Tuesday, May 08, 2018

American Real Estate: Are Rents or the Printing Presses More Reliable?


I teach two online classes on finance and investing (I would recommend neither because you can get the same much cheaper here and here).  And one of the common questions I get is "How about real estate for investing?  Can I invest in that?  My buddy says it's the way to make money!"

I try not to get angry because I have to remind myself that this is a beginner's course and most of my students' first introduction to investing.

Yes, you can invest in real estate.
Yes, you can make it rich by doing so.
No, you likely don't have the education, experience, tenacity, or capital to do so.

But another problem I face with real estate as a form of investment is the same problem that plaques nearly every asset class around the globe - nearly everything is overvalued.

This overvaluation comes from countries' central banks doing two things.  One, tripling, quadrupling, or quintupling the money supply. And two, keeping interest rates artificially low.  Since money is fungible, it inevitably finds its way into the larger economy, plus corporations have the incentive to borrow at historically low interest rates and repurchase their own shares.  So this money goes the only place it can - asset prices.  I say asset prices and not consumables (which would traditionally be what we'd expect a la 1970's stagflation) because of three reasons.  One, our consumables are primarily imported keeping consumer prices low.  Two, despite our raping of our own currency, other countries have raped their's even worse.  This allows the US dollar to remain the world's reserve currency and us to export our inflation to naive and more corruption nations' economies.  Three, the genesis or pathology of a lot of this new money is borrowing, so items purchased with debt tend to go up.  Thus why housing, cars, health insurance, stocks, and college tuition are experiencing hyperinflation...but you American sheep think this is a good thing.  In short, asset prices, but specifically stocks and real estate, are no longer driven by fundamentals, but an ever-expanding monetary policy, which presents us with an interesting question when it comes to real estate investing;

Are renters or government printing presses more reliable?

The paradox that one faces with real estate (and other asset classes) is that they are no longer actual investments where underlying cash flows (such as dividends, interest, or earnings) inevitably pay back the original investment and continue to provide an adequate monthly or quarterly ROI.  They are now functioning as hedges against inflation as asset prices are decoupled from the cash flows that traditionally and historically gave them value.  And so now people who wish to invest in real estate or perhaps are just facing the prospects of selling their home face a problem - do you invest in an overpriced asset whose cash flow simply doesn't warrant the price being asked to be paid, or do you buy it anyway because you'll be priced out of the market (a sentiment Millennials might be somewhat familiar with, even though they voted this upon themselves).

Though risky and completely against fundamentals (not to mention my conservative nature), I'm wondering if it isn't necessary to own some kind of housing (or stock) as simply a hedge against inflation.  Additionally, I'm finding it infinitely more reliable that governments are going to keep their printing presses than me finding a reliable tenant who pays on time every time and stays in the place for years to come.  And whereas I'd like to say that there's going to be a crash this time, I'm more and more convinced if a crash is going to come at all, it will be in the form of stagnating prices, not an actual crash.  Overvalued as property prices may be, there isn't the massive oversupply of inventory there was in 2007, and the feds are so far up banks' asses their exposure is not what it was 10 years ago.  We can hope and cheer for a serious recession which I do believe would at least temper (hopefully tank) property prices, giving us commoners opportunities to invest in reasonably priced properties (and other asset classes) that do provide adequate ROI, but we must also face the chance that like "perma-bubble" markets such as Australia and Vancouver, external forces are flooding the markets with so much money, you're almost compelled to own at least some REIT's or indexed funds just to match inflation.

So if you're looking to sell your house, remember you have to buy another one.
If you're thinking the S&P 500 is overvalued, it most certainly is...but how much more money is the fed going to print off this year?
And if you think tuition is too high now, just wait till next year.

Thankfully, at least we know college is an increasingly worthless investment you can avoid. Perhaps you Millennials can use the proceeds you save from not attending to put as a down payment on a mini-house.
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15 comments:

Dogfish said...

