CoC returns in todays high rate environment?

[Daniel Netzer]

What's a reasonable cash-on-cash Short Term Rental return with 7.5% rates nowadays? Feels like 12-15% is solid, while we expect to refinance in the years ahead at a point or two lower. Any strong opinions? 

[John Carbone]

Quote from @Luke Carl:

When my parents bought their first house their rate was 22%

These rates aren’t high. It just happened quickly. 

I hear this argument all the time from people but it is a loaded answer. What was the asset price of your parents home when they bought and what was their household salary? The old timers I talk to usually have a story of “I made 20k a year and my house was 60k”, now you talk to younger kids who don’t already own a house and they are making 60-70k in a decent job but they are needing to pay 500k+ and they are spending half of household income on shelter. I’m sure you know what needs to happen in the long run to get things to equilibrium. 

ever since the fed started raising rates the market has been predicting a stop and rate cuts since we were at a 3-4 percent fed funds, now we are nearing 6 percent and no guidance on cuts, but the “market” still doesn’t believe it. It’s the belief that rates will go back lower that is keeping asset prices higher. If we had 22 percent mortgages like your parents did (even 6-8 percent) and the duration was known to be several years of it, asset prices would collapse 50 percent in both stocks and real estate. 

Notice how in every cycle the cost to own dips down to at or below the cost to rent. Cost to buy right now is parabolic relative to cost to rent. So either rents go much higher, which if that happens, the fed will keep raising rates because they are fighting inflation and shelter is their biggest culprit right now.