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Stonecreek: Bonds, especially Treasuries, are in part falling due to the rush to cash. Liquidity is king right now, as I am sure you know. I own a bunch of SFHs; 25% have mortgages and the rest I paid cash (and no, that doesn't mean I own four total but the count is a perfect square number). Essentially, I would have to have a 75% vacancy rate before my cash flow dried to zero. I started buying them in 2009 but have slowed back substantially the past few years due to low cap rates in Phoenix because most properties have doubled since the GFC. I almost bought a property in Richmond VA but pulled the plug this week due to the risk of local entities banning evictions (Trumps ban only applies to HUD props). I am not a fan of REITs. But you are right: if there is a major recession, my tenants might not be able to pay rent. But they will cut out almost everything else before they do this. Four of my customers have options to buy (sort of like a call applied to real estate). If they stop paying, their option to buy is cancelled. One guy has option to buy his house for 30K less than Zillow's price - I don't think he will skip rent. One of my straight rent customers owns a fast food franchise; I cut his rent by half until he can open in dine in operation again. He has always paid his rent early and is an ideal long term customer. I just tried to buy some treasuries to park some cash - I was getting 1.6 for short term (1 month) Ts but today the max was .4; I didn't even bother. My software biz supplies the paper industry, which right now seems to be doing well. Unless one shorted the market, we are all taking a haircut - only question is how much. | |||
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Bond yields are falling. Treasury bond prices are rising. Like you say, this is a rush to liquidity (and safety). However, municipals and bond fund prices are, in many instances falling. This is apparently because the market is showing some doubt regarding the bond issuers being able to service their debt. Purchasing a bond is making a loan. If the borrower can't pay then your loan is not worth its face value. Residential real estate is a great investment -- until it's not. You're already experiencing a decline (though small) in your revenue due to a tenant who is economically stressed. What if half of your tenants stop paying simply because the don't have the money? How many evictions can you do each month and how much does the typical eviction cost you? Have you ever seen the condition of a house where the tenants lived "free" for the three or so months it took to evict them? Not usually pretty, and it amounts to a big expense on top of the eviction costs when you go in to remediate. Besides, real estate is just about the most illiquid investment there is, even in "good" times. In "bad" times it turns into a black hole, sucking up maintenance costs and eating your lunch with real estate taxes. I have no idea about Arizona, but a $200,000 rent house in Texas will cost you about $6,000 a year just in property taxes. Not to mention insurance, HOA fees, and potential vandalism to an unoccupied property. My point is that in a serious economic downturn there really are no safe havens. If you make your living from investments you're going to hurt. | |||
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When I wrote bond prices were falling, they were (it was the leading story in the WSJ that day). There was a rush to cash. Yes, residential real estate is illiquid, but unlike in years past, there are players with deep pockets that will pay cash. You won't get a great price, but I normally get at least one call or text per day. I got one yesterday, but will admit the number has fallen dramatically. Since I use very little leverage, I can potentially mortgage them as well. As far as taxes, we aren't Texas. I don't buy a property unless it yields 7% after taxes, HOA fees, and insurance. Some of my older props no longer yielding that based on current value, but vastly exceed my original investment because rents have gone up the last 11 years. Finally, one thing I love about real estate is depreciation. If I bought a house for 250, I deduct $7200 per year in depreciation (assumes land is 50K of that 250K). When I sell that property, I do have to recapture depreciation, but the rate is 25%, which is lower than my marginal tax rate. What other investment allows you do defer taxes and pay a lower rate when you do? Even better is a 1031 exchange. What is ironic to me is I always thought the biggest real estate risk in Phoenix was global warming reducing demand, or a nuclear blast destroying everything. Never thought I would see this... | |||
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Stonecreek: Well, guess what? I got a call yesterday asking if I wanted to buy some properties. I am telling you, this is looking like a big liquidity crisis. Good news is rents are still coming in. | |||
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We don't completely disagree, but I'm just not as bullish on real estate as you. I visited Phoenix a short while ago and saw quite a bit of the recent residential development. I think the biggest risk to values is the same there as in any of the residential hot spots around the country. And that is when housing demand slackens (for whatever reason) that the "now" premium for existing houses suddenly vanishes. The "now" premium, as I call it, is the price of a house over and above the materials and labor which go into making it. In hot markets people will pay more for an existing home than the cost of a to-be-constructed home due to the six month or so lag between the occupancy of the two. That "now" premium in places like Austin, Phoenix, and the D.C. suburbs seems to be around 30% or so. In other words, people have been paying about $4 for a 2x4 stud already in place and another $4 for putting it there as compared to the store cost of $3 plus $3 in labor to put it in place. Any kind of pull-back in the housing market can virtually eliminate the "now" premium. Worse, when too many people can't afford to buy a home then the price of materials, labor, and even land goes down, making existing home that much less competitive. I owned just one rental SFH up until last August. I had found that it nearly always costs between $5,000 and $10,000 in renovations plus one to two months' rent when tenants (even good ones) change. So when my long-term tenant moved I spent the rehab money on making it marketable and got out from under it at about the market high point. While it had made me decent money in rents it was just similar to stock dividends over that period of time, as was its appreciaton. And if I'd held it as a rental I would have probably suffered about the same decline in value as I've suffered in equities in the last three weeks. As I say, there are no safe harbors during a serious recession, but at least you don't have to pay a plumber to dig the baby wipes out of the sewer line or drive 25 miles out of your way to reset the damn GFCI button in the bathroom on a share of Berkshire Hathaway or Procter & Gamble. And if I need to pull some cash I can sell one of them that has gone down and one of them that has gone up, have my money by tomorrow morning, and have ZERO tax liability. Try that with houses and see how it works. Although I don't consider myself to be a "wealthy" person, I do have enough assets to diversify them. I've got some stocks, some municipals, own some private notes from trusted persons I personally know, have some unimproved acreage, and keep some significant amount of money in cash equivalents. Unless the U.S. Treasury defaults (not too far-fetched a notion considering the incompetence of the current administration), then the cash and probably municipals will be fairly safe. Thus, I don't feel all that stressed about the kind of economic disturbance we're currently in, but I am concerned for many, many friends and family who are not as fortunate as I may be -- or, who may have too many eggs in a single basket. | |||
