Here, this where our Fearless Leader hangs his real estate license. (This was us going off on a tangent again under the Tips On Real Estate Deals thread)
Don’t forget the long term cost of a higher property tax base and probably higher interest rate if you pump the tax free gains back into a similar rent/price profile property. I have yet to create a spreadsheet model that calculates all the ins and outs of selling vs renting. Did anyone here create one?
When the majority of BA dropped 40% from peak(2008-2011), many investors bought the homes. Now, they are the winners ! At that time, they were not scared, now they reap the benefit.
When brexit day stocks fell, I bought almost 20k stocks. All are sold at 7%-9% profit level by last December !
Jil, right now nobody is really scared of anything. Even Trump can’t scare them enough to sell their houses
I don’t think getting an agent license is worth it to sell just one house. Getting a license is not a $0 activity either. There are all kinds of fees involved. Besides, you are really only looking at 1.5% to 1% commissions to the listing agent. The buyer agent you have to pay whether you sell your own house or not.
What is a good rent/price ratio in Cupertino? And just to be sure, rent/price ratio is calculated using monthly rent or annual rent?
I don’t know, not a landlord myself, but the rule of thumb I’ve seen is:
Monthly rent times 100 = price you can pay for house and have it cash flow (aka 1% rule)
Monthly rent times 50 = if you can buy house at this price you’ll make good money (aka 2% rule)
Of course in the bay area you have to rely on appreciation for some of your return and might have negative cash flow. Is it worth it? Depends on your predictions.
Thanks for sharing. I wasn’t aware of these thumb rules.
There are two main camps of RE investing philosophies: the cash flowers and the appreciators.
For cash flow people cash is king. So they seek high rental income on low cost properties. They think appreciation is some black magic that’s unreliable. They typically come from Midwest and flyover states.
Appreciators think the big money is in property value appreciation. Rent income is nice but it’s more so as a defense mechanism. The rental income allows appreciators to hold on to their properties. They count themselves lucky if rent just about covers PITI payment. They typically come from expensive coastal markets.
I am in the camp of appreciators. I want my properties to be around cash-flow neutral so I can play defense and hold on to them indefinitely. It’s difficult to hold onto anything if it burns a big hole in your pocket. I calculated for a typical 25% down situation, the 0.5% rule gives me neutral cash flow. So if a property sells for 800K, shoot for 4000 rent a month.
But that calculation works on purchased price. If you are thinking about renting out your existing house, and potential rent already covers PITI payment, the question to ask is how much do you think the house will appreciate in the future. If you are moving away and you don’t like being a long distance landlord, it may make more sense to sell it and get the tax free profit.
Many ways to skin a profitable cat.
I want both…Cash flow and appreciation. .The holy grail is 10% cash flow and 10% appreciation. .In Tahoe it is hard to find. Impossible in the BA. In Arizona it is possible or even better…The key is to find properties than need rehab…Properties that average investors aren’t capable of buying…Often that means 5 units and more…hard to finance. .keeps away the amateurs. …Everyone can afford a house or duplex. .Few can pay cash or have access to comercial financing. …Best to find syndicators that bundle investors money…
I sold almost 7 months ago. For my neighborhood I’ve seen no price appreciation since then.
I’m living debt free with a large nest egg, but my egg will never grow into a chicken fit for dinner.
I’ll have to find another wave to ride that fits my comfort zone/lifestyle
+1 for Mr. South Lake Tahoe. Multi units are for pros. Condos/SFHs are for amateurs. Lock in your win and go enjoy your life. Don’t ever look back…
Both Manch & Elt1 has great answers already. I am in the agreement with both of them. You need both. Appreciation will build your wealth, but cash-flow will pay your bill.
First of all those numbers are rules-of-thumb, so I don’t follow it religiously and I just use it for comparison between different property & location.
First step is to find out where you are in the investment cycle. I see appreciation as growth opportunity and I see cash flow as stability & comfort. If you are early in the cycle, I prefer growth over stability. But I also don’t chase growth with the expense of negative cash flow, coz we all know market is going to change and you don’t want to be in over your head.
For Bay Area specific, I will take 0.5% as good investment if you see the reason that your property can appreciate. But for mid-west, I want at least 1% coz I know that there is not much appreciation I can hope for.
I have never seen 10%+10%, but seen max 12% combined cash flow (4%-6%)+appreciation (6%-7%) with bay area.
Where in Arizona? Phoenix? I checked on that market on and off throughout the years.
Never been bullish on Phoenix till this last year.I have invested in two large apartment development projects…Both with projected 25% IRRs and 2-3 year holds…