As a buy and hold investor, would you invest in today's market?

Question

I found this article today on chase.com that provides 6 nice charts that indicate that the housing market has recovered from the recession. The basic highlights are that house sales are up, house prices are back to their pre-crash values, foreclosures are down, and the number of cash-only investors are also down. Buying property in this market, in my mind, would seem like buying a stock at the top of a rising market (doesn't adhere to the buy low sell high strategy).

However, for a buy and hold investor, as long as you find a deal where the numbers work, do you care what state the market is in? I would consider short term appreciation (5-10yr) to be very volatile so that would be a down side but you could always just keep the property cash flowing when the market is down.

What do you guys think?

Account Closed · Answer

The trick is to find property that will always be in demand by tenants.  If the property is in a one company town, and that company closes their facility, you're in trouble.

I managed a 26 unit building through the crash.  It happened to be across the street from a private university campus.  The owner had sworn off students, as of course, undergrads are a pain.  But, we lost the market for his usual targeted tenant - the single working tenant (most units were small studios).

We ended up looking at students again, because the students need housing, regardless of the local economy crashing.  After trying renting to different types of students (I could tell you stories!), we discovered that we loved law students.  So, we targeted the law school on campus.

But, my point is, that property is next to a very successful, growing university that isn't going anywhere.  Regardless of the economy, students will be attending that university and will need housing.

There will always be a market for rental units.  The trick is to find property where it will always be in demand, regardless of what happens to the economy.

And, of course, to be able to be confident you should always be able to demand rents high enough to at least pay your costs, and hopefully, a good deal more than that.

So, it doesn't really matter the cost of the property - if you can feel confident about the future demand for those units, and that you can still make money after paying the bills.

I hope that made sense :-)

Paul C. · Answer

Yes, the market has recovered and then some. Moodys RCA/CPPI index (repeat sales index) for almost all property types is higher than the 2007 peaks, especially MF.

Overall I'd agree. However, I view the equity market as efficient and the RE market as inefficient. Meaning, the state of the market isn't as important in an inefficient vs. efficient market. All shares of GE are created equal, while not all single-family homes/duplexs/etc. are not.

Rich Baer · Answer

@Kevin Longeuay

The market for retail has clearly topped and it won't take much to pop it especially if Trump wins. I have stopped buying properties to renovate and sell but I continue to buy long term rentals. They can be purchased in any type of market. Just find what works for you. Remember that when the market pops you will be able to find many more cheaper rentals as 50% of today's investors will disappear just like in 2008.

Account Closed · Answer

The easiest way around having to consider all students, is to only advertise where your targeted students are.  I went to the law school and asked them if I could have permission to post a flyer on a bulletin board somewhere.  The administrator in charge of helping first year law students told me she'd be happy to advertise my vacancies on the law school's facebook page!  The angels sang LOL.

The campus didn't have enough housing for incoming law students, and they wanted to be able to help students find good housing.  Our building was across the street from campus and offered tiny studios.  It was just a perfect win-win.

That university also has an off-campus housing website that allows landlords to list their units.  And it actually has a choice of who you would accept - undergrads, grad students, staff, etc.  Which is probably not really legal, but I used it since it was there :-)

But, yes, you can make your criteria anything you want - as long as it's not discriminatory against the protected classes.  And requiring that your students are in good standing with even a particular GPA, etc., is perfectly legal.

I also did not allow co-signers for any tenants - students or otherwise.  I just learned that they're worthless anyway, and if the co-signer is mommy, mommy will quite possibly be a pain in your butt.  I only wanted to deal with the tenant, so I only put the tenant on the rental agreement.

For full-time students, I did not require proof of income.  This is how I got around the no-cosigner criteria for students.  I had separate criteria for my full-time students.  Applicants who were full time students in good standing had one set of criteria.  Everyone else had a different set of criteria.  I believed this was legal and that I could argue the need for the different criteria.  I didn't want mommy on the rental agreement, and in order to do that with full-time students, I made my criteria for them that I did not require proof of income.  I told them I don't care where the rent money comes from, but it's their responsibility to get it and to pay it to me on time.  I required proof that they were students in good standing (or that they had been accepted for law school full-time), and I still ran their credit checks, eviction checks, etc.

Plus, the university was a very expensive private university.  Any student who was going there had money backing them up.  A couple of my student tenants were living on their financial aid, and I did let them pay rent late if their FA checks were running late (which I would get them to verify with a letter from the FA office).  But, they always came through.

Part-time students had to prove income like any other non-student applicants.

I also only did month-to-month agreements, so if they were a problem, I could just give them 30 days notice to move.

I never had problems getting the rent paid by students.  I did send a mass text reminding all my tenants when rent was due, because the law students were so exhausted, they'd just forget to hand me the check that was sitting on their desk.  They thanked me for the reminders and always paid.

But undergrads - unless they are foreign students or engineer students - are a trainwreck.

I found MBA students to be short-term renters, but otherwise not a problem.  Art/Theater/Drama - run the other way LOL.

I've heard that med students are also great.  But, the key is to just advertise where your target tenants will see the ads, if at all possible.  That's legal.  Putting in an ad that you only rent to law students could be problematic.  So, just advertise where your target tenants live.  There's no law that tells you where to advertise.

And if you offer a rent credit to the grad students of $100 if they refer a new tenant to you that you rent to - you'll end up with a waiting list.

And let them sublet over the summer to another grad student.

I think I'm repeating myself, but I'm too lazy to go back and see what I wrote in my previous post :-)

Kevin Longeuay · Answer

Interesting takes on the market... Good to hear from both sides that the rental property is still considered a good investment as long as the deal is good and the property is in a good local market.

@Joe Splitrock As far as looking at the underyling local economy, I've been able to find data on population growth from the census bureau but it seems much more difficult to find data on job growth. Any pointers? Also, are you mainly looking at those numbers from a long term stability standpoint? I.e., growth over a 10+ year span or just looking at recent growth (1-2 years) to indicate a potentially increasing/decreasing market?

Joe Splitrock · Answer

How is it that Trump accelerates a market crash? I am not entering into a political debate here. It is just that market cycles run past presidential terms and are influenced by many factors. For example if we enter a recession the first quarter after Obama leaves office, it was not caused by the new president. Economic policy takes months or years. I just don't see how Trump or Clinton will have immediate negative or positive effect on the housing market. You could argue consumer confidence can be affected short term, but much of the country could care less who gets elected.

The millennial generation is buying houses and as more of them start families, they will be upgrading houses. I think that will fuel the market and I foresee a flat line rather than crash.

To answer the OP, yes I would invest in today's market and I am. The time value of real estate and using other people's money to acquire property has huge benefits, even if prices are recovered. At the same time be careful because certain markets are too inflated. You have to look at the underlying local economy - jobs and population growth are good indicators.

Kevin Longeuay · Answer

Sue K. I'm not familiar witht he RCA/CPPI index, could you elaborate a bit more on what that is and how you use it as a market indicator?

Joe Splitrock · Answer

@Kevin Longeuay I am looking at my local economy and getting information from the business news. My plan is to hold properties 10 years or longer, so even if housing prices dip, I am not concerned in the short term because I have cash flow. In my market a house may dip from $150K in a good market to $135K in a bad market. California will see much larger growth and much larger dips. It is all very much local.

Joe Splitrock · Answer

I am not saying you are wrong my friend, just not sure it is that easy for anyone to predict. What happens if Clinton wins, then still Bushes fault? This blame game is too exhausting for me.

I am convinced I can prosper in any market, so I kind of don't care.

As a buy and hold investor, would you invest in today's market?

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