5 yr future speculation for Landlords

Rehabbing, Fix and Flip, Rental Properties
1

Its a very interesting time in REI. I’ve been doing REI for about 17 yrs, so I’m not as seasoned as some, but definitely not a noob. However I am a firm believer in the ebb & flo of markets, and being raised a surfer in Australia I’m a firm believer that if there are no waves out there to catch today, there will be tomorrow. Its just about positioning yourself.

I haven’t seen the level of ‘silliness’ in the RE market that we’ve had in the past 3 yrs ever. I live in Phoenix, which was proud to boast that it was the #1 fastest growing city in the USA. I’m not sure if that is still the case, but this place got overrun by out of state investors either developing and building new property, or buying anything in sight for fear of a bidding war. It was insane. I made millions in a month just on equity. Of course its all theory, and on paper.

But I don’t really care about equity. That’s a great thing when I retire. But the fact is that I have already retired (somewhat). I look for cashflow. I look for a passive income stream from my investments that is secure and consistent and I can live off it. For me, that’s better than cashing in your 401K and living off that. At least my investments continue to grow in value and continue to pay me back every month. The amount of time I have to invest in being a landlord is about 5% of what I have to invest in a job, so I’m pretty happy.

Now I want to look ahead 5 yrs. With some clarity and objectivity. Not like some over hungry journalist looking to break some BS story about the US being responsible for the world’s ailments due to the ‘sub-prime fiasco’ and that all US people are greedy and the end of the world is nigh.

I see, in the next 36 months, a rapid accelleration in rents. Phoenix is, IMHO, way underpriced for rental properties. This is mainly due to the heavy supply of them due to recent developer activity here. But if the market cools down a bit, this will not stop the rapid movement into this city of people who need a job. As long as Phoenix continues to attract companies to move here, and create jobs, we will always be in good shape. The second they change that, then we have too much property and not enough renters and that drives the rental prices down here.

So with all of this said, what do others think are likely occurrences for the next five years that REIs (particularly buy & hold investors like me) will need to deal with? What do you think is a reasonable interest rate to expect 5 yrs from now for mortgages? Do we have to fund the cost of an expensive war with interest, like we did in the 1970s when interest rates hit 18%?

Thoughts?

V

2

Very difficult to say, especially on a national level as real estate is neighborhood specific. I own several homes in the Denver area. The values on some of my properties were stagnate while some dropped 15% within the last two years. All because of the neighborhood.

That being said I agree with you that we should see rapid increases in rental rates. I am guessing we should see 5% per year or more based on the number of foreclosures and people entering the rental market. This is a very good thing for investors because it will help align rents with mortgage payments making it easier to cash flow our investments and make it easier to buy at discounts.

As far as interest rates, I have been in the mortgage business for four years. I have obviously never experienced anything like we have today. What I can tell you is the fed and even the president have expressed concern. I think it will be necessary for the fed to lower the fed rate at its meeting next month which, depending on inflation, could spark a series of decreases. Looking at a five year horizon is near impossible but I would doubt we will every see rates close to 18% again. My guess is they will probably be within a point or two of where they are now.

It is times like we have today that make people like the ones on this board rich. There is enough for all of us so go make your money. :beer

3

Thanks for your thoughts. I am budgeting around 11% interest rates as a ‘guess’ for 5 year horizon. Of course I could be out by a massive amount, but I guess the best thing would be to see how that goes.

Yes, we have a big problem with rent pricing. The problem with this is that there are a huge number of property owners who bought their real estate 10-20 yrs ago, and have been reluctant to raise rents because they didn’t want to disturb long term tenants. If we get one of those in a block that we have properties in, it causes an artificial devaluation on rents because all the tenants talk and compare the rents they are paying. The fact is that when I go to the market to find new tenants, the rents I can ask are simply based on what the market will sustain. I need to get our rents up about 25% in the next 3 yrs or so, and at that point there is money in this beast. Otherwise we’re still in a market where you need to throw in 25% of the property value to get it to cashflow.

I am also moving all of our investments away from single unit dwellings (ie. houses, condos, etc.) to multi-family properties because I think they are more likely to cashflow as rents go up, and are less exposed to risk. Albeit there won’t be much equity gain in these, but if the market is likely to be down for a number of years, its probably the best place to have REI for us at the moment.

V