April 16, 2007

The traditional 100x to 120x rent to purchase price equation is now laughable, wouldn't you say?


I've always known that real estate investors (real ones, not the fake ones these past few years) use a 100x or 120x rule of thumb when evaluating potential rental properties to purchase, so that a 10% to 12% ROI before expenses could be achieved. Even a trained monkey wouldn't buy a property with a negative ROI after expenses, unless he was a gambling monkey, vs. an investor monkey.

So, are you laughing yet? Or crying? Because we all know that rule of thumb not only got thrown out the window, the thumb got chopped off too. Places are going for 300x and 400x rental income now.

Take my old loft in Arizona. I tried to rent it (before I woke up and sold) for $1000 a month and had no takers, figured $800 would be right.

$800 x 120 = $96,000. Yet the place sold for over $300,000.

See the problem? Plus then you've got the stupid always-rising condo association fees, taxes, maintenance and not being able to rent the unit out. "Investors" were just gamblers betting on future appreciation, and now they've lost. Big time.

So do the math with your place - give us real examples. And we'll laugh and laugh and laugh and laugh, because we all know one day the 100x to 120x rule will apply again, we know rents ain't gonna be going up, so you know what that means... Watch out below!

It would be fun to go look at condos or houses with a real estate clerk, ask how much the place would rent for, then offer 100x. Oh, man, would that be fun. Especially when the place is being offered at 400x.

Look to achieve 12 per cent rental return "Some landlords are happy to receive eight, nine, or ten per cent rental return however I feel that a 12 per cent return is achievable and that is my benchmark," Mr Ahuja explained.

"I use the simple 'rule of 12' when deciding if a property is worth investing in; take the purchase price, divide by 100 thus giving the monthly rental figure that needs to be charged to obtain a 12 per cent gross yield. "For example if a property is priced at £100,000, divide by 100 giving £1,000. If the monthly rental figure (£1,000) can be achieved in the area then go for it."

58 comments:

Anonymous said...

Oh, and for god's sake, why are you showing George Bush on a computer keyboard? He doesn't use computers!

Frank said...

I'm renting in Newport Beach for $3,500/month. This same exact house is listed all over the neighborhood for $1.2M (yes, half the neighborhood is for sale). A few smart people are asking around $800k for the same model house but they're not selling either.

In 2005 a bunch of idiots actually paid $1.2M+ for these houses. And now I'm paying $3,500 to a wannabe "investor" to live in it ... LOL

test said...

Is this a test find the president find the monkey?

David in JAX said...

Nobody in the real estate leasing business would pay 120 X Rent. That is still considered very high. 100 X Rent is considered the rule of thumb for the Maximum value for a single unit. The price obviously slides down when more and more units are thrown into the equation. Real Estate Clerks hate this equation because a "great location" does not affect this rule of thumb because location and desirablity affect the rent and not the multiplier.

davoice said...

In bigger cities in Spain you can easily find 1/2 bedrooms, rent 600-700€, buy around 300000€. 2/3 bedrooms, rent 900-1000€, buy 450000€... that's x450, go figure.

We're bubble champions over here, plus almost 96% of the mortgages are variable rate, and rates keep going up.

Oh, another thing, we build more houses in Spain than in all the other EU countries COMBINED!

Anonymous said...

I live in an expensive neighborhood in DC. Great location--can walk to many nice things--a single family rowhouse. We were moving to DC and willing to overpay during the transition. I pay $3900/month (gasp!), which includes lawn care. At 120X,
this house should sell for $470K. Minus the endowment for perpetual lawn care!

A nearly identical place sold for $900K three months ago.

anonymous wimp said...

The HOUSE I rent in a very nice subdivision: 5 bed, 3.5 bath, 3000 square feet, two car garage, built 1984. 1/2 acre lot backs to trees.

Rent:2600 per month
For sale last summer (prior to renting) : $720,000
"Zillow" valuation last summer: $720,000
Currnet "zillow" estimate: $640,000

New York Times graph on how many years before buying is more cost-effective than renting: "NEVER"

Valuation/rent ratio now: 246:1
Valuation/rent ratio last summer: 276:1

So we continue to rent.

cow_tipping said...

This is the one thing that lets me sleep at night.
150K paid in 2003 for a 2723 sqft brand new house.
$1500 as per rento meter is just slightly higher than market.
My house payments are $1486 actually not counting association fees which we are going to probably kill off in the next few months.
So I am not out of the $$ in that regard. I also got myself a great loan 5% on a 15 yr straight loan.
But if RE crashes ... I might still lose my ass ...
Cool.
Cow_tipping.

