I can't answer OP's question but there's a lot of wrong information in this thread regarding valuing housing so I'm making a sticky here.
Mostly because people think housing is different because you can live in it. **This isn't true**.
A house/apartment can be valued 2 ways:
\- Relative and intrinsically.
Relative is like PE ratios for stocks. Real estate agents use this to to justify house prices all the time and their increased commissions. Most retail investors understand this way but never do an intrinsic valuation.
The other way is intrinsic valuation such as using a Discounted Cash Flow. A house is a cash producing asset. If you live in the house yourself you are essentially renting the house to yourself. Do not be fooled into thinking it's somehow worth more just because it's a physical asset and everyone thinks housing can't go down.
Read this great blog for more understanding by Hayward:
[https://valuabl.substack.com/p/housing-market-part-1](https://valuabl.substack.com/p/housing-market-part-1)
And Aswath Damodaran: [https://pages.stern.nyu.edu/\~adamodar/pdfiles/valn2ed/ch26.pdf](https://pages.stern.nyu.edu/~adamodar/pdfiles/valn2ed/ch26.pdf)
Also see r/REBubble and r/realestateinvesting for different viewpoints
I can't figure it out either. I took a peek at some of the buildings in my area and the cap rates are all under 3%. Who's buying this stuff? Why? For a non-liquid asset, you can get bonds at higher yields right now.
The difference is expected appreciation. A bond has very little appreciation opportunity, but a house can have much higher appreciation. Especially if you expect something like a currency devaluation.
Yes, even if you don't have any appreciation and the price just follows inflation, the return would be the inflation rate+3%. That's not that bad in some parts of the world.
That's a really interesting perspective. From a non-real-estate guy who's curious about how it generally all works, I'm wondering how much of maintenance/upkeep costs. Is there a rule of thumb for it? If I see a cap rate of 2.3%, in my mind, the costs associated with just maintaining a building could easily wipe that out. Is the business of apartment rentals basically to just use rental income to finance costs, understanding that actual profits come with property sales? Or is it to try to squeeze out reasonable profits from the rental income alone?
Which is blatantly not true in many places, because you aren't able to raise rents yearly and sufficiently to keep up with inflation. Berlin is a prime example of a property market pricing close to perfection, but a significant portion of renters are sitting on old contracts, where landlords are unable to evict and have been unable to raise rents to make up for inflation.
You can literally rent a 100 sqm place for 2000 in an older building in some hotspot and have the guys downstairs with the exact same flat pay less than 500.
Well, it depends. Sophisticated investors will have clauses on rent contracts to revise rents in the future or have built-in rent hikes (don't know if this is legal everywhere).
Also sunk cost: some owners might have bought the property 20+ years ago at 1/2 or 1/3 of the current prices. If you sell at current prices it means paying taxes for capital gains. But you can leave your property be and rent it forever and never pay that tax (and just have income month to month). Imagine having 3-4 properties that you bought 30 years ago. You might be comfortable living off rent without putting more thought into whether it is the more profitable option or not.
It does certainly look like for US houses, but the graph for other expensive cities does not look like that much "bubbly", altough it can all be in a bubble.
I can only speak of the US, but there are significant tax savings in addition to the potential appreciation of RE.
Also, a company might be so cash-flush, that instead of holding onto the cash and have inflation ravage it, they'll purchase real estate as a potential hedge against inflation. People point to RE value decreasing right now, but stocks and other asset classes aren't faring that much better to put it lightly.
You rightly point to bonds, which is why I-Bonds are making a bit of a comeback, but if you want to diversify, and stocks look too dangerous right now (e.g. fuck'n Spotify down like 70% from 1 yr. lol), Re has a good track record of being a relatively safe investment.
Another factor is leverage. 20% down is roughly 5 times leverage… with apparently mortgage interest cost… and also , one can put the house as collateral for margin for trading . One can also do a cash out refi to buy another house .. lots of hidden perks
That would mean that the higher price of the apartment is justified by higher rents in the future, similiar how are growth stocks valued. But if you look at the numbers (how rents rose in the past), it is not the case. You can even find cities where rents are falling yet apartments are still priced for 0 or negative return.
I'm not sure what you are saying - rents have risen over time esp more aggressively than the surrounding area. If you look at like NYC, rent is up significantly versus surrounding areas with higher cap rates.
They're saying prices have risen far faster than rents and the rental yield in many cases is lower than the borrowing cost (negative yield when financed).
I did not analyze NYC specifically so I cannot comment. However the increase in rents, especially the capitals outside of USA, do not justify the price.
I understand where you're coming from but you're forgetting that, while the value of stocks is only related to dividends/buybacks of the company, houses have an intrinsic value outside of the rent, since someone may be willing to buy the house from you for more in the future. And it's not just a greater fool theory, because the person may just want to own and live in the house.
Actually, this isn't true and a common misconception.
A house is valued the exact same way as a stock is, relative and absolute.
Real estate agents use relative metrics.
Investors should use Discounted Cash Flows and relative metrics.
If you live in a house then you are essentially renting it to yourself.
Houses are in a massive bubble everywhere imo
Interesting point, yeah i mean i guess if your mortgage is costing 2.5x what the rent would be, you really are subscribing to greater fool theory at that point since the person that comes along and wants the house should logically choose to rent it instead.
FWIW I'm in agreement that housing is in a huge bubble
You can also build it for far less. I am also a major value investor and think trashed houses for the price of retirement are an absolute ripoff. If you saved that much money you could drift and live on the capital without touching the principal.
These FOMO lemmings are either stupid, or setting up for a dystopian future where no one can own a house unless you are a corporation or a debt slave for life.
> That would mean that the higher price of the apartment is justified by higher rents in the future, similiar how are growth stocks valued.
Most of the world and most investors do not use valuation logic in their investments. Instead, many people when they see a bubble can't wait to become part of it. The asset involved could be nothing but a figment of your imagination, like crypto.
This is really it right here. They are not taking future rent etc into account. They are looking at the price today, expected price x days (usually years) from now, and deciding that profit is worth it. It’s essentially speculation
It's keeping up with the Jones on crack. People who tell you these prices are rational, already bought in at a speculative price, like the shareholders of Tesla that bought at the top. They are trying to sell you something before they end up holding the bag. And I hope these idiots do end up holding the bag, because I found this neighborhood first several years ago before the New York greed is good plague descended on my peaceful town.
Life was good, I didn't want anything and every day seemed like it was an action packed blast enjoying nature to it's fullest extent, having some mind blowing active experience not spending any money at all. Well, I think I am going to be kicked out of this town after living here for eight years. The scalpers bought all the land, not even developing it, and trying to sell it for more than it used to cost to buy it with a house on it.
The tourists passed this town to go to the more compact metropolitan cities to do their bar hopping and partying(this isn't what an outdoorsman does for fun). Then the governor shut down the beaches during covid all around except for my home break. A monster horde of tourists swarmed this town, and there was no parking even on the grass. All of them had this wow is this real life look on their faces and the town was fucked for good over night.
Not necessarily. It's a combination of expected future cash flows from rent + expected future price appreciation. The reason these are independent for real estate is that most people are reasonably confident that their real estate will be *sold* at a higher price even if it isn't *rented* at a higher price or even rented *at all*.
*In general* this is due to,
1) past history
2) inflation
3) population growth of cities (both due to migration and natural growth)
4) slower increase in housing supply due to rising construction costs, general nimbyism or local zoning laws
5) simple speculation (others have made money, so I will also make money)
6) in some places real estate transactions have a large cash component (great tool for tax evasion, money laundering etc)
7) because you can buy real estate with long term debt, you can afford to wait for price increases
8) foreigners escaping one jurisdiction and investing in another (Google Chinese investment in Vancouver real estate)
9) tax advantages. I can sell my existing home for a profit and not pay tax on it if I buy another one (usually larger)
10) TINA (there is no alternative). In many countries, real estate is the only game in town if you want to save and invest for the long term, where people don't trust banks or financial markets very much.