Meanwhile in Australia the average house price in Sydney is 800k...

gunner451 said...

So basically buy and hope the house of cards doesn't fall? Man the choices suck!

Anonymous said...

So if the assumption is that the govt will just keep printing money, inflating the value of your "hard assets" (property, stocks) why not just buy gold & let them inflate it for you? No maintenance cost and rentor problems (real estate) or stock price manipulation/corruption issues (Enron, tyco, etc, etc). Plus , if the shit hits the fan you e got a movable asset.

Anonymous said...

The inflation that has already happened is kind of baked in. What kind of event is going to uninflate it? The housing crash kind of did it short term. That was semi unique. The crazy bad loans were an obvious bubble.
It's best to be in the game. One of us... One of us...

Anonymous said...

Yup, I agree with this. The main thing the central banks and money printing does is force people into higher risk pools. This is marketed as a "good thing" when people see nominal values of the things they own go up. Example: in the last 30 years, holding the S&P and reinvesting dividends would have resulted in a 10.45% annual ROI (7.7% ROI after inflation).

So what's the issue w/ that? Well, having clear winners and losers is a pretty big thing. And even if you think buying a home, or owning stock, is fundamentally flawed, you're kind of forced to do so, because $1000 a month in mortgage and $150 a month in property tax + insurance that goes up at 3% a year, is better than $1150 a month in rent that goes up 3% a year ($1271 vs $2077 in 20 years). Low central bank rates mean that you need to take more risk to earn more return. Like in July 1984, a 6 month CD would yield 10.9% annualized (!).

As gunner451 alluded to, I am terrified of things falling apart. But I also know that not being in the game is a surefire loss.

Post Alley Crackpot said...

The great Boomer hope: the Millennials will buy their houses so they can get out from under all of the equity they've arbitraged into them.

Otherwise most of the Boomers don't stand a chance at retirement or pretty much even maintaining a reasonable standard of living.

The Gen X non-owner's strategy then: you may as well expat out of your first-world country because the only houses that are affordable are the houses that never improve in value, making them a year-on-year net negative.

But gold as a portable asset, someone says ... O RLY? SRSLY?

575k USD is the spot price of a London delivery "400 troy ounce" Good Delivery gold bar which weighs roughly 12.5 kilos (and is actually 438.9 troy ounces).

Got twenty million USD to move? That's over 15k troy ounces of gold, or roughly 475 kilos.

That's portable in the sense that you can move it, not in the sense that you can carry it with you ...

Wandering man said...

The farmland prices are brutal as well, only established farmers can even think of expanding acreage at 7-10k per acre.
Pretty soon the new generation of farmers will just be a bunch if investors in suits, because only the super wealthy can afford to buy the land.

Tyler said...

I've been asking myself this question multiple times to try and figure out what the best strategy is. My current though process is buy a few real estate assets that can be rented at a positive cashflow or close to it in a city/state/province that have natural resources (Oil/Gas/Mines) near by and hedge with precious metals/crypto. My thought process is people will always need a place to live/rent and people will always need those resources in my lifetime so those cities will always need people/services to support the industry. Tech cities (San Fran etc.) can be moved to other jurisdictions very simply but you can't move an oil field.

Best case things stabilize Rents keep pace with inflation and asset values increase with inflation or better.

Other Cases

Hyperinflation - Mortgage can be paid off with a couple Gold Coins or Bitcoin and charge rent at new established currency

Deflation - Interest rates stay near 0 so mortgage payments stay low enough to keep the cashflow in the green or slightly below until things get better.


Keep getting an error when submitting sorry if there are multiple repeats.

Tucanae Services said...

Anonymous given other factors gold would be an excellent passive investment. There is only one problem -- certificates. There are 4x/5x more promises (aka certificates) floating than gold in vaults. Big banks and institutionals playing shorts keep the apparent gold price deflated. I have a small holding in gold/silver for that 1% chance the SHTF occurs. The critical component is I have it physically available to me.