Anonymous said...

Were you using the gross or net rental income?

Anonymous said...

Or rents will seriously increase in the next few years...

Marky Mark

Batman said...

I went away for a year and rented my place to exactly cover my costs (I bought pre-boom). If I take the rent I earned and divide it into the current price of the house if I sold I get 420.

As a landlord for a year I didn't take into account the damage to my place, tax on rental income either.

David in JAX said...

Anonymous said...
Were you using the gross or net rental income?


The rule of thumb is based on Gross Rental Income.

Anonymous said...

"Or rents will seriously increase in the next few years...
"

DOUBT THAT! My rent actually declined 5% this year!

Anonymous said...

In July 2006, we moved from Tampa, FL to Scottsdale, AZ. We were amazed at how high the property values were in AZ.

In 2006, we were renting a brand new 2,400 sf home in Tampa, FL for $1,300/Month from a Las Vegas owner whom bought it for $180K. Housing was softening and we had begun looking at houses in Venice, FL, an older beach community. Newer houses were listing then for about $375K for 2,400 sf with a pool about 1/4 mile from the beach. We we waiting for them to get into the $200Ks, where they should be by early next year.

In Scottsdale, we are currently renting an 1,800 sf house for $1,700/Month from owners whom bought it last year for $500K. A multiplier of nearly 300 x Rent! while houses are depreciating.

Anonymous said...

I've read this 100X to 120X metric before but I think it's outdated. I'm no financial wizard but judging on my own experience it makes no sense.

I rent a house for $1700. I do the lawn work which I don't mind since I do love riding that mower lol. We have almost 2 acres, a pool (which is maintained by the owner), home is completely renovated, hardwood floors everywhere, new kitchen with new appliances, 2 fireplaces and in a great part of town.

My landlord paid $400,000 for it last year. We were their first tenants. They bought it with the intention of retiring there sometime next year. So they're not looking to make any money, more like have it lived in while their mortgage is paid off. I think we got a hell of a deal on the rent, but even so the 100X to 120X is out of whack.

Using the 100X to 120X rule that home should be $170,000 to $204,000. That makes abilustely no sense. Before the current owner bought it, last sale was in 1997 and it was for $218,000. I know because I checked county records easily available online. So 10 years ago it sold for more than what the 120X rent says the house is valued at today. That just makes no sense whatsoever.

Anonymous said...

That's gotta be a picture of the HP troll!!!!!

Seneca said...

Yeah there are some crazy deals going out there. I pay $1300 month (non US country in grip of its own even worse housing bubble) and yet the townhouse I live in would be put on the market for about $350k or so now if the landlord tried to sell. That's a multiple of 270x and prices have levelled off here in recent months.

As for rents going up, our own central bank recently made a big deal about how rents SHOULD go up (unbelievable) and surprise surprise the mainstream media has flooded us with 'reports' on how they think rents are guaranteed to rise 50% in the next few years. We have had lots of reports of 'rental auctions' in major cities and people offering 5 to 10% more per week to secure their rental.

The biggest problem with this is that people pay rent from actual income, not borrowed money (wages going up at 3-4%) so it just won't work. Renters will simply share, move back with parents or move further away.

The best part is that I have noticed (via online rental websites) that rental prices surged about 6 months ago and are now decreasing. About 20% of landlords seem to have bought their own PR and are asking very inflated rents, but the overall direction is down.

One advert in particular advertised without a price and said 'make an offer'. 2 weeks later it was unrented and I noticed it was now headlined, 'rental reduced'... even though no price had ever been given. I guess it has to suck when your greed gets completely beyond the pale of reality.

DM1976 said...

I've always used the formula of rent = 1% of purchase price. In other words 100x rent.

That's just a rule of thumb, then you go and do your due diligence. You look at vacancy rates, condition (upcoming repairs), taxes, insurance... Then you know you have a deal.

The big time buy and hold guys I know used to look for $100+ a month in cashflow in '04 and '05, but halfway though '06 they shifted to $150 and then $200, now they're $300 - $350+ monthly cashflow or they don't buy. It's their way of prepairing for the crash I guess.

On the other hand I know people that will buy and rent nicer homes because they get better tenants. Of course they only pay 100x rent, but that's because they buy under market value.