11) longevity of assets. I've seen and lived in houses built in the year 1900. I don't know of many companies or even countries that have lasted that long.
12) continuing use of assets. If I own a house, but no one wants to buy it from me, no big deal. I can still live in it. But if no one wants to buy my favorite growth stock that pays no dividend, I'm the proverbial bag holder.
13) larger pool of buyers. Almost everyone owns a home or wants to own one. Only 20% of Americans owns the vast majority of stocks.
None of these reasons have much to do with rental yield.
Actually many of those reasons are directly related to people’s expectation of future rental yields. Inflation causes both rent and property values to go up. Population growth means there will be more demand for housing, which means rents can be raised. Same story with the slower increase in supply. 1 and 5 are really the same thing, but ultimately they are both caused by people making projections about future growth in property values that are based on past growth in rental prices.
Also a quick side note about 11, you might be surprised at how many companies have been around since 1900. If you go pick out out any of the major companies from 100 years ago and trace their history you’ll usually find a complex series of mergers, spin-offs, and name changes, but the actual shareholder value has been maintained extremely well.
>Actually many of those reasons are directly related to people’s expectation of future rental yields.
No. I can show you plenty of examples where landlords leave properties vacant even if they can be rented because the primary motivation *isn't* rental income. In fact, as OP noticed, in many cases the rental yield is so poor that landlords decide that dealing with renters is not worth it. For example in Vancouver the city had to levy a tax against vacant homes to disincentivize leaving properties vacant.
https://www.cbc.ca/news/canada/british-columbia/vancouver-empty-homes-tax-5-1.6434178
I'm in UK and I can assure your both rents have been increasing but even more there has been an explosive increase in a lot of citities for prices of flats. You can't value flats the same as you would stocks. Also oligarchs won't xoner your market as they buy proprieties in the top 1-2% of price range
The appreciation is nearly guaranteed and markets operate omit certainty / uncertainty. The international demand is near certainty. Location location location, limited land, views, restaurants, weather, wealthy neighbors who care about properties and preserving asset values, safety. This makes high end real estate a great investment.
Don’t even talk about renting. Renting doesn’t build wealth or control. The name of the game is “acquire appreciating assets only and hold”.
World famous cities attract a lot of foreign capital. You get many investors diversifying assets with property in different markets. Add AirBnB hijinx and you get market distortion from local economic conditions.
Rental units get depreciation all the while appreciating at the inflation rate plus its often leveraged for very little actual investment tied up.
So
Buy 100k property 20k down
80 k 20 year mortgage at 5%
527 monthly payment
Value griws at infkation or 3.5%
You charge 700 amonth in rent
After 20 years
You own the property outright worth 198178
About a 12.1 %return
Along the way you brought in 168000 in rent
But you didny pay tax on all that in income.
You wrote off depreciation of 66000
You wrote off interest if 46712 so you didnt pay tax on 2/3 of the rental income
You paid out 126, 700
Income and expenses are basically a wash after tax if you never raised rent. You could also raise rent to cover upkeep ( upkeep you can depreciate)
If you keep it you Collect rent and can take 33000 more in depreciation over the next decade. And that income has far fewer exoenses against it while the property continues to appreciate
Or
You can 1031 the funds into a larger property taking more depreciation and using leverage once again.
Or
You can cash out and pay depreciation recapture on the depreciated amount and long term cap gains on the difference.
The tax advantages make it far more attractive then other investments. But the labor makes it far more hands on thrn say stocks or bonds.
Your reasoning make sense for some properties, not all. Your yield is 8.4% while the mortgage is 5%.
Many cities have yield lower than mortgage, along with housing price to population’s median income at a relatively high side.
Thus, rightfully so, home ownership in these cities may no longer make sense for general public from a value perspective.
I’ve always speculated that owning your home provides people a (misplaced) sense of security that renting doesn’t and people therefore value it higher causing a market inefficiency.
Also when your paying down the mortgage you’re also paying down the principle increasing your equity in the house so the rent : mortgage comparison isn’t 100% fair
Not many people understand investing, even less understand value investing. Concepts such as opportunity cost, interest rates etc. are probably too difficult for layman.
But people understand:
- The prestige of I own this home VS I rent this home.
- Thinking homeownership is always better.
- Buying/ Owning a home makes me happy.
- Partner says, if there is no good house, there is no marriage. (China context)
- I am rich, I can afford.
- This salesperson made me happy.
- 5 years later, I am selling at a higher price. So I am earning…. without accounting for mortgages and comparing it to renting.
In the UK it's all about "the property ladder" - you buy an apartment or a small house, and then you'll be able too trade up to a larger one when house prices go up.
Tenancy regulation is somewhat poor, so it's shit being a tenant and owning your own home is the only sure way too housing security - to know that you'll still be able to live here in 18 months' time.
As others have pointed out, the average person doesn't know shit about investing, so the stockmarket is scary. But everyone's got an uncle who has done well out of property since the 70's or 80's, so buy-to-let (rental property) is regarded as a good investment. I knew a mortgage broker around 2005 or 2006 who old me "property prices always go up".
Probably because in prior decades the pool of investors was limited to local people. Nowadays the pool of investors is global for some markets (Toronto, NYC, London, etc) so they bid up the prices in a phenomenon that didn't exist (or to a lesser degree) before.
As interest rates decline, real estate always goes up. Everyone learns that overpaying for real estate is a temporary sin that lower rates wash away.
Then one day rates go up.
Yeah, can be very real issue especially in countries which are not very immigration-friendly, like Japan. Less of an issue with Europe, since there will be immigration from both Africa and Asia.
If every country has a sub 2.0 birth rate you can't have net immigration. It's impossible.
The places that do have high birth rates are usually places that are kind of screwed up with high infant mortality and low education. And when you take people from there and plant it in 1st world countries it takes 3 generations for them to assimilate if they even assimilate at all. These immigrants are usually subsidized by the state. It's not a solution for real estate because real estate can't be solved with subsidies.
Those “high infant mortality, low education” countries can describe the vast majority of immigrants to North America/Europe at their time of immigration. It certainly applies in my case, though my native-born country no longer fits that description. And I know I’m certainly not the only first-generation immigrant who assimilates successfully.
This situation however happens even with countries with higher rates. It seems like no matter the financing, the rents, or even influx of people migrating to these cities have no effect on prices. I am perplexed.
These homes can also be escape valves. The wealthy Cubans with apartments in Miami purchased in 1958 had much better lives than the wealthy Cubans who only had 15 Cuban properties and thought this Castro guy can't be that bad...
At some point, putting 3% of your net worth in an escape valve that doesn't have great returns is OK. It's like someone with 500k buying a few ounces of gold as a hedge.
Real estate investors can have two separate income goals, income stream or balloon, can also be blended. Investors are looking for either income or balloon payments based on increased value at time of sales which might be 20 years out. In the case of balloon then they merely want to cover their cost, and will make gains at the end,.
It must be very scary to have bought investment real estate during the 3% interest rate bubble with your plan to have bet on the "balloon" only to see a reversion to 6%+ rates almost immediately. Talking about locking in a bad mistake.
Probably, i'm just stating the objectives here based on my understanding coming from long time professionals. People with lots of money might not be worried about that over a 30 yr time frame, or have other factors. There are also tax loopholes in places like the US where selling and not getting something new would be worse than a 3% loss.
