House Price to Rent Ratios
Regarding the above captioned, Joe Leider has a nice post that's worth a read.
Water Buffalo comments: "don't forget about another important ratio that was often overlooked in the early 2000s: the ratio between median income and home prices. Because houses are usually purchased with a mortgage, this increase in value of housing prices should be tied to the increase in the wages of the people buying them."
We Nattered: "And that has been a total disconnect in recent bubbles."
TSGR comments:
"Interesting approach. The heuristic is not that different from the one I heard before, namely, that you should buy a rental property only if you can get 1% of its value as a monthly rent (12% on an annual basis). However, these calculations can quickly put you out of markets with average house prices higher than $250,000 (very hard to get over $3,000/mo rent in most places - not of course Manhattan or LA)."
Illuminati Investments comments:
"This rule of thumb would keep you from investing in pretty much every rental property. Assuming annual expenses (other than the mortgage) aren't more than a very conservative 5% of the home's value, this would still put the cap rate at over 7%, very hard to find deals at that value these days."
Sensible Investor comments: "I'm sorry. but when one buys a home, one is renting from the bank."
Left Banker comments: "You can look at it two ways: Renting from the bank is one. Buying an asset on 80-90% leverage at near 3% interest cost (plus a tax advantage) is another."
ChasingAlpha comments: "we must ask ourselves this, what are the chances of us picking the Celgene of the time when we are signing the mortgage note? We could just as easily pick the Enron and end up penniless."
The Nattering One muses...
"this would still put the cap rate at over 7%, very hard to find deals at that value these days."
It used to be 3 L's Location, Location, Location... These days, 4 L's = Location, Leverage (how much skin in the game), Liquidity (how much downside in a fire sale), Lead Time (Timing, as in how much ahead of the bubble curve was the purchase).
I like the cap rate method, but I remember when most investors would not touch anything with a GRM over 4, then it went to 7. During some recent bubbles, nothing could be found under 15, 20 and up.
Too many leveraged idiots have been allowed to run wild. Then again, greedy cash buyers can be even bigger idiots.
As we have Nattered before here, here, and here, this isn't the ownership society, that is illusory, it is the sharecropper society. Below is the historical lesson that the sharecroppers just can't seem to learn, and this is why the disasters keep getting repeated over and over:
"Homes are sticks and bricks where people live their lives and raise families. Homes should not be chattel for serial flippers, speculators and landlords. Seek margin in video games or cars or stereos or durable manufacturing, not the necessities of life. If you lived in the home for an extended period and it appreciates, that's one thing. But beware, when you turn your own backyard into a major source of wealth, that's when the trouble starts."
Water Buffalo comments: "don't forget about another important ratio that was often overlooked in the early 2000s: the ratio between median income and home prices. Because houses are usually purchased with a mortgage, this increase in value of housing prices should be tied to the increase in the wages of the people buying them."
We Nattered: "And that has been a total disconnect in recent bubbles."
TSGR comments:
"Interesting approach. The heuristic is not that different from the one I heard before, namely, that you should buy a rental property only if you can get 1% of its value as a monthly rent (12% on an annual basis). However, these calculations can quickly put you out of markets with average house prices higher than $250,000 (very hard to get over $3,000/mo rent in most places - not of course Manhattan or LA)."
Illuminati Investments comments:
"This rule of thumb would keep you from investing in pretty much every rental property. Assuming annual expenses (other than the mortgage) aren't more than a very conservative 5% of the home's value, this would still put the cap rate at over 7%, very hard to find deals at that value these days."
Sensible Investor comments: "I'm sorry. but when one buys a home, one is renting from the bank."
Left Banker comments: "You can look at it two ways: Renting from the bank is one. Buying an asset on 80-90% leverage at near 3% interest cost (plus a tax advantage) is another."
ChasingAlpha comments: "we must ask ourselves this, what are the chances of us picking the Celgene of the time when we are signing the mortgage note? We could just as easily pick the Enron and end up penniless."
The Nattering One muses...
"this would still put the cap rate at over 7%, very hard to find deals at that value these days."
It used to be 3 L's Location, Location, Location... These days, 4 L's = Location, Leverage (how much skin in the game), Liquidity (how much downside in a fire sale), Lead Time (Timing, as in how much ahead of the bubble curve was the purchase).
I like the cap rate method, but I remember when most investors would not touch anything with a GRM over 4, then it went to 7. During some recent bubbles, nothing could be found under 15, 20 and up.
Too many leveraged idiots have been allowed to run wild. Then again, greedy cash buyers can be even bigger idiots.
As we have Nattered before here, here, and here, this isn't the ownership society, that is illusory, it is the sharecropper society. Below is the historical lesson that the sharecroppers just can't seem to learn, and this is why the disasters keep getting repeated over and over:
"Homes are sticks and bricks where people live their lives and raise families. Homes should not be chattel for serial flippers, speculators and landlords. Seek margin in video games or cars or stereos or durable manufacturing, not the necessities of life. If you lived in the home for an extended period and it appreciates, that's one thing. But beware, when you turn your own backyard into a major source of wealth, that's when the trouble starts."
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