I love a couple years ago in Money magazine they intervied this guy who was buying preconstruction in AZ. He didn't even know where his placed were. They asked if he was worried about a bubble and he said he wasn't, he'd just rent. His average monthly mortgage was almost $4,000 a month. With 10's of thousands of properties vacant and up for sale what kind of rent can you get?? $2,000/mo? If he's got 10 places at a 2k/mo loss, that's $20k per month in the red... $240k a year.... He's one of many...

Oh god this is going to be a blood bath once it picks up speed...

If you've ever ridden a roller coaster and sat in the front, you know how you go over the top, but you don't start really moving untill enough of the cars have followed over the top? That's where we're at. We're in the front seat of the coaster. Wait till we start moving and you hear the shrieks of terror!

Kenduffelsniffenspotzen said...

I applied your rental tool to housing here in Green Bay. It is saying that local housing is between two and three times more expensive than it should be. And prices are laughable low compared to places elsewhere.

James Dean said...

If rents increase, inflation increases, interest rates go up, housing prices go down, and (hopefully) wages go up.

James Dean said...

PS> My Maryland house rents for 350x Sale Price.

Mark in San Diego said...

I moved to a larger place here in SD with a sweeping view of the bay - - 1200 Square feet 2/2 in Little Italy (trendy neighborhood) all for the price of $2500 a month - the owners would probably "reduce" the price to $750K if they thought they could sell - they would really like 800K. . .divide by 100, and they should be charing me $7500 . . .I figure their real expenses with mortgage, HOA, taxes and insurance would be about $6000.

Mark in San Diego said...

From the SD Union Tribute March 21 - and people think rents will cover their depreciating properties. . .?

Vacancy rate highest since '95

Several reasons cited in S.D. rental report

By Roger Showley
STAFF WRITER

March 21, 2007

Apartment complex vacancies in San Diego County rose to their highest level in 12 years, spurred by new construction, condo converters caught with empty units and a growing number of individuals renting condos to upwardly mobile tenants, MarketPointe Realty Advisors reported yesterday.

Graphic: March's county apartment market

In its semiannual report Rental Trends, covering the last six months of apartment activity, the real estate consulting company said the vacancy rate will stand at 4.5 percent as of March 31, compared with 1.8 percent in September and 3.1 percent a year ago. This represented the highest vacancy rate since 4.96 percent in March 1995.

David in JAX said...

Anonymous said...
I've read this 100X to 120X metric before but I think it's outdated...


This is because you are looking at your property from the pespective of someone who wants to own and live in a home for retirement. A professional who wants to make money buy buying and renting property will not pay more than 100 X rent because they will never see a return on their investment if they do. Your landlord, more than likely, bought the home for a reason other than rental property.

area 51 said...

My condo sold for $210,000. (now happily sitting out the bubble)
Neighbor's condos were renting for about $1000/mo.
So that's 210x?
Not including association fees of $140/mo.

Anonymous said...

I wonder if the politcal will is out there to have the IRS look a little closer at that guy's tax return, showing 3 primary residences and 5 second homes... I dont know what games people play, exactly, but I do know they play games with this stuff. I have a feeling an anxious gov't will be willing to look the other way.

Anonymous said...

dadid in jax:

I am the poster of with the $1700 rental. I know that the landlord is looking at it differently than an investor. But there is no way 100X rent is anywhere close to reality. The $400K they paid was amazingly low given what other homes are selling for, and yes actually selling for not listed for.

When I found out they only paid $400K I was stunned. There is a house about 1/2 mile down the road that sold for $800K a month ago and the properties behind ours are all million plus homes, the kind of properties with private gated, tennis courts, 5 car garages, guest houses etc. My rentals is the cheap house on the block so to speak.

Forgetting all that you still missed my point. Using the 120X rule would mean the house is worth less than what it sold for 10 years ago which is absurd.

Anonymous said...

oops dadid = david

Mark in San Diego said...

To $1700 a month renter -

I think you missed the point, that if your landlords paid 400K for the property, then even at $600 per 100K on a fixed loan, they have a $2400 a month mortgage, plus at least a $500 a month property tax, plus any other dues, expenses, etc. so let's be kind and say their expenses are $3100 a month, then you are paying only $1700, and they are subsidizing you for $1400 a month!! Great deal. . .even if they put 100K down, they are losing 5.25% (current CD rates) interest on their downpayment.

BTW - I used to own two rental condos in Walnut Creek CA -- bought one at a bank sale in 1991 for 110K and was able to get $995 rent a month 100 x 995 = $99,500. . .so with the tax write-off, I was in positive ROI.

cow_tipping said...