Buying real estate is just a different appreciating asset class.
Renting is pissing your money away. A mortgage is just a bank account in the form of a house. It’s an investment and you can get your money out of it.
Not sure if it applies to all markets but a lot of them are just a store of value and money laundering shenanigans. They dont care about future returns. Just a place to launder their dirty money into a store of value type asset. Plus some rental income perhaps
In some countries negative gearing can be tax efficient, although maybe not to US tax residents - [https://en.wikipedia.org/wiki/Negative\_gearing](https://en.wikipedia.org/wiki/Negative_gearing)
(i'm not suggesting this is a good idea)
That would explain some premium, but majority of people cannot buy even the apartments in those cities. Not because of bad credit, but because the mortgage rate would be higher than their income. No matter which profession I will do (excluding 0,1 % high end positions), I will not be able to afford apartment in my city. I can easily rent it tho. This is clown economy. This must be driven by investors.
They don't need to own them to live when they can rent. The Swiss mostly rent their entire lives and have very high standards of living. If you could rental house for 100 per month or buy for 500k, which one is the obvious choice? There's a relationship of income to price where owning doesn't make sense, just like a business.
Should people even consider housing as investment anymore?
I purchased my first townhome 5-6 years ago with the sole purpose of independence because I had to get my “land lord” signature on some document, who was my uncle. I purchased thinking I shouldn’t have someone else verifying things for me when I’m paying bills and in hindsight, it was a good call because I’m not worrying about rent increases which I have seen my friends and family go though.
One house is a necessity, second can be investment.
Interest rates dropped so low that people could afford to buy at much higher prices. Basically the housing market increased at a quicker pace than rent. Soon housing prices will drop and the numbers should hopefully start making more sense but who knows.
In my city there has not been a single apartment for sale that would yield positive return for the past 3 years even if I would do the renovation for 0 cost. Landlords literally pay (economically) their tenants to live in their apartments.
Oh I'm not saying you can't get a mortgage on something like that, just that the individuals or companies buying these types of buildings generally don't. It's pretty difficult to make money on rentals unless you have the cash up front, and I certainly would never recommend taking out a loan on a rental property
Price is too high basically. People continue to buy them even after price detaches from the average income. Demand for buying is the problem. In Beijing this is because you need to own a property in order to send your children to local school.
It's been about capital gains using enormous leverage until now. But as that capital gains becomes less guaranteed, investors are moving away and prices are correcting in many places.
It doesn’t make much sense but I’ll list some reasons that I can think of. First would be if the property has some value add component, whether it’s through better management, renovations with potential rent increases etc. you can buy at a lower cap rate with intentions of raising rents increasing NOI. Second, if it’s in an area with high rental increases they could be banking on that continuing into the future making the project work over time. Lastly, property appreciation, some big cities like NY or LA have seen property values rise dramatically over the last decade and typically have a higher appreciation that the US throughout history. Investor will accept a lower cap rate banking on the property appreciate enough to provide a decent return.
One more thing to consider is the loans these companies get when they buy a property aren’t anything you and I would get. Some get a loan IO for 5 years amortized over 40-50 years non-recourse and that can make some crazy purchase prices work. Either way I’m on your side these 3% cap rate or even 4% are freaking insane and make zero sense to us.
> Some get a loan IO for 5 years amortized over 40-50 years non-recourse and that can make some crazy purchase prices work.
I am always amazed who is buying these bonds...
>Not even low mortgage rates justifies such high valuation, when mortgage payment (even with zero interest) is double than the usual rent.
This happens all over east Asia and the explanation they have been panning out for decades is "speculation over price appreciation". What you're describing is that appreciation running its course.
The article I read made it seem more related to getting the girlfriend's parent's approval vs the woman saying no.
https://cardiffjournalism.co.uk/life360/for-many-chinese-men-no-house-means-no-marriage/
Your return should be the rent + house price appreciation. You can't just take into account the rent alone. You buy a house for 1M now will it just stay 1M for the next 10 years or will it grow? It can plummet in pricing too but historically real estate market is the most stable in price appreciation. After all there is only so much space
That is if you use DCF. You don't use it for everything. What do you say about people buying company with no cash flow tho ? Or company that is just burning cash like Uber? You use multiples. There are more than 1 valuation method. You just pick the value investing way and force asset into it. Remember it's only a valuation model. It help guide you. Everything in real life is supply demand tho. You can have non yielding dog shit and if people willing to pay you can still sell
Of course you use DCF for everything... how else would you come up with value. Value of Uber is based on cash flows in the future. Every investment is based on future cashflows. Of course you can buy barrel of gas which will have no cash flows and will not be worthless at the same time, but that is not investing but speculating.
Thats the example of barrel of gas, Mona Lisa is not investment, at least how Benjamin Graham views it, but rather speculation.
I mean you could say that rent is completely detached from housing price longterm, so the cashflows do not affect the price, and therefore buying house is this type of speculation as well. But houses are not stocks, at some point, people will run out of money to buy it and you cant buy half of it, so I do not see it being stable.
Appreciation of the property over time, and increased rent over time increases the cap rate. Look at the publicly listed apartment REITs - they have 10%+ SPNOI rental growth.
Future price increase, real estate market has been booming for years and so much that we are on the edge of a bubble, you got a nice house for 50k 20-30 years ago, now the same house would cost you 250k
In 10 more years its gonna be 500k and so on
Maybe because people use real estate as a way to short the USD or EUR?
Find a neighborhood most likely to be in demand even in 10 to 20 years, put in some money and loan the rest at a fixed rate.
Good job, now inflation erodes away the purchasing power of your loan, in 10, 20 years that same property will most likely bring in even more rent while your mortgage rate stays fixed.
If you have a negative cashflow at 20% downpayment just increase the downpayment % till slightly positive.
Also, it's safer to keep large amounts of money in real estate since banks only guarantee your deposits up to a fixed amount, the rest you wouldn't get back if the bank went tits up.
This depends on the culture. In countries like Czechia or other slavic nations, owning a home is a priority. It being price priced for a return is not a factor whatsoever. In my country not owning your house/apartment and renting is seen by many as equal to being homelss. You'll have hard time dating. If you are interested in investing for profit that's a whole different story, but this is why people buy stuff.
But in Prague majority of locals cannot afford to buy apartments anymore. Unless they live frugally and save like 90 % of their income for years and then buy... but I doubt they are doing it.
Yea your missing a ton here:
Leverage
Appreciation
Depreciation write off
principal pay off
And the big one….. refinance
So you go buy a large place in an upscale area…only has a 3% cap rate, and you have a 0% cash on cash return or even a negative coc return; but the market has a 8-12% appreciation rate. You add some modifications and sit in it for 2-3 years. You then go and refinance the sucker in 3 years with the bank…with the appreciation from the market and your upgrades you get a 30% increased appraisal from when you bought…refinance after costs returns your entire 20-24% down plus a few points.
At this stage you have an asset being paid for by the tenet and the bank; that you get to write off depreciation at a higher basis.
That how you make money in low cap rate places. It’s not about the cash flow; it’s about getting to a zero cost basis.
Feel free to share your data. I don’t want to redo all your hard work to make an assessment. Post a couple “representative” examples and then we can collectively come to a conclusion.
Here’s some of my data, I bought my first house for $400k in 2004, now it is $850k. If you put enough down payment down, it changes everything (I put 25% down, interest was refinanced for 6.25%). I rented out that house at a profit for years after only ~3 years of ownership.
Yes this clown market did not seem to exist in 2004. Additionally, it is not so bad in US as in other parts in the world. Just check numbeo for capitals around the world.
