Sunday, October 02, 2016

The Rush to Buy Investment Rentals.

Consider this, landlords do not set rent rates, renters do. The rent paid is the amount paid per month times the months rented in a year. For example, if you rent out a house for $5,000 a month and only get rent for two months out of that year, the effective rental rate is $10,000/12 or $833 per month.

Right now if you want a decent return on your savings, you have to commit to rental real-estate. It is paying about 6 to 8 percent. Notice the banks are paying .05 percent interest. Real estate prices are determined by what the monthly payment is and supply on the market. So at low interest rates, buyers can afford to pay higher prices.

For example, a 300K nest egg in the bank returns a retirement income is .05 percent which is $1,500 per year, a pretty paltry amount. Take the same money and buy a 3-bedroom home, and rent it out for $1,500 a month. Generated income over a year is $18,000. $18,000/300K equals 6% interest. An investment in rental real estate multiplies your retirement income by 10 times. Historically a 6 percent return on rental property was considered the break-even point on rental returns. Most successful landlord’s years back, were generating about 20 percent return on investment. From this you can deduce that present purchase prices of real estate are double or better of what they should be. In other words, house prices are artificially high because of very low government financing for rental real estate.

Equilibrium in the past, was when house payments per month was lower than the monthly rental rates. Renters paid more for the freedom to pick up and move when they wanted. Today our governmental is forcing a misallocation of resources into rental real estate because of the abnormally low bank interest rates. Notice that the sales price of a home determines the owner’s monthly payment and supply determines monthly rental rates. So in essence, the consumption of real estate for rental use has created a shortage of homes at reasonable prices for future home owners

Presently three things are true. Interest rates do not reflect the rate of risk; they are abnormally low. Second massive amounts of money have been redirected into real estate investment rentals. Third housing prices do not reflect the true utility value of the asset; they are excessively overpriced due to an artificial lack of supply. The economy is adjusting to these new conditions being true. The only thing that has really happened is that there has been a massive misallocation of resources into rental income property. The REITS purchased the real estate bubble of 2007 and saved the banks. Our government is now the new piggy bank writing home loans through Fannie and Freddie. Real banks won’t even touch the very low interest rate loans; you just can’t loan money at 4% for 30 years when your depositors can withdraw their fund in 3 months and move to a better interest rate.

Once people start moving home or doubling up on apartment rentals, this creates an unanticipated surplus of rentals. Most rentals were bought on the projection of real anticipated dollars that other investments couldn’t offer. A surplus of rentals means that the lower priced unit gets rented for 12 months. The trouble is, most of these real estate trusts, bought on the assumption that rents could go no lower than X amount and now their projected cash flow assumptions are beginning to be way off of the mark. The idea that they could set rental rates was wrong. Their rates only determined the number of months the unit would remain vacant.

Another thing that is not in the REITS investment model, is wear and tear. Put 3 families in a two-bedroom rental and it is trashed after a year. From there, it is only downhill. This is far different that the REITS profit projection model suggested. Plus, your investors were happy with 3% returns when the market paid .05% but when rates rise, investors will want to withdraw their funds from the REITS.

What we are looking at here, are home prices that are absurdly out of whack in relation to rental returns. We are also looking at interest rates that are absurdly out of whack in relation to risk

We have gone from a housing bubble that collapsed in 2007. The government assumed all financing after the fiasco. What followed was a misallocation of resources with the low interest rates that sponsored the new rental real estate investment boom.

So if you can find a rental property that will rent for 100 times the sales price, buy it. All you need is 20 percent down. The property will pay for itself in 20 years. From there, your rent checks are your retirement nest egg.

The only other game in play, is the stock market. Faites vos jeux!

Interest rates reflect that there is no risk in the world and everyone is entitled to purchase whatever they want no matter how little cash they have. Do you get the feeling that this is not going to end well?

Of course there are the old standbys; gold, silver and platinum. With .005 percent interest rates, they seem to be very good friends.


Anonymous said...