Anonymous said @ April 16, 2007 2:47 PM :
Using the 100X to 120X rule that home should be $170,000 to $204,000. That makes abilustely no sense. Before the current owner bought it, last sale was in 1997 and it was for $218,000. I know because I checked county records easily available online. So 10 years ago it sold for more than what the 120X rent says the house is valued at today. That just makes no sense whatsoever.

Yes, I am not surprised that's 1997 prices are higher, rents have plummeted, while house prices skyrocketed, and worse yet, we exported 10's of 1000's of jobs that were done in the US at $40-80 an hour to India for $15-20 an hour and to china for $2 a day ... and god knows where else ... mexico where they do the work here but 60 of them like in a 3 bed house you know ... that kind.
Jobs have gone out, more houses been built, looser lending pushed prices up so a true rental may have been cash positive for a very short term, before rates reset, and rents have plummeted cos every renter, bought ... only renters these days are the "bubble sitting losers", never mind that the bubble sitters have heavily vested themselves into safety by avoiding RE.
Cool.
Cow_tipping.

Anonymous said...

anon said:
"Forgetting all that you still missed my point. Using the 120X rule would mean the house is worth less than what it sold for 10 years ago which is absurd."


The 100-120 rule has been broken for a LONG time in a number of areas. I am talking decades. I rented a house on the peninsula in the bay area with a nice view for 1200/mo back in 93. They kicked us out after it sold for 320k. The place currently zillows for nearly 1M.

Ponzi Buster said...

Here's the way I see it:

Housing traditionally (and I use the term loosely, since nothing recently has been close to normal) has been valued based on factors like square footage, number of bdrms/baths, condition, etc. This is the grist for the mill of an old-fashioned appraisal. Another approach is to look at what it would cost to BUILD a similar home, from the ground up, based on current prices for lumber, sheetrock, land, etc.

However, during a housing boom there's another component to the price: speculative value. People are paying inflated prices, based not so much on the property's intrinsic worth (e.g. what it would cost to BUILD a similar house, in today's economy, using today's dollars), but on an EXPECTATION of getting a greater return in the future. That is speculation.

So realize there are TWO factors for determining worth: intrinsic value (replacement cost based on building), and the second is the speculative value.

Now as anyone knows, the latter has been the over-riding factor during the Great Bubble of 2000-2006. Everyone and their dog realized that real estate is a "can't lose" proposition, and you'd be a FOOL NOT to buy real estate, right? You'd be a sucker NOT to invest in a 2nd home, condo rentals, etc. especially since the Gov't and lenders were offering free funny money to anyone who could fog a mirror...

Only problem: what does this do to existing inventory, when everyone like Casey Serin buys 8 properties in less than a year to get rich? Uh, huh: it becomes a self-fulfilling prophecy, and prices rise as demand for houses is artifically inflated for a time. Once people realize it's not such a good investment, they tend to dump their $$$ from a losing investment (whether willingly, or after the bank tells them they basically suck at financial analysis and will be foreclosed on). Then begins the hunt for a "greater fool", i.e. someone to sell the bag of magic beans to.

But before the peak/bust, a valid and rational argument can be made for paying inflated prices that are clearly out of step with median salaries (as well as the rules of thumb for ROI, i.e. the 100x rule), since there is little doubt there is a speculative bubble that a saavy investor COULD time an exit from before it burst.

In fact, no SMART investor ever doubted for a moment this run-up in prices WAS driven by speculation (Robert Kiyosaki, the "Rich Dad, Poor Dad" author, publicly advised his followers to exit the real estate market back in 2005. Malcolm Forbes says the reason he's so rich today is he doesn't get greedy and sells off early, not trying to perfectly time his exit to extract the maximum yield and risk being left holding the bag). Hell, even Donald Trump publicly stated there was a bubble, and sounded a warning to not get caught holding the bag.... Instead, investors like these guys LOVE bubbles, as they buy low (after the burst), and sell high (before the burst).

But my main point is, no one who knew anything about market cycles doubted there WAS a bubble, and many people made alot of $$$ of it. Yes, there always is a risk that it might collapse before the investor could exit the market, but there WAS an opportunity to pocket windfall profits earned at double-digit rates. Many did exactly that.

Therefore, people WERE willing to pay a more significant premium for a piece of the action, and wanted the speculative aspect of home ownership, even paying prices 2-3x above those that a rational "buy and hold" investor would be willing to pay.