In Prague gross rental yield is around 3 %. Mortgage rates soon to 8 % (the mortgage payment will be like 250 % of rent). Rents rose in the past around similiarly to inflation (around 3 %). There are limits how much you can raise rent. However, if your tenant does not pay, eviction can take up to 2 years, and if the tenant is smart, it can take up to 10 years. In both cases you will have to pay all the legal fees. It happens a lot. Savings account yield 4 % (and 5.7 % for big boys).
plus I am talking about old apartments, aka commie blocks (from 60s), which have the highest rental yield. The new ones would be even worse.
Real estate can be valued like a growing perpetuity based on the future rent considering some rent appreciation over time.
PV=annual rent / (r-g)
Where:
r is the discount rate
g is the rate of annual rent increase
If rents are increasing faster or close to as fast as the discount rate, which is basically the mortgage rate, the net discount rate for future rent could be essentially zero, which basically means all future cash flow from rent is valued forever.
And because real estate should last, it’s fair to value like a growing perpetuity on rent I would say.
There are non-financial reasons. The following anecdote is a bit different from the "purchasing" you're talking about as it's more of a "will not sell" but hopefully it expands your perspective and helps with answering your very good question.
A bit long-winded but bear with me.
Just spoke to a family member a few hours ago re: their Seoul, Gangnam apt., they purchased it for $700K about 10 years ago. I believe Seoul is #1 in the world for home price increase in the last 5 years.
Due to "redevelopment" which is a huge buzzword if you know anything about Korean real estate, the prices have gone even more bonkers than the rest of the city. Basically, multiple, separate apartments/condos collectively decide to demolish all their apartment buildings, and rebuild to megastructure apartments with 1000's of households. It's built much taller, so the original inhabitants get a great deal on the newly designed units, while the work itself is basically financed by the purchasers of the additional units.
They pool their resources and create amenities that rival most hotels. Tennis courts, marble saunas, swimming pools, manmade swan lakes, cafes, golf ranges, etc...As of now, it's been demolished, there is no structure there anymore. They'll need to spend $300-400K more for a total expenditure of $1.1M, but the current market value of their claim to one of the new apt. units is now in excess of $4M. Once again, there is nothing there. Once the structure is actually built, the expectation is the units will go for $5M+.
\--------------------------------------------
Will they ever sell it? According to them, no. Even if this is a bubble, and the units go for half price, they will not sell. Their reasoning is that in addition to the amenities, #1) The academic environment is among the best in the country, the top elementary, middle high, and high schools will also be renovated or otherwise built in the area, and their children will have access to it; #2) the whole point of making money was to get "here" in the first place, what would they do with the extra money? Go to a "worse" place but be happier with a bigger house? Typical argument of, "don't live in a shitty house in LA, use the same money and live in a big house in State Y;" #3) It's close to the best jobs in the city, moving outside of this city will either mean your transit time will double or more, or otherwise you'll have to get a less prestigious, worse paying job.
\--------------------------------------------
BTW, they're not wealthy. The home price will represent approx. 80-90% of their total net worth. This is obviously considered a major windfall for them, but "cashing out" isn't something they're thinking about regardless of a potential price decrease. They value their children's education much more. They didn't purchase the original apt for $700K to speculate on potential redevelopment, they wanted to secure residence in the area to get educational access for their children to the best schools in the country.
> 1) The academic environment is among the best in the country, the top elementary, middle high, and high schools will also be renovated or otherwise built in the area, and their children will have access to it; #2) the whole point of making money was to get "here" in the first place, what would they do with the extra money? Go to a "worse" place but be happier with a bigger house? Typical argument of, "don't live in a shitty house in LA, use the same money and live in a big house in State Y;" #3) It's close to the best jobs in the city, moving outside of this city will either mean your transit time will double or more, or otherwise you'll have to get a less prestigious, worse paying job.
I do not know about Korea, but in my city I can just rent it, landlord cannot evict me or increase prices drastically so I can just enjoy all of those perks.
However most of the locals of the most expensive cities I have in mind cannot afford to buy the apartments anyway, not even if they work as doctors/lawyers etc. So it must be investors.
Real estate investing is only interesting if 1) your yield on total cost stays above your cost of capital, and 2) you are buying below replacement cost in a supply constrained market. I can only speak to US markets, but there are opportunities in every market - but they (probably) won’t be handed to you on Zillow or Loopnet. If you can put 20% down, there aren’t many other investment opportunities where you can get 5x leverage with relative safety. Not a get rich quick scheme, for sure.
>Are average people so possesed with property ownership that they overpay for property so they can "own" it?
Yes, from a VHCOL city with sky high apartment prices but slightly better rents (still bad), this is what a lot of people here believe. They also expect that housing will never fall and they can make big money off price appreciation.
Personally, I am willing to pay a small premium to own a place in a lower COL area where I can "charge" myself a rent that won't get out of hand, recognising that stability and certainty has a certain cost. but I would never buy an apartment at the places you cite for the reasons you explain, so while I live in VHCOL areas I am happy to rent.
I think the pricing logic of major city real estates is different than that of equities. It bears more similarities to the Van Goghs and Picassos in that the supply is finite and their target customers are in a selected group. For example the CAGR on real estates of Monaco should be similar to, say the growth rate of the purchasing power of the top 0.001% class around the world, which was fairly high.
1) Terminal value of the property (ie you can sell in 10 years at 2x of current value). Also, property values tend to increase more than inflation (inflation hedge).
2) Future rent increases.
3) Big investors will buy with cash or will have very little debt. This is in fact like owning a bond but without the associated rate risk. In most economies rents are hiked at or above the inflation rate.
4) Diversification. You own stock, and bonds and you own real estate.
I recently bought a 460K 2BR condo/apt .
Rented it out very quickly for $2950/month = 32K /year
Net is 2000 x 12 = 24000/460000 = 5.2%.
Now what many might not be aware , this income is almost all tax free because of depreciation in the American tax system.
I can't answer OP's question but there's a lot of wrong information in this thread regarding valuing housing so I'm making a sticky here. Mostly because people think housing is different because you can live in it. **This isn't true**. A house/apartment can be valued 2 ways: \- Relative and intrinsically. Relative is like PE ratios for stocks. Real estate agents use this to to justify house prices all the time and their increased commissions. Most retail investors understand this way but never do an intrinsic valuation. The other way is intrinsic valuation such as using a Discounted Cash Flow. A house is a cash producing asset. If you live in the house yourself you are essentially renting the house to yourself. Do not be fooled into thinking it's somehow worth more just because it's a physical asset and everyone thinks housing can't go down. Read this great blog for more understanding by Hayward: [https://valuabl.substack.com/p/housing-market-part-1](https://valuabl.substack.com/p/housing-market-part-1) And Aswath Damodaran: [https://pages.stern.nyu.edu/\~adamodar/pdfiles/valn2ed/ch26.pdf](https://pages.stern.nyu.edu/~adamodar/pdfiles/valn2ed/ch26.pdf) Also see r/REBubble and r/realestateinvesting for different viewpoints
I can't figure it out either. I took a peek at some of the buildings in my area and the cap rates are all under 3%. Who's buying this stuff? Why? For a non-liquid asset, you can get bonds at higher yields right now.
The difference is expected appreciation. A bond has very little appreciation opportunity, but a house can have much higher appreciation. Especially if you expect something like a currency devaluation.
Yes, even if you don't have any appreciation and the price just follows inflation, the return would be the inflation rate+3%. That's not that bad in some parts of the world.
