Would you buy a house now for semi-investment if you have the cash?

[Liar Loan]

Its wonderful to move to AZ,,,,in December. When the temperature is tolerable. In June,,,,Let's move to cooler location,,,Las Vegas....

The homes price is attractive to move some of 40 millions residents of CA away. Arizona 8 millions can handle more exodus.

I had a few buddy that have a few doors for rent in AZ in the 2005-2006 craze. All given up and sell at a lost during the GFC. One guy held on to this day. Last I talked to him, the house in Scottdale AZ finally break even after 12 + years. The good thing is 90 % of his mortgage paid for by the renter. Go long in realestate whereever you put your money and you will be fine.

My rental in Lake Elinsore is pretty much the same scenario. Bought it back in 2005 and it's finally break even this year after 15+ years.

Affordable sunbelt areas can go up a lot during a housing boom, but they crash the hardest and take the longest to recover after a downturn. 

I bought some duplexes in the CA desert in 2014-15 and they more than doubled in price in five years, so I decided to sell just as the pandemic was getting underway (for which USCTrojanCPA heckled me).  These inland desert areas always crash hard because the demographics are less college educated and more prone to being laid off, use smaller down payments when they do buy, and tend to have fewer reserves to weather the storm.  Consequently, these areas tend to have crashes that are 1.5x-2x that of Orange County.  They are great buys during the recovery phase though.  You have the potential for outsized appreciation and solid cash flow if you buy at the right time.

Another contrast that illustrates this is comparing my first condo purchased in Orange County in 2006 to your Lake Elsinore purchase.  My wife and I bought it almost to the month that housing peaked for our area, it crashed in value by 60% (condos get hit harder than SFR's for all the same reasons that inland areas do), and we kept it as a rental.  I sold it after 11 years for just under what we paid, but it actually took a full 12 years to recover.  That illustrates the difference in recovery time between inland/sunbelt areas (15-17 years) vs coastal (10-12 years) --- and we bought a year later than you so at an even worse point in the cycle.

 

[talkirvine]

Its wonderful to move to AZ,,,,in December. When the temperature is tolerable. In June,,,,Let's move to cooler location,,,Las Vegas....

The homes price is attractive to move some of 40 millions residents of CA away. Arizona 8 millions can handle more exodus.

I had a few buddy that have a few doors for rent in AZ in the 2005-2006 craze. All given up and sell at a lost during the GFC. One guy held on to this day. Last I talked to him, the house in Scottdale AZ finally break even after 12 + years. The good thing is 90 % of his mortgage paid for by the renter. Go long in realestate whereever you put your money and you will be fine.

My rental in Lake Elinsore is pretty much the same scenario. Bought it back in 2005 and it's finally break even this year after 15+ years.

Affordable sunbelt areas can go up a lot during a housing boom, but they crash the hardest and take the longest to recover after a downturn. 

I bought some duplexes in the CA desert in 2014-15 and they more than doubled in price in five years, so I decided to sell just as the pandemic was getting underway (for which USCTrojanCPA heckled me).  These inland desert areas always crash hard because the demographics are less college educated and more prone to being laid off, use smaller down payments when they do buy, and tend to have fewer reserves to weather the storm.  Consequently, these areas tend to have crashes that are 1.5x-2x that of Orange County.  They are great buys during the recovery phase though.  You have the potential for outsized appreciation and solid cash flow if you buy at the right time.

Another contrast that illustrates this is comparing my first condo purchased in Orange County in 2006 to your Lake Elsinore purchase.  My wife and I bought it almost to the month that housing peaked for our area, it crashed in value by 60% (condos get hit harder than SFR's for all the same reasons that inland areas do), and we kept it as a rental.  I sold it after 11 years for just under what we paid, but it actually took a full 12 years to recover.  That illustrates the difference in recovery time between inland/sunbelt areas (15-17 years) vs coastal (10-12 years) --- and we bought a year later than you so at an even worse point in the cycle.

Thank you for sharing your experience with us. Stories about real estate down cycles and how investors handled their asset during the hard time are rare but valuable.

 

[Ready2Downsize]

I bought a house in 1981 (peak of interest rates which the builder bought down) and it took till 1987 to break even. Sold that for a profit after the boom before the S/L crisis but to do that I bought the peak in Tustin Ranch in 1989. Took until 2000 to break even. Rented it for a while and bought another house in Northwood in 1994 which went down further due to the OC BK. Barely broke even on it in 1998 when we bought our forever home in Northwood Point. Kept it 17.5 years and made good money on it. I'll make as much on my Tustin Legacy house as the Northwood point home in less than 7 years.