That speculative element offered an expectation of greater-than-normal returns, and strongly justified asking premium prices in 2000-2004, and that's exactly what happened.

But now that the bubble is clearly on the way down (and lenders going BK SHOULD give you a clue to it getting worse), why are sellers STILL demanding an inflated price that they paid, based on what is now a sure loser?

This is alot like trying to sell a lottery ticket for more than you paid AFTER the winning numbers have been announced, and the ticket has been shown to not be a winner! At this point, the late buyers who paid a premium are now left holding a worthless piece of paper, as there is a time limit to what it's speculative worth.

That "get rich in real estate" ship HAS left the port already, and if you didn't reap the generous profits from the run-up, you'd better get rid of your depreciating asset BEFORE it gets worth less. Good luck finding a buyer: I wouldn't touch ANY property until we get back to the fundamentals of a sound housing market.

Bag holders are left with nothing more than an overinflated mortgage to pay off, on a depreciating asset. Hope they LOVE their house, and planned to stay in it for awhile (without having done anything stoopid like doing a re-fi to extract "equity" from the over-inflated home value: people forget that it was a LOAN, not an endowment).

The speculative component that helped justify a steep price run-up has now been shown for what it is: a busted dream, with homes not worth what people thought they'd be worth.

We've pierced the perennial favorite urban legend that real estate ONLY goes up in value, and in fact it's completely UNREASONABLE to expect that it COULD continue, permanently straying sky-high. A market that puts housing at such low levels of unaffordability, even for supposed high wage earners, IS unsustainable over the long-haul. Affordability MUST be maintained, or else the market stalls.

So what is the reason prices don't drop off rapidly? The hot potato buyer (AKA FB) is reluctant to accept the reality of the situation, or figures they've built up enough of an equity cushion on the upslope to take their time and see what else happens. IF they bought early enough (i.e. before 2003-2004), that might be the case.

The ones who are sweating bullets are those who bought 2005-2006, or God forbid, in 2007: for the most part, they're going to get burnt to a crisp.

For this IS the classic textbook example of a market asset bubble: rapid run-up in prices, with no other rational explanation except pure speculative greed, and the widespread perception of a "once in a lifetime" opportunity to get some easy money. Suckers will soon realize they're being separated from their money....

If that's too harsh, then think of it like a game of musical chairs, with fat payouts to many participants, with the losers donating their retirement plans and future wage earnings to help pay for the retirements of others. A giant game of chance, sponsored by your elected representatives.

David in JAX said...

Forgetting all that you still missed my point. Using the 120X rule would mean the house is worth less than what it sold for 10 years ago which is absurd.

I didn't miss your point at all. I'm just pointing out TO YOU that the 100 X Rent is still applicable in the rental market. I understand that your home is most likely not worth less than it was ten years ago. I'm trying to point out that 1) your owner is more than likely taking it on the chin by renting you that home and 2) your one example does not make the rule out of date.

I also understand and agree with Keith that the rental rates being so much lower than the cost of ownership are going to help drive the price of homes down.

Anonymous said...

A more accurate number is somewhere around 200x I think. I think the pullback will be to around this value (bloodbath).

If you could get a 12% return PLUS capital appreciation (which you would expect if the housing market is so bad that you can buy at 100x), then you have a red hot deal.

BEFORE the housing boom, houses were going for 200x. Now they are selling for 400x where I am (with rents going up maybe 30%).

Ben Dover said...

Currently renting a large 4/2 restored victorian for $1350. This place has an attached greenhouse and upstairs sunroom, heating bills are very low from the passive solar. Water/sewer paid by landlord. Zestimate $338,000 (X250),
-2,250 30 day change. A real "investment" for sure ;)

Ben Franklin said...

I understand that your home is most likely not worth less than it was ten years ago.

And just WHY exactly would you think that?

Is your CAR worth more than it was a few years ago? What about your CLOTHES? Or your jewelry? Aside from "collectible" items, are cars generallly worth MORE or LESS as time goes by?

See, the thing people often forget (and it's easy to do, given the past 5 years) is a physical asset, and a home is nothing more than a collection of physical materials that degrade with time (albeit slowly).

A house doesn't "age" like a fine wine: it LOSES it's intrinsic value, and maintenance and upkeep costs actually make it MORE expensive as time passes. That restored Victorian above may offer charm as part of it's virtue, but maintaining the old gal is not without greater costs.