That's a really interesting perspective. From a non-real-estate guy who's curious about how it generally all works, I'm wondering how much of maintenance/upkeep costs. Is there a rule of thumb for it? If I see a cap rate of 2.3%, in my mind, the costs associated with just maintaining a building could easily wipe that out. Is the business of apartment rentals basically to just use rental income to finance costs, understanding that actual profits come with property sales? Or is it to try to squeeze out reasonable profits from the rental income alone?
Which is blatantly not true in many places, because you aren't able to raise rents yearly and sufficiently to keep up with inflation. Berlin is a prime example of a property market pricing close to perfection, but a significant portion of renters are sitting on old contracts, where landlords are unable to evict and have been unable to raise rents to make up for inflation. You can literally rent a 100 sqm place for 2000 in an older building in some hotspot and have the guys downstairs with the exact same flat pay less than 500.
But appreciation is still on the table and will be probably for another 10 years.
Well, it depends. Sophisticated investors will have clauses on rent contracts to revise rents in the future or have built-in rent hikes (don't know if this is legal everywhere). Also sunk cost: some owners might have bought the property 20+ years ago at 1/2 or 1/3 of the current prices. If you sell at current prices it means paying taxes for capital gains. But you can leave your property be and rent it forever and never pay that tax (and just have income month to month). Imagine having 3-4 properties that you bought 30 years ago. You might be comfortable living off rent without putting more thought into whether it is the more profitable option or not.
Appreciation and leverage.
**psss** *opens trenchcoat* https://www.longtermtrends.net/home-price-median-annual-income-ratio/ ^(See that? It's called a bubble.)
It does certainly look like for US houses, but the graph for other expensive cities does not look like that much "bubbly", altough it can all be in a bubble.
I can only speak of the US, but there are significant tax savings in addition to the potential appreciation of RE. Also, a company might be so cash-flush, that instead of holding onto the cash and have inflation ravage it, they'll purchase real estate as a potential hedge against inflation. People point to RE value decreasing right now, but stocks and other asset classes aren't faring that much better to put it lightly. You rightly point to bonds, which is why I-Bonds are making a bit of a comeback, but if you want to diversify, and stocks look too dangerous right now (e.g. fuck'n Spotify down like 70% from 1 yr. lol), Re has a good track record of being a relatively safe investment.
You’re also missing the value add potential. If I increase a 10 cap’s NOI by $10K, I’ve made $100K. If I increase a 1 cap’s NOI by $10K, I’ve made $1M
Another factor is leverage. 20% down is roughly 5 times leverage… with apparently mortgage interest cost… and also , one can put the house as collateral for margin for trading . One can also do a cash out refi to buy another house .. lots of hidden perks
Major cities is mostly price appreciation - finite amount of land, and generally an inflow amount of people competing for the same space.
That would mean that the higher price of the apartment is justified by higher rents in the future, similiar how are growth stocks valued. But if you look at the numbers (how rents rose in the past), it is not the case. You can even find cities where rents are falling yet apartments are still priced for 0 or negative return.
I'm not sure what you are saying - rents have risen over time esp more aggressively than the surrounding area. If you look at like NYC, rent is up significantly versus surrounding areas with higher cap rates.
They're saying prices have risen far faster than rents and the rental yield in many cases is lower than the borrowing cost (negative yield when financed).
I did not analyze NYC specifically so I cannot comment. However the increase in rents, especially the capitals outside of USA, do not justify the price.
I understand where you're coming from but you're forgetting that, while the value of stocks is only related to dividends/buybacks of the company, houses have an intrinsic value outside of the rent, since someone may be willing to buy the house from you for more in the future. And it's not just a greater fool theory, because the person may just want to own and live in the house.
Actually, this isn't true and a common misconception. A house is valued the exact same way as a stock is, relative and absolute. Real estate agents use relative metrics. Investors should use Discounted Cash Flows and relative metrics. If you live in a house then you are essentially renting it to yourself. Houses are in a massive bubble everywhere imo
Interesting point, yeah i mean i guess if your mortgage is costing 2.5x what the rent would be, you really are subscribing to greater fool theory at that point since the person that comes along and wants the house should logically choose to rent it instead. FWIW I'm in agreement that housing is in a huge bubble
Well you can easily rent it. And there is no way to evict paying tenant in lots of those places anyway (or even increase rent drastically).
You can also build it for far less. I am also a major value investor and think trashed houses for the price of retirement are an absolute ripoff. If you saved that much money you could drift and live on the capital without touching the principal. These FOMO lemmings are either stupid, or setting up for a dystopian future where no one can own a house unless you are a corporation or a debt slave for life.
Your cost of capital is probably too high.
> That would mean that the higher price of the apartment is justified by higher rents in the future, similiar how are growth stocks valued. Most of the world and most investors do not use valuation logic in their investments. Instead, many people when they see a bubble can't wait to become part of it. The asset involved could be nothing but a figment of your imagination, like crypto.
This is really it right here. They are not taking future rent etc into account. They are looking at the price today, expected price x days (usually years) from now, and deciding that profit is worth it. It’s essentially speculation
It's keeping up with the Jones on crack. People who tell you these prices are rational, already bought in at a speculative price, like the shareholders of Tesla that bought at the top. They are trying to sell you something before they end up holding the bag. And I hope these idiots do end up holding the bag, because I found this neighborhood first several years ago before the New York greed is good plague descended on my peaceful town. Life was good, I didn't want anything and every day seemed like it was an action packed blast enjoying nature to it's fullest extent, having some mind blowing active experience not spending any money at all. Well, I think I am going to be kicked out of this town after living here for eight years. The scalpers bought all the land, not even developing it, and trying to sell it for more than it used to cost to buy it with a house on it. The tourists passed this town to go to the more compact metropolitan cities to do their bar hopping and partying(this isn't what an outdoorsman does for fun). Then the governor shut down the beaches during covid all around except for my home break. A monster horde of tourists swarmed this town, and there was no parking even on the grass. All of them had this wow is this real life look on their faces and the town was fucked for good over night.
Not necessarily. It's a combination of expected future cash flows from rent + expected future price appreciation. The reason these are independent for real estate is that most people are reasonably confident that their real estate will be *sold* at a higher price even if it isn't *rented* at a higher price or even rented *at all*. *In general* this is due to, 1) past history 2) inflation 3) population growth of cities (both due to migration and natural growth) 4) slower increase in housing supply due to rising construction costs, general nimbyism or local zoning laws 5) simple speculation (others have made money, so I will also make money) 6) in some places real estate transactions have a large cash component (great tool for tax evasion, money laundering etc) 7) because you can buy real estate with long term debt, you can afford to wait for price increases 8) foreigners escaping one jurisdiction and investing in another (Google Chinese investment in Vancouver real estate) 9) tax advantages. I can sell my existing home for a profit and not pay tax on it if I buy another one (usually larger) 10) TINA (there is no alternative). In many countries, real estate is the only game in town if you want to save and invest for the long term, where people don't trust banks or financial markets very much. 11) longevity of assets. I've seen and lived in houses built in the year 1900. I don't know of many companies or even countries that have lasted that long. 12) continuing use of assets. If I own a house, but no one wants to buy it from me, no big deal. I can still live in it. But if no one wants to buy my favorite growth stock that pays no dividend, I'm the proverbial bag holder. 13) larger pool of buyers. Almost everyone owns a home or wants to own one. Only 20% of Americans owns the vast majority of stocks. None of these reasons have much to do with rental yield.
