All Forum Posts by: Justin Colletti

Real estate often does outpace increases in the CPI yes, but that's not the same thing as "inflation", at least by the better, classical definitions of the term.

For an improved view of the picture, compare the cost of the median US home to other assets. For example, the price of gold, the price of stock indexes, the price of commodities and so on, and you will find that despite the recent nominal increases, US real estate is actually closer to its historic lows than its historic highs.

Here's a chart that is particularly telling in my view: The Case/Shiller housing index relative to gold. It tells a similar story to the chart shared earlier of the Shiller index relative to M2 and income, but even better in my opinion, as average wages can also fluctuate in real value:

Here's a closeup of the past 60 years or so:

A confounding factor here is that although home prices are actually down in real terms, rents and wages are also down in real terms compared to historic highs.

Yes, so called "appreciation" in most homes is almost entirely a function of inflation... with a few small caveats.

Houses are depreciating assets. Relative to when they were new construction, they become worth less over time.

This is why you can depreciate your properties on your taxes. It's because they are indeed depreciating assets! :-)

The caveats here are:

1. The real rate of currency inflation (which is NOT measured by the CPI) in many periods is likely to be higher than the interest rate on your loan. 

This means that your deal gets better over time because you are paying back your loan in currency that has lost value at a rate faster than your interest rate.

This is an artifact of pure fiat currency systems that advantages debtors/borrowers over savers/lenders.

So, while not technically "appreciation" of the house itself, it is depreciation of of the loan, making you richer than you would otherwise be. Unfortunately, this occurs at the expense of savers/lenders, which is a major flaw in the current monetary system.

2. The area that the property is located in could become more desirable, increasing the property value.

But this is NOT the house itself appreciating in value. It is the property on which it is located increasing in value due to increased demand for land in that area.

All else being equal, the house on that same land would be worth more if were just built than if it were 60 years old with 60 years of wear and tear.

3. At a certain point, perhaps there is SOME genuine appreciation in value if a home is of historic significance ore desirable BECAUSE of its age... but that's arguable.

This is potentially a bit misleading, and is arguably not all "appreciation" at all, because a tremendous amount of work and costs in maintenance and repair must have gone in to making the house a more desirable asset in spite or because of its age.

If a house sells at a premium because it's a rarity, in amazing shape for its hundreds of years of age, this was only made possible by tremendous additional costs laid out over the years. So did it really "appreciate"?

Despite popular belief at the moment, housing prices have not "appreciated" that much in real terms, despite recent price increases.

But don't take my word for it! You can easily confirm for yourself that housing has not gone up that dramatically in real terms in recent years.

For a better view of the picture, compare the cost of the median US home to other assets: For example, the price of gold, the price of stock indexes, the price of commodities and so on, and you will find that despite the recent nominal increases, US real estate is actually closer to its historic lows than its historic highs.

(I can help you find charts showing this if you need any help. Just let me know!)

What makes real estate seem relatively expensive is that wages and rents are down even more than home prices in real terms.

All this becomes a lot more clear when you stop measuring home prices only in dollars, which fluctuate in value, and instead cross reference them against other assets, especially against other real assets, preferably those with relatively stable values over time.

Hope that makes sense!

-Justin

It's crashing right now. The high end real estate market has dropped dramatically. People don't talk about it. But that's where it starts.

Inventories are starting to build, and prices are coming down in the most expensive areas. California in particular is seeing some of the worst real estate sales since the crises in many areas. We're starting to see compression in New York and in the commercial markets.

One factor however, is that houses aren't actually that expensive, priced in a stable monetary baseline, like gold. (Try a site like stockcharts.com or pricedingold.com to see that for yourself.) What's anomalous is that rents are extremely low compared to carrying costs.

So could housing crash down? Yes. But I think it's somewhat more likely that rents (and taxes and energy and other carrying costs) all go up while home prices continue on as "normal" in nominal dollar-denominated terms.

Hope that helps!

Absolutely I am preparing for it, yes. We are overdue for one.

Current yields are pathetic at this point. There is very little value to be found in any conventional cashflowing investments at this point, outside of a few select local markets. And euphoria and optimism are high (as evidenced by  some comments in this very thread!) This is always the case before a crash.

How soon will it come? Impossible to say. Could be 2 years. Could be far less.

The difference with this next crash however, is that this one could be inflationary, like the 1970s. We could very well see another "silent crash" where asset prices remain elevated, while the price of everything else rises around them.

If that occurs, you still lose purchasing power by being in bad investments. You just don't lose in nominal dollar amounts. But the actual losses are still very real indeed.

That said, if you find a deal that pencils out well with a good margin of safety, go for it. A great deal that actually cashflows reliably always trumps general market conditions. The trouble is finding them, without compromising where you know—deep down—that you shouldn't be compromising.