ESPECIALLY as newer homes are made that offer energy-efficient features (solar panels, double-panel windows, appliances, etc), wiring for modern communication, better earthquake-resistant features, etc. etc.

The only reason to think an older home is worth MORE than it was 10 years ago is when you look at it's worth based on it's speculative value in THIS current market.

It's going to take some time for consumers to realize that everything they accept as gospel is in fact dated by bubble thinking, and is colored by their prior bubble brainwashing by NAR, etc. People didn't think of housing like this in decades past: the fools saw their houses primarily as a place to live, and not as a lottery ticket to incredible wealth!

$1700 a month renter said...

mark in san diego,

Why do you assume any of that? That is the biggest gripe I have about HP. Everyone immediately assumes the worst in every situation. Every seller MUST be upside down on their home. Every landlord MUST be losing money. Every loan MUST be a fraud.

In reality they bought with cash. All they're losing is 5.25% of $400K plus $3500 in tax. So my "subsidy" is a a couple of hundred a month.

I know it doesn't make as fun of a story as if they'd bought with a negative option ARM that will reset next week causing them to go bankrupt, but sometimes life's not all that exciting.

David in JAX said...

Ben Franklin said...
I understand that your home is most likely not worth less than it was ten years ago.

And just WHY exactly would you think that?


Your right. There is no basis for that comment. It was just an assumption that could be correct or incorrect.

David in JAX said...

In reality they bought with cash. All they're losing is 5.25% of $400K plus $3500 in tax. So my "subsidy" is a a couple of hundred a month.

This is exactly why the rule works inself out. Nobody who rents real estate as a business would lose 5.25% plus $3,500 in tax and accept a couple of hundred a month in "subsidy." No business would expect to lose 5.25% a year until some unknown point in time when they may or may not be able to sell the business for a potential profit. Right now, 100 X rent is the rule of thumb that is used on what to pay for a single family home or condo with the intention or renting the unit and making a profit in the first year of rental.

Anonymous said...

$1700 renter....your example proves this entire thread's point. Your landlord is losing money renting you that house. So he should have paid a lot less for it.

Anonymous said...

but the bidders were buying with money borrowed from the bank loaning 100 for every 10 in deposits, or savers bidding against funny money, insured for repayment by the taxpayers, what is that an 87 percent housing inflation, or 87% to high price, but then again, my slum is better than yours, location, location, hot???? aND THAT 100 TIMES RENT RULE AS FAIR PRICE, STILL WONT KEEP THE PRICE OF TOMATOES DOWN..............................

Anonymous said...

Was 100X ever accurate in California? I can't imagine SF or LA home prices ever being that low.

Anonymous said...

THE BUBBLE HAS BEEN GOING ON SINCE THE CAPITAL GAIN WAS ADJUDGED, OR RULE CHANGED TO BE TAX FREE, UP TO 250,000, WHICH WAS A UNREASONABLE COST OF ANY HOUSING UNIT AT THAT TIME.................

Anonymous said...

This is exactly why the rule works inself out. Nobody who rents real estate as a business would lose 5.25% plus $3,500 in tax and accept a couple of hundred a month in "subsidy."

Man you are missing the point still. Interest at 5.25% for $400K is $21,000. With property tax yearly is $24,500. I'll leave out tax deductions to keep it simple. At $2041 a month rent it would be profitable for the landlord. So at 100X the value of the home would be $204K. This is still less than the cost of the home 10 years ago, meaning 100X rent is meaningless.

WaitingToBuy said...

I pay $1000 a month and i know the mortgage is $1700 a month since the landlord came and bitched about what a great deal i am getting. Said he needed to raise the rent but i ended up signing new lease for same price a before. He baught the house at the peak of the market late 2005.

GT said...

when i went to rent from my landlord i talked him down to 1500 and i asked any lower and he whined it didnt even cover the mortgage (he bought for 250k). i am unsure if he meant mortgage or everything, as in 250 hoa dues etc. but i laugh thinking about the poor guy. of course now the units are going for 350-400, aka 230-270x

foobar said...

"Or rents will seriously increase in the next few years..."

Incomes would have to rise first. Lately, they've been stagnating and aren't really showing a lot of upside pressure.

B. Franklin said...

This is still less than the cost of the home 10 years ago, meaning 100X rent is meaningless.

No, a temporary exception to the rule doesn't make it meaningless: it just means it's incredibly unprofitable to own real estate as an INVESTOR right now. Many people who buy a home as a HOME (novel concept there, eh?) don't care about such rules of thumb. They buy because they want the home.