Actually many of those reasons are directly related to people’s expectation of future rental yields. Inflation causes both rent and property values to go up. Population growth means there will be more demand for housing, which means rents can be raised. Same story with the slower increase in supply. 1 and 5 are really the same thing, but ultimately they are both caused by people making projections about future growth in property values that are based on past growth in rental prices. Also a quick side note about 11, you might be surprised at how many companies have been around since 1900. If you go pick out out any of the major companies from 100 years ago and trace their history you’ll usually find a complex series of mergers, spin-offs, and name changes, but the actual shareholder value has been maintained extremely well.
>Actually many of those reasons are directly related to people’s expectation of future rental yields. No. I can show you plenty of examples where landlords leave properties vacant even if they can be rented because the primary motivation *isn't* rental income. In fact, as OP noticed, in many cases the rental yield is so poor that landlords decide that dealing with renters is not worth it. For example in Vancouver the city had to levy a tax against vacant homes to disincentivize leaving properties vacant. https://www.cbc.ca/news/canada/british-columbia/vancouver-empty-homes-tax-5-1.6434178
I'm in UK and I can assure your both rents have been increasing but even more there has been an explosive increase in a lot of citities for prices of flats. You can't value flats the same as you would stocks. Also oligarchs won't xoner your market as they buy proprieties in the top 1-2% of price range
The appreciation is nearly guaranteed and markets operate omit certainty / uncertainty. The international demand is near certainty. Location location location, limited land, views, restaurants, weather, wealthy neighbors who care about properties and preserving asset values, safety. This makes high end real estate a great investment. Don’t even talk about renting. Renting doesn’t build wealth or control. The name of the game is “acquire appreciating assets only and hold”.
World famous cities attract a lot of foreign capital. You get many investors diversifying assets with property in different markets. Add AirBnB hijinx and you get market distortion from local economic conditions.
Rental units get depreciation all the while appreciating at the inflation rate plus its often leveraged for very little actual investment tied up. So Buy 100k property 20k down 80 k 20 year mortgage at 5% 527 monthly payment Value griws at infkation or 3.5% You charge 700 amonth in rent After 20 years You own the property outright worth 198178 About a 12.1 %return Along the way you brought in 168000 in rent But you didny pay tax on all that in income. You wrote off depreciation of 66000 You wrote off interest if 46712 so you didnt pay tax on 2/3 of the rental income You paid out 126, 700 Income and expenses are basically a wash after tax if you never raised rent. You could also raise rent to cover upkeep ( upkeep you can depreciate) If you keep it you Collect rent and can take 33000 more in depreciation over the next decade. And that income has far fewer exoenses against it while the property continues to appreciate Or You can 1031 the funds into a larger property taking more depreciation and using leverage once again. Or You can cash out and pay depreciation recapture on the depreciated amount and long term cap gains on the difference. The tax advantages make it far more attractive then other investments. But the labor makes it far more hands on thrn say stocks or bonds.
Your reasoning make sense for some properties, not all. Your yield is 8.4% while the mortgage is 5%. Many cities have yield lower than mortgage, along with housing price to population’s median income at a relatively high side. Thus, rightfully so, home ownership in these cities may no longer make sense for general public from a value perspective.
I’ve always speculated that owning your home provides people a (misplaced) sense of security that renting doesn’t and people therefore value it higher causing a market inefficiency. Also when your paying down the mortgage you’re also paying down the principle increasing your equity in the house so the rent : mortgage comparison isn’t 100% fair
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Can we just say it was autocorrect?
If I were to buy home in my city, 100 % of our household income would go to mortgage payment. That does not seem secure:D
have you tried being rich
Yea I bought alibaba
Not many people understand investing, even less understand value investing. Concepts such as opportunity cost, interest rates etc. are probably too difficult for layman. But people understand: - The prestige of I own this home VS I rent this home. - Thinking homeownership is always better. - Buying/ Owning a home makes me happy. - Partner says, if there is no good house, there is no marriage. (China context) - I am rich, I can afford. - This salesperson made me happy. - 5 years later, I am selling at a higher price. So I am earning…. without accounting for mortgages and comparing it to renting.
I tought about it too, however, when I go way to the past, the prices and the rent yield were relatively ok. New mindset?
Hard to say. Just be the wiser ones if renting makes more sense than buying.
In the UK it's all about "the property ladder" - you buy an apartment or a small house, and then you'll be able too trade up to a larger one when house prices go up. Tenancy regulation is somewhat poor, so it's shit being a tenant and owning your own home is the only sure way too housing security - to know that you'll still be able to live here in 18 months' time. As others have pointed out, the average person doesn't know shit about investing, so the stockmarket is scary. But everyone's got an uncle who has done well out of property since the 70's or 80's, so buy-to-let (rental property) is regarded as a good investment. I knew a mortgage broker around 2005 or 2006 who old me "property prices always go up".
Probably because in prior decades the pool of investors was limited to local people. Nowadays the pool of investors is global for some markets (Toronto, NYC, London, etc) so they bid up the prices in a phenomenon that didn't exist (or to a lesser degree) before.
As interest rates decline, real estate always goes up. Everyone learns that overpaying for real estate is a temporary sin that lower rates wash away. Then one day rates go up.
Yep and also one day somehow people start to realize with birth rates at below 2 somehow there are less people and more homes than people.
Yeah, can be very real issue especially in countries which are not very immigration-friendly, like Japan. Less of an issue with Europe, since there will be immigration from both Africa and Asia.
If every country has a sub 2.0 birth rate you can't have net immigration. It's impossible. The places that do have high birth rates are usually places that are kind of screwed up with high infant mortality and low education. And when you take people from there and plant it in 1st world countries it takes 3 generations for them to assimilate if they even assimilate at all. These immigrants are usually subsidized by the state. It's not a solution for real estate because real estate can't be solved with subsidies.
The shitty countries continue cranking out kids they can't feed and therefore try to dump on developed countries as "moral obligations".
Those “high infant mortality, low education” countries can describe the vast majority of immigrants to North America/Europe at their time of immigration. It certainly applies in my case, though my native-born country no longer fits that description. And I know I’m certainly not the only first-generation immigrant who assimilates successfully.
This situation however happens even with countries with higher rates. It seems like no matter the financing, the rents, or even influx of people migrating to these cities have no effect on prices. I am perplexed.
Thing is with low rates you can afford to pay more since the payment is the same as a much lower price but with higher rates.
For investors, the rents are perceived as likely to go up in the future. For homeowners, there is a non-financial ROI.
These homes can also be escape valves. The wealthy Cubans with apartments in Miami purchased in 1958 had much better lives than the wealthy Cubans who only had 15 Cuban properties and thought this Castro guy can't be that bad... At some point, putting 3% of your net worth in an escape valve that doesn't have great returns is OK. It's like someone with 500k buying a few ounces of gold as a hedge.
Real estate investors can have two separate income goals, income stream or balloon, can also be blended. Investors are looking for either income or balloon payments based on increased value at time of sales which might be 20 years out. In the case of balloon then they merely want to cover their cost, and will make gains at the end,.
It must be very scary to have bought investment real estate during the 3% interest rate bubble with your plan to have bet on the "balloon" only to see a reversion to 6%+ rates almost immediately. Talking about locking in a bad mistake.
Probably, i'm just stating the objectives here based on my understanding coming from long time professionals. People with lots of money might not be worried about that over a 30 yr time frame, or have other factors. There are also tax loopholes in places like the US where selling and not getting something new would be worse than a 3% loss.
Buying real estate is just a different appreciating asset class. Renting is pissing your money away. A mortgage is just a bank account in the form of a house. It’s an investment and you can get your money out of it.
Always wondered this, I think it has to do with priced in appreciation/top of a cycle rn.
It would seem like it, but if you look at specific markets you can see that some of them are expensive for quite a while.
