How long will this opportune time to buy rentals last?

Question

I have a lot of questions about buying rentals but I guess it really comes down to how long will this cycle last to be able to purchase property so cheap?

I ask this because I am starting to finally get cash coming in from other projects and my end goal is to have passive income coming in as a security blanket of sorts. I wish I would have been at this stage a year or two ago, but what are you going to do? I guess my questioning comes from my lack of experience in a sellers market. I know you can still acquire rentals but they must be so hard to find at prices with a deep enough discount, especially if you were to compare to our current prices today.

Would it be smarter to continue to build the fix and flip business and hold on to cash and try to leverage the money into a way of lending and then go wild when the market turns down again? I feel like such a newbie asking this question but I guess that's what this is for.

Thanks for your help in advance!

Don Konipol · Answer

Nobody really knows what the future holds, we can only make informed guesses, which often turn out to be at least partially wrong.

You need to figure your return on investment via fix and flip vs your return from rentals.  Of course, with rentals you will need to included any anticpated value increases as well as net income and any equity buildup, and subtract deferred maintenance.  Chances are your fix and flip business offers returns superior to the rental business.

The exception to relying totally on the results of this analysis are

1- you want to hedge against hyper inflation in which hard assets with flexible rental rates are superior

and/or

2- you want rentals for diversification away from your fix and flip business.

As a wealth accumulation tool the buy and hold strategy is not quick; it is however tested and of a high percentage of success.

Bill Gulley · Answer

I agree with Don, without any buts at all.

RE is cylical and sensitive to local conditions. Even if we were to say this buyers market would remain for 2 years, 4 months and 3 days, it wouldn't do you any good to know that as you could always look to some other markets. RE is local

If you would define what you mean by your finance/lending thought be happy to address it.

There is about a 5 to 7 year cycle in RE where prices catch up, with stagnet periods and then swing the other way. There are also micro swings within these spans as well, but not as significant. Weather play a role in most areas, people don't usually want to move in snow, in some places August can be slow due to heat. School years make a big difference with kids being able to move in or out of a school system.

I'd suggest you study your local markets or farm areas. IMO it also depends on what you're looking at, rents usually follow sales and new starts rapidly increasing usually depress existing sales. Appreciation has to be viewed over decades.  The size of your farm area influenced by population is a good indicator or changes. Too much to mention really, but RE is local.

Matt DuSold · Answer

Man a lot of good thoughts here, that's what makes this a great place!

Bill, as far as lending, I know people would want money at 10% or maybe even hard money. I haven't thought about it too hard just a thought of income if prices for a rental were too high. I may even like JV'ing on deals more. I like the teaching aspect and would love to teach people in a non guru way but making it a win win for everyone. Just a thought.

I guess I never really kept it simple, if the numbers work the numbers work no mater what market conditions are. If I can comply with a 40-50% (controversial I know) and rent for 2% of purchase price there is no reason to pass it up.

Thanks for the input everyone!

Ken Latchers · Answer

Timing the market is popular for stocks, but it oes not really work.

As for real estate, whatever was true in the past may not have any meaning in the future.

You can gather all the opinions you want, but it will not make you any money. There are a lot of variables - world economy, interest rates, mortgage rates, banks' willingness to lend, rents giong up and down, local markets.  I highly doubt anyone can answer your question with other than a guess...

Gidon Freidfertig · Answer

As we see now the tide is turning in spite of federal economic policy to make America a "fair playing field" which is contrary to anything capitalistic in nature. If Romney is elected President look for price increases and a more crowded market with lower ROI in the rental market. At the same time geopolitical forces (war with Iran and unstable middle east ) could cause further economic weakeness and uncertainty will cause a hold on any growth and more buying opportunity. True growth will happen at the end of the next Presidents term in office around 2015.

Andrew Jones · Answer

I have been asking myself this same question. The market definitely has picked up, but the rent to price ratio is still good in my market. In rental neighborhoods price greatly depends on what investment returns investors are willing to except.

Mike Jakobczak · Answer

I think you should always be building your portfolio yearly and shouldn't worry to much about timing the market.  Obviously when you see an opportunity in a market, such as now you act on it a little more aggressively.  Real Estate has a lot to do with location and even in the recession you still had some places hold their values due to the strategic area the properties are located.

Ryan M. · Answer

Rents are increasing which makes paying more still fine. Once rents lag far behind and values go crazy it is time to unload.

Don Konipol · Answer

Books have been written about "timing" in real estate investing, but Bill just covered all of it in a few paragraphs.

Since all real estate is local, there is no "one size fits all". Family friends of ours found a "great deal" on a 6500 square foot house on an acre and a half lot in Bloomfield Hills Michigan in 2002.  They got it for "$200K under market" by all analysis.  Put $100,000 + in improvements.  Total paid was $1,640,000.00.  Two years ago they short sold the property for $315,000.00, wiping out their $440,000 down payment and their $100K improvements, and wiping out $800K of the banks loan!

Matt DuSold · Answer

Charles- I agree it seems it is starting to pick up here as well. Property is moving quicker and it seems money is becoming easier to get.

Dan- I think you are right on. The main reason I would want to acquire rentals is for diversification. I guess I have t weigh how badly I want that, and I don't think I want it bad enough to make a "poor" investment.

I guess my questioning stems from my age, how long are we typically in a buyers market or sellers market? I know the boom happened in 2005 and we are just now recovering from it (possibly) although I know many people say we will never have anything this bad again. I was in highschool as the market was going up and back then I probably had no idea what any of this meant so I am a little uneducated on the subjerct. Looking at past data, on 20 year increments so I could be wrong, it seems like there is a swing roughly every 5 years? I know I am asking a lot of questions that are hard to answer, I am just trying to figure out what my best long term strategy is.

Thanks for the help again!

How long will this opportune time to buy rentals last?

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