Hi @Myles Ellison, yes we are absolutely loving it here in Keene. Great area. Prices in the northeast are a little high from an investor's perspective these days (as I'm sure you well know) but they are a lot closer to being rational here than where we came from in NY and NYC!

Some single family properties around here can actually pencil out around break-even sometimes, even in decent areas, which is very nice for a regular homeowner in market like today's. And every now and then, you can find a deal that makes sense as an investment, too.

I've seen some deals in multifams that pencil out OK, particularly in neighborhoods that could use a bit of little love. I'm evaluating some right now, actually! Ideally, we'll be able to add a property or two a year to our portfolio, but we are pretty picky about deals.

My best guess is that in future years, rents will continue to creep up in smaller cities like this one, eventually making investment real estate at current prices seem more reasonable. So as long as you have a plan for rising utility costs, and have enough of a cushion in your cashflow assumptions to ride out bumps along the way, that could make low-but-positive returns today look like better-than-expected returns tomorrow.

But that's all just rank speculation on my part! The opposite could always happen, so we like to make sure that there's a good margin of safety in any potential deal. One problem to be aware of is declining admissions at Keene State, which is one big driver of the rental market in the southern downtown Keene area. Fortunately, there are other factors driving the economy here, and a very rich community of small and independent businesses—especially compared to a lot of the rest of the country.

There are investment risks, as there are anywhere, but a lot of wonderful potential as well if you're smart about it. It's also just a darn great place to live! Just as long as you aren't planning to come in and vote to raise our taxes, New Hampshirites are a very welcoming bunch, I've found! :) Feel free to reach out anytime and say hello.

Hi @Jason Woodson, yes! We are up here in a duplex in West Keene, actively looking for new multifam and commercial properties in the area. Couldn't have picked a nicer place to live! Please feel free to reach out directly anytime to say hi.

Hi Megan,

The wife and I looked very seriously at Saugerties for a long time.

First the positives: Saugerties is geographically beautiful, and has a great downtown.

It is a little depressed in spots, and like much of New York, the properties tend to be quite a bit overpriced compared to rents, and once you factor in property taxes and other costs.

It could probably make a very nice place to live, and we almost pulled the trigger on a place there before deciding to move to New Hampshire instead.

So why didn't we buy in Saugerties? Because, in our experience, very few homes we might have been comfortable owning in that area currently make any sense from an investment standpoint.

You're just not likely going to be able to buy a place there right now and have it cashflow as a rental property or BRRR, or have it pencil out anywhere near being a profitable 70% ARV flip.

In our experience, the rents just aren't high enough, and the home prices just aren't low enough—even when they need a lot of work.

Some eventually sell for far below their ask and may be an OK deal then if you're savvy enough to make that happen. I recall one property that was originally priced at $150-$170k, and we penciled it out as being worth about $50k-$70k for a modest return.

It stayed on the market for more than a year before it eventually did sell for closer to the $50-$70k range to someone brave enough to wait and wait and then bid super low. So there is always a chance of finding something.

That said, there may be exceptions, and things may have changed from a couple years ago. But we ran the numbers on about a hundred places and came up pretty empty compared to where we wound up in New Hampshire, where properties penciled out much better.

(I have come to think that New Yorkers are a little delusional about their property values. As a life long New Yorker till now, I get to say that :)

That said, Saugerties is a lot better on all these fronts than say, Westchester, or some of the even more developed upper Hudson valley towns where home prices are completely divorced from rents, and only speculation (or habitation for your own personal enjoyment) is possible as a strategy.

If you're talking about investing, rather than speculating however, the game around that general region seems to be buying rental units in C or D properties in C or D neighborhoods and finding renters who can pay modest rates based on welfare payments.

That's not something we wanted to get involved in personally. Even then, I'm not sure the cashflow is tremendous in the region, though there are probably exceptions and some people probably do quite well.

Well, that's quite a bit of typing. But I hope that helps! Your experience may differ. And your luck as a speculator may be different than for a pragmatic math-loving investor. Good luck! Please let us know how it turns out.

Thanks for the warm welcome Chris! I'll definitely touch base as we get settled up there. Will be starting to do the father thing up there myself. New territory that I am very much looking forward to!

(accidental duplicate)

Hi Bradley,

Would be curious to hear more about what parts of these towns you might suggest avoiding.

The wife and I are looking in Keene at the moment, and are trying to stay away from the flood zones and the more run down blocks in north and east Keene as we get started.

That said, I'd imagine that at the right price and with the right insurance, some of those properties could work out long term for some investors?

Those particular areas seem like a little much for us to start with at our experience level, but I wonder if they work for other investors, or if it's more of "steer clear" scenario. What do you think?

Thanks for sharing your insights on it!

PS: I very much like the idea of helping to revitalize some of these areas over time. We're both active small business owners, and though we don't hire a ton of people in our businesses currently we do hire some and, I figure every little bit helps!