All depends on WHEN you buy.

There is coming a time when houses don't go up at all and maybe drop. I know this because it's happened several times in my life.

 

[sleepy5136]

I bought a house in 1981 (peak of interest rates which the builder bought down) and it took till 1987 to break even. Sold that for a profit after the boom before the S/L crisis but to do that I bought the peak in Tustin Ranch in 1989. Took until 2000 to break even. Rented it for a while and bought another house in Northwood in 1994 which went down further due to the OC BK. Barely broke even on it in 1998 when we bought our forever home in Northwood Point. Kept it 17.5 years and made good money on it. I'll make as much on my Tustin Legacy house as the Northwood point home in less than 7 years.

All depends on WHEN you buy.

There is coming a time when houses don't go up at all and maybe drop. I know this because it's happened several times in my life.

Yup and based on your experience, holding on to RE long term is generally not going to be an issue on when you buy. I feel like everyone is so fixated on trying to time the market. This goes for not only RE but also stocks. Especially stocks. Everyone wants to wait for the crash and throw out that bubbles exist and wait for the crash to happen. Instead of simply DCA and buy in increments when you can and hold it out. You would be far ahead that way than timing the market.

 

[Sidehussle]

Hey Liar, the 2004 crash was directly linked to NINJA loans and subprime, Lehman, etc...

Don't know what caused `89 (savings and loan?) 

This time around, bank originations are strict and tight with LTVs 80% or lower - so even with current insane valuations (any way you look at it - cap rates, ratio to median incomes, etc.) - just don't see RE specific knife drops.  What am I missing??

I would not invest in Irvine because price-to-rent ratios are on the high side historically and the prior two times they have reached these levels (1989, 2004), a crash ensued not too long after.  If you believe that Irvine is immune to crashes like many of the people here, then feel free to ignore fundamentals.  Maybe this time really is different.

The other problem with high price-to-rent ratios is that your ability to cashflow is much more difficult. Even paying all cash, your cash-on-cash return is probably between 1-2% once you factor in management fees (your time should be accounted for).

If you want to invest in RE despite stretched valuations, there are certain types of commercial property that do well during recessions - self-storage for instance.  You have enough wealth to be considered a 'Qualified Investor', which would allow you to invest in private funds that specialize in commercial real estate.  With your REIT accounting background, you should be good at performing due diligence before deciding where to invest.  The drawback is your money will be tied up for a number of years, and you won't have direct control over the investment strategy like you would with a SFR rental.

 

[eyephone]

Interest rates?

Hey Liar, the 2004 crash was directly linked to NINJA loans and subprime, Lehman, etc...

Don't know what caused `89 (savings and loan?) 

This time around, bank originations are strict and tight with LTVs 80% or lower - so even with current insane valuations (any way you look at it - cap rates, ratio to median incomes, etc.) - just don't see RE specific knife drops.  What am I missing??

I would not invest in Irvine because price-to-rent ratios are on the high side historically and the prior two times they have reached these levels (1989, 2004), a crash ensued not too long after.  If you believe that Irvine is immune to crashes like many of the people here, then feel free to ignore fundamentals.  Maybe this time really is different.

The other problem with high price-to-rent ratios is that your ability to cashflow is much more difficult. Even paying all cash, your cash-on-cash return is probably between 1-2% once you factor in management fees (your time should be accounted for).

If you want to invest in RE despite stretched valuations, there are certain types of commercial property that do well during recessions - self-storage for instance.  You have enough wealth to be considered a 'Qualified Investor', which would allow you to invest in private funds that specialize in commercial real estate.  With your REIT accounting background, you should be good at performing due diligence before deciding where to invest.  The drawback is your money will be tied up for a number of years, and you won't have direct control over the investment strategy like you would with a SFR rental.

 

[Ready2Downsize]

Hey Liar, the 2004 crash was directly linked to NINJA loans and subprime, Lehman, etc...

Don't know what caused `89 (savings and loan?) 

This time around, bank originations are strict and tight with LTVs 80% or lower - so even with current insane valuations (any way you look at it - cap rates, ratio to median incomes, etc.) - just don't see RE specific knife drops.  What am I missing??

