Seppia wrote: ↑Sat Aug 10, 2019 5:01 am
@shemp: I’ve run the numbers in all the cities I lived in, plus many perspective places where I could/would move. In my experience I’ve found zero places where cap rate is 5%, so much less so real landlord profits.
Bankai gave an example of 6% cap rate, presumably in UK since his numbers £. Of the numbers he listed, the only one open to serious dispute is ownership costs. Cheap buildings sometimes are cheap because of deferred maintenance. 6% cap rate is not common nowadays because of low interest rates, but it was in the past.
If the case of the OP, I doubt cap rate was very good, because $450K in 1990 near Pittsburgh was very expensive, and expensive houses usually have low cap rates. You want working class neighbourhoods.
jacob wrote: ↑Sat Aug 10, 2019 7:12 am
US real estate had historically returned around the rate of inflation. That makes sense since houses are consumables that don't do anything. The expected economic profit is zero.
You're making the same mistake as the OP. Housing is a business and houses most definitely do something. Namely, they generate a stream of housing services which you can use yourself, in lieu of buying such services from someone else, or which you can sell, if you want to be a landlord. Expected economic profit is certainly not zero, though it might be less than other equity investments (ownership of businesses other than housing, education, buying an automobile to allow driving to a better paid job, career counseling, etc) because of less risk. Risk is low with housing because there is always a market for housing services, so prices are fairly stable. The 2008 collapse was an anomaly and even then most of the USA was only lightly affected.
ether wrote: ↑Sat Aug 10, 2019 7:56 am
Single family homes will almost always lose money as a rental.
Expensive McMansions yes, but not cheap houses.
Landlords get the depreciation tax break, but that's a minor factor with cheap houses because it only applies to the building, not the land. Plus, depreciation reduces your basis when you sell, so higher taxes on gains. Owner occupants can't deprecate but they get the much more significant break of no taxes on for first $250K capital gains ($500K if married couple). Owner occupants also get the very significant tax break of no taxation on imputed rent, meaning housing services derived from living in the house. For example, for a renter in the 25% income tax bracket to pay $12000/year rent, they have to earn $16000. Whereas an owner occupant living in that house is not taxed on the $12000 value he receives, so effectively a $4000/year tax break. This tax break is most applicable someone in high tax bracket with stocks/bonds throwing off taxable income, who can switch from stocks/bonds to owner occupied housing, thus saving taxes that would previously have been due on stock/bond income.
As for leverage, that's just a multiplier: it turns a good investment into a great investment (as with Bankai's example of 35% ROI) or it turns a bad investment into a disaster, but it never turns bad to good or vice-versa.
oldbeyond wrote: ↑Sat Aug 10, 2019 7:39 am
Historically the "owners dividend" has provided a sizable part of the return from residential housing, see
viewtopic.php?f=3&t=9597
Under steady state conditions, "owners dividend" should provide 100% of return. Land should appreciate in line with nominal GDP while buildings depreciate, so the two more or less offset one another. Housing is a business and what matters most is the stream of profits (actual profits for landlords, imputed profits for owner occupants).
unemployable wrote: ↑Sat Aug 10, 2019 11:46 am
(You can rent out spare bedrooms or whatever, but then that portion you rent out isn't part of your primary residence anymore, and introduces externalities as well.)
Renting out rooms is exactly what many people should be doing if they are not rich. Of course it's a nuisance. So is almost everything having to do with making money in this world.
unemployable wrote: ↑Sat Aug 10, 2019 11:46 am
Your house, the one you live in, is probably not going to make you rich,
Bankai gave a example of 35% ROI, and that is not uncommon with real estate. (Though as I noted, maybe Bankai's estimates might be wrong, especially ownership costs and appreciation assumption.) You most definitely can get rich with real estate, precisely because it allows for high but fairly safe leverage.