Cappy, I have two rentals and have no problem finding renters. Fact I usually have some renters on list if my current renters move out. The primary risk I see with real estate is as inflated as it can get if things in the job market got really bad people would not be able to afford the costs for lack of income. And for anybody thinking of it, never do Sec8 -- ever!

Anonymous said...

Gold looks like a very bad option because of the following:
- big maintenance costs: where do you keep it, how do you defend it from burglers, how much of you personal safety do you risk if you keep gold in your own hose, how do you transport it ?
- you cannot buy gold without paying a premium and commissions
- you cannot sell gold without paying a big commission
- the risks of selling a large quantity of gold
- hard to find buyers (are you going to use craiglist ?)

Anonymous said...

When you know a game is rigged, it's best to just not play, even if you lose out on some potential gains. All sheep get slaughtered, even the ones who know where the chute is going.

The best hedge right now is probably guns. The "scarier" the better. Remember, they can't ban things retroactively; they can only ban new sales and production. Go look up the prices on pre-ban Tommy guns...

Faithless Cynic said...

A good deal of money can be made in ghetto rentals, but, you will earn it. In 2001, I bought a trashed four bedroom brick townhouse in a very "druggy" area for $30K. The mortgage was $150 per month and the place rented for about $800 per month. I put about $5000 and a lot of sweat equity into fixing the place up. I did not know anything about rental repairs and had to learn on the job. Thanks be to Yootube, I am now a good handyman. Fast forward to 2017, for 16 years my rental has delivered a reliable $650 to $700 per month. Now the mortgage is paid off, My profit is greater. I have evicted some folks who thought paying the rent was optional. I kicked out a 10 year tenant because I could not stand her constant complaints and insults. The police raided my rental when my tenant was selling drugs. I have been called a slumlord, effing Jew, a member of the 1%, and been told " you never fix nuthin " When I am meticulous about maintenance.

There are a few things you should know before considering buying a ghetto rental:

The tenant will hate you no matter what. They are conditioned to despise " The Jew "

Screen tenants like you are hiring for the CIA

DO NOT TAKE SECTION 8, If you are required to, find a way to deny them

Join a local landlord association.

DO NOT try to be friendly with tenants, this is a business.

IF YOU WILL NOT EVICT A FAMILY FOR NON PAYMENT IN DECEMBER, FIND ANOTHER PROFESSION. I had a tenant tell me he spent the rent on Christmas presents for his kids. He was really pissed when the eviction notice arrived. FUCK THEM, I HAVE A MORTGAGE TO PAY.

LASTLY, you get the amount of verbal abuse you take. Choose none. Never raise your voice to the scum. Think long term. Assume all conversations are being recorded. Communicate mostly in writing or email.

A GHETTO TENANT IS LYING WHEN THEIR LIPS MOVE.









Faithless Cynic said...

A good deal of money can be made in ghetto rentals, but, you will earn it. In 2001, I bought a trashed four bedroom brick townhouse in a very "druggy" area for $30K. The mortgage was $150 per month and the place rented for about $800 per month. I put about $5000 and a lot of sweat equity into fixing the place up. I did not know anything about rental repairs and had to learn on the job. Thanks be to Yootube, I am now a good handyman. Fast forward to 2017, for 16 years my rental has delivered a reliable $650 to $700 per month. Now the mortgage is paid off, My profit is greater. I have evicted some folks who thought paying the rent was optional. I kicked out a 10 year tenant because I could not stand her constant complaints and insults. The police raided my rental when my tenant was selling drugs. I have been called a slumlord, effing Jew, a member of the 1%, and been told " you never fix nuthin " When I am meticulous about maintenance.

There are a few things you should know before considering buying a ghetto rental:

The tenant will hate you no matter what. They are conditioned to despise " The Jew "

Screen tenants like you are hiring for the CIA

DO NOT TAKE SECTION 8, If you are required to, find a way to deny them

Join a local landlord association.