However, SMART investors who bought for the sake of operating as landlords were priced out of the market many years ago. The market has been over-run with wanna-be Donald Trumps, all driving up the prices well beyond what the fundamentals suggest as reasonable for rentals, bidding against each other and snapping rental property off the market.

In case you haven't heard, we're exiting the Great Housing Bubble of all time, which ran from 2001-2006; it was largely based on speculation, funded by a "credit bubble" (anyone who fogged a mirror could get a loan, regardless of having a job, FICO, etc).

But as they say in financial statements, "past performance is not a guarantee of future performance". This applies to the housing market.

Heck, I'll take it one step further: the data proves the market peaked on average in Mar 2006, and has been falling since then (and don't bother point out how Seattle and Houston are still going: I know...). The incessant downward slide is under way, and it's only as dramatic as you want it to be (for me, it's excruciating and boringly slow, like watching paint dry). But the trend is there's no turning back, at this point.

Some ruthless investors even sold their homes in 2006, and turned around and rented another one while pocketing the huge gains, riding out the correction! How smart is that?

@@@@


Let's try this another way: suppose you worked at a job where your costs for gas/auto, maybe child care, etc. kept increasing to the point where you were LOSING money whenever you went to work. You weren't making ANY profit, and in fact were showing LOSSES.

If this inflation in your operating expenses happened slowly, at first you'd probably not even notice it. After some time, though, you'd have to start to question if the "job" was truly worth it. You might even decide to quit and find a better job.

The same thing happens with investments; the idea of smart investing is to get your MONEY to work for YOU, not for you to have to work for YOUR money. That's the point of SUCCESSFUL investing. Any idiot like Casey Serin can make BAD investments, but what's the point of that?

So when talking about buying homes from an rental investment standpoint, you have to look at it in a calculating manner, using such conventional standards (such as 100x, etc) for the purposes of obtaining decent ROI (return on investment, which includes covering operating expenses). If you can't get better than 5% (e.g. a CD), then why bother?

In California, flippers and speculators have driven prices way out of the realm of reasonable affordability, in essence paying even more than a pros would pay to acquire a new property (based on covering costs of operating as a rental). And anyone who knows California real estate knows that prices are now well beyond the realm of what even MOST long-term investors, first-time home buyers, etc, are willing to pay! THAT'S the PROBLEM!! Expect it to get worse, as lenders supposedly are returning to "cconventional" lending standards that do NOT assume double-digit appreciation.

Now those elevated prices? Perhaps it was reasonable to pay in 2003, when there is a REASONABLE expectation of double-digit YOY inflation (as there was a few years ago), but as I've said before, the hand-writing on the wall is legible: those days are DONE, GONE. Finding a "greater fool" is getting harder and harder, but fortunately there's enough sheeple out there who DON'T have a clue!

Look at the comments from waitingtobuy and gs: eventually these "hobbyist landlords" will figure out that you can't lose money every month, hoping to make such losses on volume! (This is exactly what Casey Serin and other late-to-the-party investors attempted to do! He lost money on one house, so he buys 5 more! As a result, Casey owes $2 Mil, though he deserves credit for single-handedly trying to drive real estate prices higher! Now THERE'S a housing bull!!).

Ben Dover said...

That restored Victorian above may offer charm as part of it's virtue, but maintaining the old gal is not without greater costs.

It needs gutters and paint, but IT'S NOT MY PROBLEM.

The house was bought as an "investment" but the owner was greedy and held it too long. Now he gets to rent it to me. He balked at signing a year lease, but NO WAY I would rent without a lease. NEVER EVER rent month to month in the current environment! If the house is sold or foreclosed you are out on 30 days notice. A lease usually runs with the property and must be honored by the new owner. YMMV

David in JAX said...

Man you are missing the point still. Interest at 5.25% for $400K is $21,000. With property tax yearly is $24,500. I'll leave out tax deductions to keep it simple. At $2041 a month rent it would be profitable for the landlord. So at 100X the value of the home would be $204K. This is still less than the cost of the home 10 years ago, meaning 100X rent is meaningless.

OK, you are only looking at one small part of the picture. It's obvious you have never been a landlord. Mortgage and taxes are only a small part of the equation. You are leaving out tons of expenses that your landlord pays. And guess what, 100 X Rent IS the going rule of thumb.

Anonymous said...

BWA HA HA HA!! You idiots really think landlords are losing money? If landlords lost money they wouldn't rent to your sorry asses.

