All Forum Posts by: Sebastien Hitier

I take your point that people invested where they were comfortable. What is your data source concerning under 1000 doors investors?

Hi @Michelle Bright, thanks for the reference, what episode do you recommend?

I side with @Robert Leonard on this... 

It does not matter so long as yields are below 3%. Your time is best employed on selecting better long term investment, and then better purchase and mortgage terms. The savings yield on a emergency repair money has to be a rounding error of the return on your investment.

Hi @Jia Liu

welcome to BP. I only ever saw 2 kinds of rent to own:

• where the landlord/seller gets the wrong terms because option price near market value and rent is actually counted towards purchase price, causing the option to be absurdly undervalued: seller keeps all the risks and the buyer gets all the upside.
• where the tenant/buyer gets an absurdly high price and none of the rent is counted towards market value.

To help with a more precise answer, which side are you on and what kind of terms (maturity, discount rate, and market appreciation rate) are you talking about?

People use financing because (a) they need it to afford more investment (enabling) or (2) to improving the ROI of their investment (enhancing) in case the anticipated yield of the investment (cap rate) is higher than the mortgage rate.

In one case, financing is enabling the transaction, in the other case, it is enhancing the transaction. 

Numbers do matter: financing will have catastrophic effect on your ROI if the net yield of the investment (including repairs, vacancy, market value change at disposition) is lower than financing rate.

Optimistic use of financing is conducive to ruin (you may call this reckless after the fact). You need to be especially wary of features such as refixing rates and balloon payments.

For less risky real estate investment, where loans have a low fixed rate and servicing inclusive of principal repayment is covered by cashflow, financing always makes sense as it enhances the ROI.

When investing in very high risk real estate, or low cost real estate where it is not possible to get an low mortgage rate, it can make sense to go cash only. You may leverage once you can demonstrate to your lender and yourself your ability to achieve scale and stability.

To know which case you look at, you must run the numbers. Leverage entails a potential for ruin, so you need a margin of safety by stressing the numbers.

people use financing because (a) they need it to afford more investment (enabling) or (2) to improving the ROI of their investment (enhancing) in case the anticipated yield of the investment (cap rate) is higher than the mortgage rate.

In one case, financing is enabling the transaction, in the other case, it is enhancing the transaction. 

Financing can have catastrophic effect on your ROI if the net yield of the investment (including repairs, vacancy, market value change at disposition) is lower than financing rate. Overoptimistic (reckless) use of financing with unmatched tenors or high rates is conducive to ruin.

So when investing in very high risk real estate, or low cost real estate where it is not possible to get an low mortgage rate, it can make sense to go cash only. You may leverage once you can demonstrate to your lender and yourself your ability to achieve scale and stability.

For less risky real estate investment, where loans have a low fixed rate and servicing inclusive of principal repayment is covered by cashflow, financing enhances the ROI.

In short, it usually enhances the yield, but you must run the numbers. There is a potential for ruin, so you need a margin of safety.

There are a lot of valid points and contributions from @Matt R. @David Faulkner

@Andrew Johnson and @Levi T.

• California had appreciation each time mortgage rates went down, and appreciation is commensurate to the bump in affordability provided by that in the long term. 
• Rates are not going down much further so it is likely that prices will not appreciate as much there. Whether it is less likely for nominal prices to go down when rates go back up (anchoring) is not relevant.
• it only takes 3% net rental yield difference in the long run to compensate the past appreciation, and that difference may go down below 1% if rates stop going down.

Looking at past periods where rates went down significantly and rental yields similarly compressed is not helping anticipate appreciation now that the rates are low.

This is a long term consideration, in the short term, any markets can move up 15% just because of momentum, but I doubt you can sustain this in the next 15 years. 

It seems easier to me for a single house price to go from 200k to 400k than from 1m to 2m, so given equal growth rates, I would favor areas where price is nearer replacement cost. It seems less fragile to me.

@David Faulkner and @Matt R. let's put aside personal preferences for a moment and let the number talk. I will take a long term view and I will compare San Diego, America's Finest City with Kansas City, the City of Fountains. I would be interested in your view on these numbers.

Let's assume that some areas of San Diego and Kansas City were at same home value 50 years ago, and all overperformance came in the last 50 years. This assumption is favaorable to the appreciation camp.This implies a 3.2% appreciation differential. You would end up with zillow home price index at 575k in San Diego and 120k in KC.

Conclusion 1: net rent yield needs to be 3.1% higher  in KC to make sense vs San Diego

The law of compounding is such that a 7% net rent differential will favour KC against San Diego even if the price index was to climb to 6mln (inflation adjusted) in the next 50 years. The lesson is: it should be very hard for appreciation to keep up against a substantial net rent yield differential.

Now let's look at why there was might have been such a stellar 3.1% in America's Finest City long term appreciation and where this number is going to be.

Appreciation Effect 1 - Rising Inequality and Ricardian Rent less than +1%

Living in San Diego gives access to higher paying jobs, and space there is very limited. So prices go up.

Looking at US census data, I see that wage growth of the top 5% of the US population was never more than 1% higher than the bottom 20% since 1967. So even assuming that San Diego was inhabited by the top 5% US income only (median income at 160k), only 1% would be explained, 

Appreciation Effect 2 - mortgage affordability +2.7% since 2000, +3% since 1981

Since 1981 to now mortgage rates have gone from 18% to 4%, this contributes an annual growth 3% per year to the mortgage can afford. The number since 2000 is from 8.5% to 4% contributing 2.7% .

Conclusion 2: Comparative Annual Appreciation of CA to MO go back below 1%

recent price appreciation in California from 1981 is due to mortgage rate going down 14%, and that it can not continue as mortgage rates will not got negative. 

In case mortgage rates go up, some of the previous excess appreciation (compared to the long term rate of 1%) may have to be forfeited (While nominal depreciation is unlikely because rich people do not like to sell at a loss, we may see stagnant nominal prices until affordability is reestablished).

@Albert Limm welcome to BP neighbour... US is very transparent in general and there are still some good markets. You are welcome to PM, I do invest like you.

I worked in KC with Shaun Gamble from Veteran Home Inspection. I would recommend.