DO NOT try to be friendly with tenants, this is a business.

IF YOU WILL NOT EVICT A FAMILY FOR NON PAYMENT IN DECEMBER, FIND ANOTHER PROFESSION. I had a tenant tell me he spent the rent on Christmas presents for his kids. He was really pissed when the eviction notice arrived. FUCK THEM, I HAVE A MORTGAGE TO PAY.

LASTLY, you get the amount of verbal abuse you take. Choose none. Never raise your voice to the scum. Think long term. Assume all conversations are being recorded. Communicate mostly in writing or email.

A GHETTO TENANT IS LYING WHEN THEIR LIPS MOVE.









Anonymous said...

Inflation in the overall economy is around 2%. Houses have increased in price at a greater rate but you have to consider that they were at a all time low when adjusted for inflation. The stock market will give you 7-8% ROI. Share buybacks add value if a buyback is done at a good multiple.

Faithless Sinik said...

You can make money with ghetto rentals. You will certainly work for it! Here is my example: 

In 2001, I bought a trashed brick 4 bedroom townhouse for $30 K. The house was located in a drug and violence area.  I spent 2 years and about $5000 fixing the place up. The rehab took awhile because I was working full time and I did not know squat about home repairs. I taught myself everything. 

Since 2003, the rental has produced a steady $800 to $945 a month. I had about a year of vacancies due to evictions. The rents have risen over the years. I now use a rental service that deals with verbally abusive, scum tenants. The fees they charge for " scum management " are worth every penny. The service finds a tenant, and more importantly, handles the eviction. The tenants think I am the maintenance man. 

If you do this, you need to learn basic home repairs like unclogging drains and toilets, treating for roaches, and fixing fist and foot holes in drywall an doors. You cannot afford to sub all this out. 

A few tips: 

Join the local landlord organization. 

Hang out on landlord websites and ask questions. Be prepared to get roasted by the curmudgeon landlords. 

Never become friendly with a tenant. 

Screen tenants like you are hiring for the CIA or use a rental service.

Memorize the happy clause " I you are not happy here then move out " 

Take EXTENSIVE before photos of the unit with a local newspaper in the photo. Tenants lie and always say " It was that way when I rented it" 

If possible, DO NOT TAKE SECTION 8. The tenants and the agency both hate your guts, and will work to destroy you. 

Be polite and professional. Do not cuss or yell. DO NOT TOLERATE ANY VERBAL ABUSE. I took two years of insults because I did not want a vacancy. The insults stopped when I gave them 30 days notice to move. 

Carry a lot of insurance. This will help against the slip and fall lawsuit scum. 

Make sure the property is lead paint free and get a state or private certificate that the property is lead free. This could save you a lawsuit when little Johnny turns up with high lead levels from another source and the tenants want to sue you!  Lead abatement is dirt cheap if you do it yourself on the down low. You are replacing the windows because they are worn out, not due to lead paint. The respirator is because the dust bothers your allergies. 

Never forget that tenants see you as the SCUM JEW LANDLORD. They are always looking to cheat you, because years of Democrat  propaganda state that you are cheating the poor, downtrodden worker or welfare sponge. Aside from dealing heroin, this is the only job where the customer hates you for selling something they want and need. 


Assume any phone conversation with a tenant is being recorded by the tenant. I got a voicemail from a tenant I was evicting. The voicemail message began with " seeing as you are evicting us due to the lead paint issue, you need to sign some papers "  I waited until my blood pressure dropped and called the evil bitch. I told the bitch there was ZERO lead paint in her unit and I had the state certificate and test results to prove that. Further, I was not signing anything. She moved without further incident. 

I bought another rental in 2005. The rehab went smoother and faster. I hope to have a decent retirement with this extra income. 

Why buy rentals? People NEED food, water, and shelter. The do not need the latest Eye phone, no matter how much they say so. Profit by selling them shelter. The " stawk " market can crash and decimate your 401K when you are too old to recover.