B. Franklin said...

NEVER EVER rent month to month in the current environment! If the house is sold or foreclosed you are out on 30 days notice. A lease usually runs with the property and must be honored by the new owner. YMMV

That's extremely good advice! Thanks for sharing.

B. Franklin said...

Why do you assume any of that? That is the biggest gripe I have about HP. Everyone immediately assumes the worst in every situation. Every seller MUST be upside down on their home. Every landlord MUST be losing money. Every loan MUST be a fraud.

In reality they bought with cash. All they're losing is 5.25% of $400K plus $3500 in tax. So my "subsidy" is a a couple of hundred a month.

I know it doesn't make as fun of a story as if they'd bought with a negative option ARM that will reset next week causing them to go bankrupt, but sometimes life's not all that exciting.


No one assumed the worst here. It ain't my home, and it ain't my $$$... ;)

However, given the numbers you've presented, the owner clearly IS not breaking even on this one, if their imtent was to run it as a profitable rental.

But as you say, the owners have the cash $$$ and bought because they want to live in the house in the future; they're willing to rent the house out for a few years until they decide it's time, so that's their business. No problem. No one else can tell them how to spend THEIR money, as that's what's nice about it being THEIR money! It's all about what's important to them....

Anonymous said...

In Hoboken, NJ, I pay 2200 a month in rent for a 2bed/bath apt., which is converting to condo, and they tried asking over 800K for it. Prices have since dropped, but I can't imagine it's asking below 700K. Talk about insanity.

Anonymous said...

Renting a house for $1500 a month that the landlord paid $360K for under 2 years ago. That's a 240x ratio. Like the house, would love to buy it from him for $150K someday!

Prop management said...

Anonymous said...

BWA HA HA HA!! You idiots really think landlords are losing money? If landlords lost money they wouldn't rent to your sorry asses.


Spoken by someone who's probably never OWNED or OPERATED a rental unit. One sure sign you're NOT running a rental business (and are PROBABLY a TRAPPED FLIPTARD) is you wouldn't be trying to convince everyone to BUY houses (as implied from the "idiot renter" comment).

No, anyone who leases property LOVES and NEEDS renters; they are the LAST ONES to try and convince housing bears that buying is a good idea! Housing bulls NEED some bears to rent!

At least in my town, there's a glut of lemming fliptards who've bought, hoping for a quick flip/massive profits, but found they had to resort to Plan B when their house didn't sell. Now they're all wanting to become property managers to rent out the "investment" place to help stop the hemorrhaging (AKA paying mortgage on an unrented, depreciating asset). They SURE as HELL ain't building equity, at this point.

So they want to become first-time wanna-be landlords, at least until they can sell the house ("once the market turns around" they say).

Only problem: everyone and their Uncle had the same idea, so they're now competing with TONS of other rentals on the market!

These trapped would be LUCKY if they can find ANYONE to help them tread water at this point, and I can assure you they're NOT calling potential renters "idiots" to their faces!! Remember: EVERYONE who had the slightest inkling to buy a home has pretty had a chance, and with home ownership at an all-time high (70%), then the pool of prospective RENTERS has dramatically fallen! Well, no Duh!

It's not like renters incomes have kept pace to support ridiculous rent increases, and the classic law of "what the market will bear" drives rental prices, not vice-versa.

I wouldn't expect things to change anytime soon for wanna-be landlords: that's what happens when newbie fools rush in where angels fear to tread!

Bob Reno said...

BWA HA HA HA!! You idiots really think landlords are losing money? If landlords lost money they wouldn't rent to your sorry asses.
There are landlords and then there are desperate homeowners and/or flippers. A landlord who has owned a home for years and likely has it either paid off or bought it before the latest housing splurge is likely making money. On the other hand, someone (like my landlord) who bought a brand new house in 2001 and couldn't sell it in 2006 is forced to rent it for less than his montly mortgage payment because that's what the markets will bear currently in Michigan where few houses are selling. We're at 209X, but the prices are falling and are likely to continue to do so for some time. Rents are also likely to fall as more homes that couldn't be sold are converted to rentals and empty condos are turned into apartments.
I agree with the earlier post about the roller coaster: the ride's just starting!

Anonymous said...

Renting a house for $1500 a month that the landlord paid $360K for under 2 years ago. That's a 240x ratio. Like the house, would love to buy it from him for $150K someday!

And I'd love to have a 3some with Angelina Jolie and Anna Kournikova but just cuz I want it won't make it so.