I would not invest in Irvine because price-to-rent ratios are on the high side historically and the prior two times they have reached these levels (1989, 2004), a crash ensued not too long after.  If you believe that Irvine is immune to crashes like many of the people here, then feel free to ignore fundamentals.  Maybe this time really is different.

The other problem with high price-to-rent ratios is that your ability to cashflow is much more difficult. Even paying all cash, your cash-on-cash return is probably between 1-2% once you factor in management fees (your time should be accounted for).

If you want to invest in RE despite stretched valuations, there are certain types of commercial property that do well during recessions - self-storage for instance.  You have enough wealth to be considered a 'Qualified Investor', which would allow you to invest in private funds that specialize in commercial real estate.  With your REIT accounting background, you should be good at performing due diligence before deciding where to invest.  The drawback is your money will be tied up for a number of years, and you won't have direct control over the investment strategy like you would with a SFR rental.

In 1989 there was a whole lot of house flipping, lots of new builds being sold to realtors who had no intention of moving in and then got caught with multiple homes they couldn't make payments on. At that time most people got adjustable loans. I always paid extra toward principle so my payments actually went down a little because my principle was lower when the loan readjusted but lots of people were caught not being able to make their payments. It's when the S/L crisis hit.

Rates going up is going to make fence sitters waiting for more inventory to jump. Bet prices go up more than they would have now.

 

[CalBears96]

Yup and based on your experience, holding on to RE long term is generally not going to be an issue on when you buy. I feel like everyone is so fixated on trying to time the market. This goes for not only RE but also stocks. Especially stocks. Everyone wants to wait for the crash and throw out that bubbles exist and wait for the crash to happen. Instead of simply DCA and buy in increments when you can and hold it out. You would be far ahead that way than timing the market.

Yup, we're planning to retire in this Bluffs 2 house, so it doesn't matter if we bought it at peak. What matters is that we need to buy the house right now because my wife only wants to buy new constructions, no resales. After OH and PS are built out, there's nothing left in Irvine other than GP, which we definitely don't want to buy because of MR. And I'm sick of the commute from Riverside to Irvine, so we need to buy ASAP.

 

[eyephone]

Retire overseas might be the play.

 

[usctrojancpa]

Interest rates?

Hey Liar, the 2004 crash was directly linked to NINJA loans and subprime, Lehman, etc...

Don't know what caused `89 (savings and loan?) 

This time around, bank originations are strict and tight with LTVs 80% or lower - so even with current insane valuations (any way you look at it - cap rates, ratio to median incomes, etc.) - just don't see RE specific knife drops.  What am I missing??

I would not invest in Irvine because price-to-rent ratios are on the high side historically and the prior two times they have reached these levels (1989, 2004), a crash ensued not too long after.  If you believe that Irvine is immune to crashes like many of the people here, then feel free to ignore fundamentals.  Maybe this time really is different.

The other problem with high price-to-rent ratios is that your ability to cashflow is much more difficult. Even paying all cash, your cash-on-cash return is probably between 1-2% once you factor in management fees (your time should be accounted for).

If you want to invest in RE despite stretched valuations, there are certain types of commercial property that do well during recessions - self-storage for instance.  You have enough wealth to be considered a 'Qualified Investor', which would allow you to invest in private funds that specialize in commercial real estate.  With your REIT accounting background, you should be good at performing due diligence before deciding where to invest.  The drawback is your money will be tied up for a number of years, and you won't have direct control over the investment strategy like you would with a SFR rental.

Interest rates before the 2008 crash were around 3.5-4.5% so not that much higher than today.

 

[eyephone]

Interest rates?

Hey Liar, the 2004 crash was directly linked to NINJA loans and subprime, Lehman, etc...

Don't know what caused `89 (savings and loan?) 

This time around, bank originations are strict and tight with LTVs 80% or lower - so even with current insane valuations (any way you look at it - cap rates, ratio to median incomes, etc.) - just don't see RE specific knife drops.  What am I missing??

I would not invest in Irvine because price-to-rent ratios are on the high side historically and the prior two times they have reached these levels (1989, 2004), a crash ensued not too long after.  If you believe that Irvine is immune to crashes like many of the people here, then feel free to ignore fundamentals.  Maybe this time really is different.

The other problem with high price-to-rent ratios is that your ability to cashflow is much more difficult. Even paying all cash, your cash-on-cash return is probably between 1-2% once you factor in management fees (your time should be accounted for).

