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.