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I would never own just one SFH; my admin actually has an additional duty of taking all tenant maintenance calls. I don't do any maintenance; we have a list of contractors we work with. I just looked and our maintenance costs YTD are 3.6% of revenue but that is actually lower than normal. I assume 1% of maintenance costs on that 7% cap rate, so realistically we are looking at 6%. But because property values are all higher than when I purchased, the total return is no longer 6%. One thing I have learned is older properties have higher maintenance costs, as do properties with pools. My option to buy contracts include my tenant paying for all repairs; if they want me to do it, we add that maintenance cost to the purchase price of the house. Option to buy contracts also mean I don't pay realtor fees; we just go to a title company and execute the deal. I sometimes give up a bit of equity, but it allows me to have more predictable revenue streams. Right now I have a guy who wants to buy his house, but doesn't have the down payment. His option to buy is 30K less than Zillow. I am going to see if I can refund prior rent to him and have him apply it as a down payment. Then I will sell stocks/ETFs that I am carrying at a loss (hate to say it, but one is XOP) to offset the cap gain from the house sale. I could buy equities in MsAZW's account, which has a lot of cash. Need to call my CPA but I think it is doable. This has been a good exercise in reviewing what I am doing, so thanks. | |||
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You're clearly managing your SFH business in a way that minimizes your risks and stabilizes your income. That's something that someone who just has one or a handful of properties can't effectively do. We got into the SFH rental business when our daughter got a divorce right at the low point in 2009 housing recession and couldn't afford her payments. We bought her out, rented the house for several years, then sold late last year. Circumstances made the deal profitable, but I learned that it is far from a passive investment! Our other daughter got a sweetheart of a deal in Houston on a HUD repo. We helped her renovate, and found that the price-to-rent ratio in that neighborhood was so favorable to landlords that I considered buying a couple of other houses there and letting her manage them. But before that could happen she took a job in another country and sold her house at a very nice profit. That was hugely fortunate since a month after she sold and moved the neighborhood flooded in a hurricane and her former house and all of the others in that neighborhood had one to four feet of water in them. No one had flood insurance since the area didn't show up on anyone's flood plain map (despite being lower than the top of the flood control dam just a couple of miles downstream!) Had I been in the SFH rental business like I considered, I would have taken a bath (both financially and literally). No investment is without risk. Banks can fail, companies in which you own stock can be devastated by embezzlement, bond issuers can default, and even cash stuffed in your mattress can vanish in a house fire. But the combination of high overhead, physical hazards, and costly maintenance -- which you're aware of and discount for -- make residential rental property a much more challenging investment than most people realize. | |||
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Getting back to hunting: No, it won't affect me at all. Since I can hunt elk, two species of deer, sheep, goats, bears, wolves, cougars, turkeys, grouse, geese, and ducks, and only have to drive (about thirty miles)the hunt the sheep and goats, I'm pretty well in the same situation as always. For most of my hunting, I just walk out the door. If this sounds like gloating, my apologies. On the other hand, I'm not wealthy and don't get to worry about the performance of all my stocks and bonds so, I guess that's the trade-off. Regards, Bill. | |||
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Ditto! ______________________________________________ The power of accurate observation is frequently called cynicism by those who are bereft of that gift. | |||
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It isn't gloating Bill; hell, I live in the west so I can go out long range shooting. Certainly could never live in the east no matter how much money I made. | |||
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Well, I hope to have a MT mule deer hunt later in the year, but this was not good news: Montana cancels NON-RESIDENT hunts . "Listen more than you speak, and you will hear more stupid things than you say." | |||
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I was thinking of doing a guided bull elk hunt this year, but since my heart seems to be doing better, just put in a draw for early rifle season for area 54 in Colorado. I used to hunt elk there a decade ago or so, nice big bulls in the black timber. Looking forward to camping and a DIY hunt again. Regards, Chuck "There's a saying in prize fighting, everyone's got a plan until they get hit" Michael Douglas "The Ghost And The Darkness" | |||
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One of the potential hazards this year might be the presence of California plates on the truck... TomP Our country, right or wrong. When right, to be kept right, when wrong to be put right. Carl Schurz (1829 - 1906) | |||
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The way the world is on lock down right now, I wouldn’t bet on any hunts before September at the earliest. | |||
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I lost Turkey Seasons in Tennessee. We will see how the rest goes. | |||
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Just be glad you don’t work for the Airlines..All my plans down the tube till this blows over. Don’t ask what I think of it all you probably won’t like what I have to say. Anyhow I can shoot all I want and have a pile of 500 NE and can get real good with my gun..So I got that going for me.. White Mountains Arizona | |||
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I do have an archery summer bear tag on the mogollon rim. That should keep me busy White Mountains Arizona | |||
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