We are looking to rent in the Palo Alto Area… I am amazed by the rents in relation to the estimated value of the houses (Zillow)… I am talking about a 2% ratio BEFORE taxes, repairs, etc (i.e. $8K/month on a zestimate of $4.9M)
Clearly the owners are counting on continued appreciation. Does this make sense, even with prop13, etc? I mean, maybe take some chips off the table here?
So, if you have the cash flow, you can “rent the life of a BA RE multimillionaire” on the cheap! :-)
You’re assuming the only people that buy homes are RE investors that plan to rent them out. The bulk of home purchases are families that want a place to live. They’re going to buy in the community they want to live and worry far less about rent ratios.
I find that a common thought in this forum and consider it a fallacy. The past is the past, good for them, but going forward it’s about today and how you are going to invest the $4.9M. Cost basis in a stock should not affect your selling decision, fundamentals and potential future growth should (that’s why Apple’s PE is a fraction of that of smaller, more nimble, faster growing companies)
This is econ 101 Sunk cost is irrelevant. But there are friction or obstacles You have ignored costs like taxes, commissions, closing costs, and other not so obvious transactional costs… even for 1031, is not easy to find another house that you like. If talking about stocks, you have bid/ask slippages, at least right twice (sell AAPLs buy AMZN), commissions, taxes, and other not obvious costs.
I agree. Lower mortgage payments and lower property taxes do help in holding on to a property bought pre-2013. However the decision to hold should take into account investment potential of current market value. Since no one has a crystal ball into the future, the question is does post-tax gain from investment property sale have same risk/reward profile as holding onto the house. Current SV landlords are betting on RE appreciation.
I guess those PA homeowners are long past the asset accumulation phase. After you reach a certain point it’s more the return of investment rather than return on investment. If you have 20m already do you really want to sweat how to optimize the 4.9? They may just want to enjoy life knowing the house value likely won’t crash 50% unlike stocks.
Won’t that apply to potential buyer? If the owner is irrational not to sell, and should sell, then the buyer of the house becomes irrational to buy because he would then become the owner? My brain hurts.
Rational or irrational depends on someone’s circumstance. For someone like Mark Z buying a 5M house is like spending lunch money. For small flies trying to earn cash flow PA is highly irrational place to buy.
Even buying to stay I think PA is borderline irrational, assuming the person’s net worth is below 10m and still need to work to make a living. It makes more financial sense to rent in PA and invest the money elsewhere for better returns.
But if you have 10m or above who cares? Just buy whatever you like.
Eventually PA will become too expensive for trophy homes and will full of high rises… not in my lifetime though.
I 1031ed my $3m RWC house into a huge money maker in Tahoe. Others will follow. Why sit around in a $5m liability, when you can buy a nice $1m house almost anywhere else. And then buy $4m of investment property that has a gross yield of $40k/m