Dear Jim,
Please spend some time out of your 20 mile radius and you might see things differently. You seem to miss the fact that the entire world wants to move to move to certain locations that you take for granted.
In any case case, your way of thinking is antiquated and if you don't see that..ask yourself this the next time there you are stuck in traffic, "where did all of these people come from and where are they going?"

god bless and good luck,
shadow hills horse

AIM said...

Real estate (i.e., valuations and cycles) has been perverted by monetary and fiscal policy and banking shenanigans. It isn't in a natural state any longer. Hard to forecast based on fundamentals. Perversion. Who knows how things will go in the future. One thing is for sure: developers got killed and are wary so new construction is very low. Yet, people are having children, people are becoming adults, people are getting jobs, people are coming into the country, etc. etc. so there will be demand for housing and a shortage of inventory. Hard to tell how this will play out with all the government intervention going on.

Every investment vehicle today is questionable, dangerous and unpredictable. Rental properties can cause a lot of difficulties to the owner (tenants, maintenance, repair, property taxes, government regulations, tax code changes, liability exposure, etc.).

The best investment is a successful business that you own and run. Most people can't confront this. Yet it is the best guarantee of a stable future. Forget retirement (it is a false concept anyway).

Jim in San Marcos said...

Hi Shadow Hill Horse

The hat you are wearing suggests that it blocks your view somewhat, you might want to cut some holes in it for your ears so you can see better.

As for rental real estate, within one mile of my house, is a brand new 300 unit low housing structure. They are offering 3 bedrooms for $2,500 a month. We are renting a 4 bedroom house for $1800. That rental project has been completed a year and I would guess that it has 10% occupancy. Within 3 miles of my place there are several larger rental complexes going up. I would guess that from the planning stage to the open house is about 6 years. These should be online by next May. You have to travel about 8 miles out to see new home building. My point in the article was to illustrate the misappropriation of financial resources to get a better interest rate on your saving.

This diversion of investment capital to building what we don't need more of, is stupid. As long as it cash flows they will build them until is doesn't. It reminds me of Africa many years ago when cattle were considered wealth. More and more cattle were bred and fed. Everyone was cattle rich. Then the price of hay tripled in price over a year and most of the cattle starved to death. Many of the cattle investors died of starvation, a direct result of their bad investments. People think that famines in the rest of the world are caused by crop failure, and that is not necessarily true--no money no food.

What in the world makes my thinking "antiquated?" Try living in a three story condo, your parking lot is a traffic jam. Your hall ways are full of dirty diapers, dog crap, beer cans, smell like cigarettes and the loud music keeps you awake nights.

Your "God Bless and Good Luck." mellowed me out a tad. I might know who you are. So at Christmas time, if you find a goat at your front door with a bale of hay, you'll know its from me. Of course the other 5 people that get a goat and a bale of hay will have no idea what this is all about.

Jim in San Marcos said...


I agree with you.

One elusive thing about owning real estate in any form, is that it is highly visible for governments to tax.

And of course, if government passes rent controls, you lose your investment.

Your right about forgetting retirement. I'm somebody at work, and a nobody when I get home.

Take care

Joseph Oppenheim said...

About 3/4 of businesses fail. It takes something special about a person or just plain luck, timing, etc for one to be successful, even after several tries. Plus, what is successful? Some people need very little money to live on.

Bottom line, there are no rules. Heck, 10 year old kids who saved their baseball cards in the 1950's could reap huge profits decades later. There are opportunities popping up all the time. Many take advantage of them for non financial reasons.Then, sometimes financial situations come along that make sense no matter what happens in the future, barring catastrophe.

If I were younger, regarding the current bank cross selling in the news, I am bombarded with offers up to $500 to open up new accounts. One could make thousands of dollars in a short time. Most people don't even understand what saving is. It's not about earning interest, though that is often a bonus. One can double their money just by adding the same amount.. Plus, pretty much everything is negotiable.

Jim in San Marcos said...

