the short term, the market stayed flat for several years after they sold. That triplex was a few blocks from the ocean in Redondo Beach ... so, they were right in the short term, but very wrong in the long term. Depends on what your time horizon is.
One thing is for sure, though, transaction costs and capital gains taxes (if not 1031 exchanging) will be a significant hurdle to overcome ... so if you sell you need to be REALLY right on the timing, direction, and magnitude of a correction to come out ahead and overcome those transaction costs ... so, I think it is smart to slow down on the acquisitions side if you can no longer find deals that make sense, and store up some "dry powder" by saving that investment money, but I sure would be very hesitant to sell for the reasons mentioned above.
- 9yLevi T.Pro MemberRental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
Originally posted by @Jack B.:
I've considered selling some rentals and buying two rentals with the money from each. I did that with one rental earlier this year. But with the market likely having only a few years to go before another correction, there will soon be a cutoff point where if I buy rentals after that, I likely won't be able to hold long enough to make any money, accounting for transaction costs buying and selling. Even with the appreciation during those few years, I'll likely just break even.
As much as I would have liked to keep buying another house every year or so, I guess I'm getting to the point where I'll just have to pool money for buying at bargain basement prices again.
Is anyone else thinking the same thing? It's not about predicting the market so much as not taking on too much risk. Sooner or later this market will go through the cycle again, and nobody ever went broke taking a profit and reducing risk.
What if you bought every house for $1, no matter if they are worth hundreds of thousands of dollars. Yes I know that's not a reality, but what if you could, what if you did. You would keep buying forever, and never ever worry about what the market is doing, right?
I'm sure you answer would be an astounding Yes, if such a dream could come true... and that, in itself, is the answer to your problem. What is the magic number that you would keep buying no matter if the market was going up, down, or sideways.
That magic number is the price you need to be buying always, because market pricing does not matter, it is only a concept of what a person perceives something is worth, not what it is worth. You can test this by knocking doors, and asking people what they think a house is worth in a photo, they will all give you a wild range.
When you truly understand that construct, and apply it, you will buy properties well below market value no problem, all day long, and put all this silliness behind.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes9y
So do you also think that interest rates will stay this low when and if prices soften? Do you also think that prices will soften enough to eliminate the time value of the mortgage debt reduction against the property?
District Invest Group545 Reviews - Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes9y
Consider an alternative form of investing such as HML. Returns can be great and you won't have to deal with toilets and tenants.
- 9yJack B.Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votesOP
Originally posted by @Thomas Rutkowski:
@Jack B. - I am in total agreement with you. You should consider a monetized installment sale. This is a strategy whereby you can get cash at closing AND a 30-year tax deferral. Its not forcing you to sell high and buy higher like a 1031 exchange.
You can then put your money into safer, protected positions like private lending where you can protect your interest with a low LTV and still earn great returns. When the market presents good opportunities again, then you can jump back in.
Thomas, I'll be in touch. Once in a while I run across a great post/email from a guy like you and it makes the forums worth it. Thank you!
- 9yJack B.Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votesOP
Originally posted by @David Faulkner:
I think it depends on your time horizon Jack. I would agree that in the short term, we are likely closer to the top than the bottom on most of the West Coast and many other RE markets. So, in the short term I would not expect continued appreciation rates like we have seen the last few years, and may even see some decline though not as much as the great recession IMO. So, if your time horizon is 1-2 years, then yes it may make sense to sell now and lock in your gains.
However, if your time horizon is 10-20 years, then I think it makes sense to hold if you are willing and able. Though there may not be much juice left in this current cycle, I still believe in the long term fundamentals of high demand and perpetually limited supply are still going to average out to a very nice return in the long run (with some short term volatility.
To illustrate this point, I have a story for you. My parents bought a triplex in the 70's for $75k and sold it several years later for $150k because they had a lot of appreciation and thought that there was no way it could go up more ... they were right in the short term, the market stayed flat for several years after they sold. That triplex was a few blocks from the ocean in Redondo Beach ... so, they were right in the short term, but very wrong in the long term. Depends on what your time horizon is.
One thing is for sure, though, transaction costs and capital gains taxes (if not 1031 exchanging) will be a significant hurdle to overcome ... so if you sell you need to be REALLY right on the timing, direction, and magnitude of a correction to come out ahead and overcome those transaction costs ... so, I think it is smart to slow down on the acquisitions side if you can no longer find deals that make sense, and store up some "dry powder" by saving that investment money, but I sure would be very hesitant to sell for the reasons mentioned above.
VERY good points David, why don't I see more brilliant posts like this here? That's a great story, and does make me think about things...
- 9yJack B.Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votesOP
Originally posted by @John Thedford:
Consider an alternative form of investing such as HML. Returns can be great and you won't have to deal with toilets and tenants.
Do you take collateral if they default? How much money do you usually need to get started? I presume attorneys do all the legal work for the contract?
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes9y
Originally posted by @Jack B.:
Originally posted by @John Thedford:
Consider an alternative form of investing such as HML. Returns can be great and you won't have to deal with toilets and tenants.
Do you take collateral if they default? How much money do you usually need to get started? I presume attorneys do all the legal work for the contract?
1st lien mortgage position. The more cash the better. I don't write loans under 50K and those don't make a lot of money but the % is strong. I absolutely have everything drawn up and recorded at closing. You would need to learn your state laws and make sure you stay in compliance. The least return I get is 16.5% per anum and many go higher due to early payoff. My rentals don't make near that:)
- 9yJack B.Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votesOP
Originally posted by @Russell Brazil:
So do you also think that interest rates will stay this low when and if prices soften? Do you also think that prices will soften enough to eliminate the time value of the mortgage debt reduction against the property?
Not sure who this was addressed to, but I'll chime in. The Fed has historically raised interest rates very high to slow down the economy, and reduced interest rates to stimulate it. We saw them increase rates astronomically in the 80's to slow down inflation, and reduce them drastically during the great recession to stimulate the economy. It's part of the natural fundamentals of economics with any country, such as GDP, national debt, etc. Interest rates are one of those factors that you look at as well when determining whether to invest in foreign markets as a corporation.
I think they may slow down the interest rate rise in the next couple years when we have a slight correction in 2018/2019, but that will only be caused by a mild recession that we are due for due to the natural cycle, usually within 36 months of hitting 5% unemployment. But it should be a mild and short recession. If anything, I think they may keep rates from rising too much during that time, but unlikely to reduce, though not impossible.
During that recession, the values won't soften enough to eliminate the time value of the mortgage debt reduction against the property. In my area, the historical average appreciation is above inflation, so as long as you didn't buy at a peak, you should come out ahead over 30 years once the mortgage is paid off. But, that also factors in many other things, cash flow, any capex such as bathroom and kitchen remodels, roof, plumbing, etc.
The big drop will come years after the recession of 2018/2019. We still have a few boom years post that recession before the big drop. There are economic fundamentals that can be used to predict with relative reliability, the next major down turn. But one has to monitor them constantly to see how they are changing over time. If one can buy low and sell high, then wait until the market bottoms out again, your profits will increase drastically. I waited to buy a house until after the crash. Not in 2009, 2010, etc. like so many people did for that tax break, only to watch their newly purchased properties to keep going down in value.
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