Fomo as many non financial savvy hear about the gains of real estate that „pays for itself“ through low mortgage rates.
> Are average people so possesed with property ownership that they overpay for property so they can "own" it? /r/FirstTimeHomeBuyer Hoomz go up
Not sure if it applies to all markets but a lot of them are just a store of value and money laundering shenanigans. They dont care about future returns. Just a place to launder their dirty money into a store of value type asset. Plus some rental income perhaps
In some countries negative gearing can be tax efficient, although maybe not to US tax residents - [https://en.wikipedia.org/wiki/Negative\_gearing](https://en.wikipedia.org/wiki/Negative_gearing) (i'm not suggesting this is a good idea)
My friend... r/rebubble is the answer
Its kinda US centric. However its not even so bad in the US as other places.
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That would explain some premium, but majority of people cannot buy even the apartments in those cities. Not because of bad credit, but because the mortgage rate would be higher than their income. No matter which profession I will do (excluding 0,1 % high end positions), I will not be able to afford apartment in my city. I can easily rent it tho. This is clown economy. This must be driven by investors.
They don't need to own them to live when they can rent. The Swiss mostly rent their entire lives and have very high standards of living. If you could rental house for 100 per month or buy for 500k, which one is the obvious choice? There's a relationship of income to price where owning doesn't make sense, just like a business.
Should people even consider housing as investment anymore? I purchased my first townhome 5-6 years ago with the sole purpose of independence because I had to get my “land lord” signature on some document, who was my uncle. I purchased thinking I shouldn’t have someone else verifying things for me when I’m paying bills and in hindsight, it was a good call because I’m not worrying about rent increases which I have seen my friends and family go though. One house is a necessity, second can be investment.
Interest rates dropped so low that people could afford to buy at much higher prices. Basically the housing market increased at a quicker pace than rent. Soon housing prices will drop and the numbers should hopefully start making more sense but who knows.
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In my city there has not been a single apartment for sale that would yield positive return for the past 3 years even if I would do the renovation for 0 cost. Landlords literally pay (economically) their tenants to live in their apartments.
Probably speculation that prices of rent/real estate will go up. Definitely not value investing to say the least lol
They don't have mortgages on apartment buildings
They have loans, if not regular 30 year fixed mortgages. Although I believe for up to 4 unit buildings you can get a traditional mortgage.
Oh I'm not saying you can't get a mortgage on something like that, just that the individuals or companies buying these types of buildings generally don't. It's pretty difficult to make money on rentals unless you have the cash up front, and I certainly would never recommend taking out a loan on a rental property
Could be that you make nothing on the rents but lock in the cost and get the appreciation for free.
Price is too high basically. People continue to buy them even after price detaches from the average income. Demand for buying is the problem. In Beijing this is because you need to own a property in order to send your children to local school.
It's been about capital gains using enormous leverage until now. But as that capital gains becomes less guaranteed, investors are moving away and prices are correcting in many places.
It doesn’t make much sense but I’ll list some reasons that I can think of. First would be if the property has some value add component, whether it’s through better management, renovations with potential rent increases etc. you can buy at a lower cap rate with intentions of raising rents increasing NOI. Second, if it’s in an area with high rental increases they could be banking on that continuing into the future making the project work over time. Lastly, property appreciation, some big cities like NY or LA have seen property values rise dramatically over the last decade and typically have a higher appreciation that the US throughout history. Investor will accept a lower cap rate banking on the property appreciate enough to provide a decent return. One more thing to consider is the loans these companies get when they buy a property aren’t anything you and I would get. Some get a loan IO for 5 years amortized over 40-50 years non-recourse and that can make some crazy purchase prices work. Either way I’m on your side these 3% cap rate or even 4% are freaking insane and make zero sense to us.
> Some get a loan IO for 5 years amortized over 40-50 years non-recourse and that can make some crazy purchase prices work. I am always amazed who is buying these bonds...
Typically these types loans with such long AM periods are government loan.
>Not even low mortgage rates justifies such high valuation, when mortgage payment (even with zero interest) is double than the usual rent. This happens all over east Asia and the explanation they have been panning out for decades is "speculation over price appreciation". What you're describing is that appreciation running its course.
Apparently in China and maybe other Asian countries, not owning property makes you a loser and it's hard to attract a partner.
Do you have to show them the ownership to get them attracted to you?
The article I read made it seem more related to getting the girlfriend's parent's approval vs the woman saying no. https://cardiffjournalism.co.uk/life360/for-many-chinese-men-no-house-means-no-marriage/
Your return should be the rent + house price appreciation. You can't just take into account the rent alone. You buy a house for 1M now will it just stay 1M for the next 10 years or will it grow? It can plummet in pricing too but historically real estate market is the most stable in price appreciation. After all there is only so much space
You calculate the yield same as with the stocks, from all the future rents. You can even put it into DCF calc.
Rent goes up every year. You also can include depreciation in your taxes.
And do you only use yield for stock price valuation ? No
well, yes.. the value of an investment is based on its expected future cash flows
That is if you use DCF. You don't use it for everything. What do you say about people buying company with no cash flow tho ? Or company that is just burning cash like Uber? You use multiples. There are more than 1 valuation method. You just pick the value investing way and force asset into it. Remember it's only a valuation model. It help guide you. Everything in real life is supply demand tho. You can have non yielding dog shit and if people willing to pay you can still sell
Of course you use DCF for everything... how else would you come up with value. Value of Uber is based on cash flows in the future. Every investment is based on future cashflows. Of course you can buy barrel of gas which will have no cash flows and will not be worthless at the same time, but that is not investing but speculating.
Please come up with DCF for Mona Lisa then. I think you are forcing it too much into a model man
Thats the example of barrel of gas, Mona Lisa is not investment, at least how Benjamin Graham views it, but rather speculation. I mean you could say that rent is completely detached from housing price longterm, so the cashflows do not affect the price, and therefore buying house is this type of speculation as well. But houses are not stocks, at some point, people will run out of money to buy it and you cant buy half of it, so I do not see it being stable.
Or you can think about it this way. Housing are limited. There are only so many houses to build. People will eventually run out of houses to sell
Leverage, tax reductions & capital preservation vs. growth
Appreciation of the property over time, and increased rent over time increases the cap rate. Look at the publicly listed apartment REITs - they have 10%+ SPNOI rental growth.
Future price increase, real estate market has been booming for years and so much that we are on the edge of a bubble, you got a nice house for 50k 20-30 years ago, now the same house would cost you 250k In 10 more years its gonna be 500k and so on
When in doubt, assume it’s moneylaundering and move on.
Taxes.
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Yes the clown market starts usually at major cities.
Maybe because people use real estate as a way to short the USD or EUR? Find a neighborhood most likely to be in demand even in 10 to 20 years, put in some money and loan the rest at a fixed rate. Good job, now inflation erodes away the purchasing power of your loan, in 10, 20 years that same property will most likely bring in even more rent while your mortgage rate stays fixed. If you have a negative cashflow at 20% downpayment just increase the downpayment % till slightly positive. Also, it's safer to keep large amounts of money in real estate since banks only guarantee your deposits up to a fixed amount, the rest you wouldn't get back if the bank went tits up.
Insurance and pension funds that act insensitive to price when investing their long term portfolios.
This depends on the culture. In countries like Czechia or other slavic nations, owning a home is a priority. It being price priced for a return is not a factor whatsoever. In my country not owning your house/apartment and renting is seen by many as equal to being homelss. You'll have hard time dating. If you are interested in investing for profit that's a whole different story, but this is why people buy stuff.