Hi Joseph

Your good, if you are following our tongue in cheek discussion, you don't qualify for the Christmas goodies of a goat and a bale of hay.

Have a good day

AIM said...

That 3/4 of businesses in the US fail is a testament to the unworkability of the horrid educational system our government has created, the unconstitutional action of taxing production through income tax, and the oppressive regulations the government has foisted upon small and big business. Our government is our worst enemy. The Obama administration has been one of the worst administrations in history.

Basic financial intelligence, accounting and business should be taught in high school. A HS student graduates today without even knowing how to balance a checkbook! Allowing for the understanding of basic principles of business and finance would drop that 3/4 statistic quickly. Marketing is a key subject.

Example: I've seen so many people start businesses and lose it all and fail because they had an idea that THEY liked and thought would be a great business. They didn't operate from the principle that they are supposed to deliver value to the community, deliver what is NEEDED and WANTED by the community. They didn't survey the public beforehand to see if their product/service was something they needed. More effectively, they should've surveyed the public to find out what THEY needed/wanted and what was value for them (find a need and provide for it). Duh! If people just knew this principle after leaving high school that 3/4 statistic would go down to 1/4.

The US government is the people's and our society's worst enemy. Lack of ethics, false data, corruption, manipulation, propaganda, greed, power, incompetence, cluelessness, etc. by the government and the power elite that manipulate it.

Hillary vs Trump? What a joke. Idiotic children. There are no real leaders. We're doomed no matter what. And we've been doomed since FDR.

Jim in San Marcos said...


Vote Trump. lets hope that things get better from here.

aim said...

Well Jim...
It's hard for me to even consider Trump as our next president. The Deep State, the establishment, the Power Elite, or whatever you want to call these deep rooted controllers, will stop at nothing to prevent anyone from disrupting or dismantling this system that they have created and control. They will maintain their power, strengthen and expand their power, and continue to ride the gravy train and take all the perqs. They'll even take us to war to achieve it.

Plus, a president can't do very much in regard to these controllers. A president would have to root out the Deep State, dismantle the NSA, CIA and FBI, overtake Congress, The Supreme Court and The Federal Reserve and put them all onto a proper course.

The military/industrial/congressional/security complex will never be taken down by a president (a position that has now basically a figure-head and a puppet).

Jim in San Marcos said...


I beg to differ. I work at Camp Pendleton a Marine base. The military budget has been cut 2/3's. You don't see it happen all at once because budget requisitions are factored in over a 5 year time line. Each following year gets worse. This first started being noticed two years ago, they were terminating marines with 18 and 19 years of service so they wouldn't have to cover their retirement. That's a real cheap shot!

A money spending Congress enwrapped in social spending programs and a gutless President have reduced us to a third world country. We have a military that is flat ass broke with no money for personnel or guns.

AIM said...

I'm confused Jim. What about the trillions being spent by US on "wars" in Middle East? What about the costly 800+ overseas military bases that the US maintains? And if Hillary gets us into a big war (with Russia, China, N. Korea) wouldn't the Federal Reserve just "print" the necessary money to create the financial war chest needed to facilitate the war? And couldn't they just do this over and over? I think that the military/industrial/congressional/security complex is alive and doing well. They are busy fighting (profiting from) "terrorism" right now.

Jim in San Marcos said...


You can't run a military if you don't give it money to run on. We spent trillions on a war in the middle east, and got nothing. We don't have more to spend.

You can claim that all the government has to do is print more dollars, but at some point that fails to work. Printing more dollars does not grow food or produce product. If it did, there would be no reason to work or pay taxes.

Anonymous said...

"The Obama administration has been one of the worst administrations in history."
For the globalists, he is doing a great job (at dismantling the USA). A+

AIM said...

I just don't know Jim. I'd like to see the real stats and facts regarding the military/industrial complex. Hard to think that it is fading and impotent. If this is so, then I guess we've reached the stage that the Roman Empire did when they couldn't pay their soldiers any longer and the military turned on Rome. That was one of the bigger points contributing to the end of that empire.