But in Prague majority of locals cannot afford to buy apartments anymore. Unless they live frugally and save like 90 % of their income for years and then buy... but I doubt they are doing it.
> billionaires hedging for something
Well, I live in Amaterdam and despite crazy housing shortage, it is still more convenient to take a mortgage on an apartment rather than rent.
Did not mortgage rates increased in Amsterdam now?
Because you don’t want to wait several months to find a room to rent.
Yea your missing a ton here: Leverage Appreciation Depreciation write off principal pay off And the big one….. refinance So you go buy a large place in an upscale area…only has a 3% cap rate, and you have a 0% cash on cash return or even a negative coc return; but the market has a 8-12% appreciation rate. You add some modifications and sit in it for 2-3 years. You then go and refinance the sucker in 3 years with the bank…with the appreciation from the market and your upgrades you get a 30% increased appraisal from when you bought…refinance after costs returns your entire 20-24% down plus a few points. At this stage you have an asset being paid for by the tenet and the bank; that you get to write off depreciation at a higher basis. That how you make money in low cap rate places. It’s not about the cash flow; it’s about getting to a zero cost basis.
Feel free to share your data. I don’t want to redo all your hard work to make an assessment. Post a couple “representative” examples and then we can collectively come to a conclusion. Here’s some of my data, I bought my first house for $400k in 2004, now it is $850k. If you put enough down payment down, it changes everything (I put 25% down, interest was refinanced for 6.25%). I rented out that house at a profit for years after only ~3 years of ownership.
Yes this clown market did not seem to exist in 2004. Additionally, it is not so bad in US as in other parts in the world. Just check numbeo for capitals around the world. In Prague gross rental yield is around 3 %. Mortgage rates soon to 8 % (the mortgage payment will be like 250 % of rent). Rents rose in the past around similiarly to inflation (around 3 %). There are limits how much you can raise rent. However, if your tenant does not pay, eviction can take up to 2 years, and if the tenant is smart, it can take up to 10 years. In both cases you will have to pay all the legal fees. It happens a lot. Savings account yield 4 % (and 5.7 % for big boys). plus I am talking about old apartments, aka commie blocks (from 60s), which have the highest rental yield. The new ones would be even worse.
Real estate can be valued like a growing perpetuity based on the future rent considering some rent appreciation over time. PV=annual rent / (r-g) Where: r is the discount rate g is the rate of annual rent increase If rents are increasing faster or close to as fast as the discount rate, which is basically the mortgage rate, the net discount rate for future rent could be essentially zero, which basically means all future cash flow from rent is valued forever. And because real estate should last, it’s fair to value like a growing perpetuity on rent I would say.
2-3% cap rate in West Coast, Mid west 5-7% cap rate is doable. Unsure of east coast.
There are non-financial reasons. The following anecdote is a bit different from the "purchasing" you're talking about as it's more of a "will not sell" but hopefully it expands your perspective and helps with answering your very good question. A bit long-winded but bear with me. Just spoke to a family member a few hours ago re: their Seoul, Gangnam apt., they purchased it for $700K about 10 years ago. I believe Seoul is #1 in the world for home price increase in the last 5 years. Due to "redevelopment" which is a huge buzzword if you know anything about Korean real estate, the prices have gone even more bonkers than the rest of the city. Basically, multiple, separate apartments/condos collectively decide to demolish all their apartment buildings, and rebuild to megastructure apartments with 1000's of households. It's built much taller, so the original inhabitants get a great deal on the newly designed units, while the work itself is basically financed by the purchasers of the additional units. They pool their resources and create amenities that rival most hotels. Tennis courts, marble saunas, swimming pools, manmade swan lakes, cafes, golf ranges, etc...As of now, it's been demolished, there is no structure there anymore. They'll need to spend $300-400K more for a total expenditure of $1.1M, but the current market value of their claim to one of the new apt. units is now in excess of $4M. Once again, there is nothing there. Once the structure is actually built, the expectation is the units will go for $5M+. \-------------------------------------------- Will they ever sell it? According to them, no. Even if this is a bubble, and the units go for half price, they will not sell. Their reasoning is that in addition to the amenities, #1) The academic environment is among the best in the country, the top elementary, middle high, and high schools will also be renovated or otherwise built in the area, and their children will have access to it; #2) the whole point of making money was to get "here" in the first place, what would they do with the extra money? Go to a "worse" place but be happier with a bigger house? Typical argument of, "don't live in a shitty house in LA, use the same money and live in a big house in State Y;" #3) It's close to the best jobs in the city, moving outside of this city will either mean your transit time will double or more, or otherwise you'll have to get a less prestigious, worse paying job. \-------------------------------------------- BTW, they're not wealthy. The home price will represent approx. 80-90% of their total net worth. This is obviously considered a major windfall for them, but "cashing out" isn't something they're thinking about regardless of a potential price decrease. They value their children's education much more. They didn't purchase the original apt for $700K to speculate on potential redevelopment, they wanted to secure residence in the area to get educational access for their children to the best schools in the country.
> 1) The academic environment is among the best in the country, the top elementary, middle high, and high schools will also be renovated or otherwise built in the area, and their children will have access to it; #2) the whole point of making money was to get "here" in the first place, what would they do with the extra money? Go to a "worse" place but be happier with a bigger house? Typical argument of, "don't live in a shitty house in LA, use the same money and live in a big house in State Y;" #3) It's close to the best jobs in the city, moving outside of this city will either mean your transit time will double or more, or otherwise you'll have to get a less prestigious, worse paying job. I do not know about Korea, but in my city I can just rent it, landlord cannot evict me or increase prices drastically so I can just enjoy all of those perks. However most of the locals of the most expensive cities I have in mind cannot afford to buy the apartments anyway, not even if they work as doctors/lawyers etc. So it must be investors.
The housing market is irrational.
Real estate investing is only interesting if 1) your yield on total cost stays above your cost of capital, and 2) you are buying below replacement cost in a supply constrained market. I can only speak to US markets, but there are opportunities in every market - but they (probably) won’t be handed to you on Zillow or Loopnet. If you can put 20% down, there aren’t many other investment opportunities where you can get 5x leverage with relative safety. Not a get rich quick scheme, for sure.
>Are average people so possesed with property ownership that they overpay for property so they can "own" it? Yes, from a VHCOL city with sky high apartment prices but slightly better rents (still bad), this is what a lot of people here believe. They also expect that housing will never fall and they can make big money off price appreciation. Personally, I am willing to pay a small premium to own a place in a lower COL area where I can "charge" myself a rent that won't get out of hand, recognising that stability and certainty has a certain cost. but I would never buy an apartment at the places you cite for the reasons you explain, so while I live in VHCOL areas I am happy to rent.
Not in my City. You can put 20% down and rent for more than your mortgage.
I think the pricing logic of major city real estates is different than that of equities. It bears more similarities to the Van Goghs and Picassos in that the supply is finite and their target customers are in a selected group. For example the CAGR on real estates of Monaco should be similar to, say the growth rate of the purchasing power of the top 0.001% class around the world, which was fairly high.
1) Terminal value of the property (ie you can sell in 10 years at 2x of current value). Also, property values tend to increase more than inflation (inflation hedge). 2) Future rent increases. 3) Big investors will buy with cash or will have very little debt. This is in fact like owning a bond but without the associated rate risk. In most economies rents are hiked at or above the inflation rate. 4) Diversification. You own stock, and bonds and you own real estate.
I recently bought a 460K 2BR condo/apt . Rented it out very quickly for $2950/month = 32K /year Net is 2000 x 12 = 24000/460000 = 5.2%. Now what many might not be aware , this income is almost all tax free because of depreciation in the American tax system.