If you want to invest in RE despite stretched valuations, there are certain types of commercial property that do well during recessions - self-storage for instance.  You have enough wealth to be considered a 'Qualified Investor', which would allow you to invest in private funds that specialize in commercial real estate.  With your REIT accounting background, you should be good at performing due diligence before deciding where to invest.  The drawback is your money will be tied up for a number of years, and you won't have direct control over the investment strategy like you would with a SFR rental.

Interest rates before the 2008 crash were around 3.5-4.5% so not that much higher than today.

Reuters News: Fed was hopeful on housing bubble in 2005: transcripts

As it turned out, the Fed continued to raise rates through the first half of 2006. Housing prices also continued to rise, and did not peak until mid-2006.

Analysts have faulted Greenspan for keeping rates too low for too long in the early 2000s, fueling the housing bubble whose collapse helped plunge the nation into the Great Recession.

In Greenspan's view, the Fed was better off standing by to mop up after bubbles. Attacking a potential bubble with rate hikes could damage the broad economy, he argued.
https://mobile.reuters.com/article/amp/idUSTRE70D6AX20110114

 

[Ready2Downsize]

Interest rates?

Hey Liar, the 2004 crash was directly linked to NINJA loans and subprime, Lehman, etc...

Don't know what caused `89 (savings and loan?) 

This time around, bank originations are strict and tight with LTVs 80% or lower - so even with current insane valuations (any way you look at it - cap rates, ratio to median incomes, etc.) - just don't see RE specific knife drops.  What am I missing??

I would not invest in Irvine because price-to-rent ratios are on the high side historically and the prior two times they have reached these levels (1989, 2004), a crash ensued not too long after.  If you believe that Irvine is immune to crashes like many of the people here, then feel free to ignore fundamentals.  Maybe this time really is different.

The other problem with high price-to-rent ratios is that your ability to cashflow is much more difficult. Even paying all cash, your cash-on-cash return is probably between 1-2% once you factor in management fees (your time should be accounted for).

If you want to invest in RE despite stretched valuations, there are certain types of commercial property that do well during recessions - self-storage for instance.  You have enough wealth to be considered a 'Qualified Investor', which would allow you to invest in private funds that specialize in commercial real estate.  With your REIT accounting background, you should be good at performing due diligence before deciding where to invest.  The drawback is your money will be tied up for a number of years, and you won't have direct control over the investment strategy like you would with a SFR rental.

Interest rates before the 2008 crash were around 3.5-4.5% so not that much higher than today.

Reuters News: Fed was hopeful on housing bubble in 2005: transcripts

As it turned out, the Fed continued to raise rates through the first half of 2006. Housing prices also continued to rise, and did not peak until mid-2006.

Analysts have faulted Greenspan for keeping rates too low for too long in the early 2000s, fueling the housing bubble whose collapse helped plunge the nation into the Great Recession.

In Greenspan's view, the Fed was better off standing by to mop up after bubbles. Attacking a potential bubble with rate hikes could damage the broad economy, he argued.
https://mobile.reuters.com/article/amp/idUSTRE70D6AX20110114

I fault greenspan for the 2000 stock bubble we had (even before it popped). But once it did pop, I believe he kept lowering rates because stocks were dropping like a lead balloon and he was trying to soften that which meant people moved money from stocks to housing. Remember he was always thinking stocks were in irrational exuberance nearly a decade before the top. He raised rates to try and fix that but then the OC declared BK because they had their pensions in bonds so he lowered rates to fix that problem which led to stocks going up.

Pretty much I blame the government for houses being so high now, preventing younger people from even affording anything anymore and the poor getting poorer.

I also blame them for the student debt problem. My feeling is if they didn't subsidize loans, institutions wouldn't charge so much. In the end it's everyone's choice whether to choose to take out loans or where to buy a house, but I fault the feds too.

In the end, I think we're headed for a bad ending....... once again.

 

[irvinebullhousing]

Interest rates?

Hey Liar, the 2004 crash was directly linked to NINJA loans and subprime, Lehman, etc...

Don't know what caused `89 (savings and loan?) 

This time around, bank originations are strict and tight with LTVs 80% or lower - so even with current insane valuations (any way you look at it - cap rates, ratio to median incomes, etc.) - just don't see RE specific knife drops.  What am I missing??

I would not invest in Irvine because price-to-rent ratios are on the high side historically and the prior two times they have reached these levels (1989, 2004), a crash ensued not too long after.  If you believe that Irvine is immune to crashes like many of the people here, then feel free to ignore fundamentals.  Maybe this time really is different.

The other problem with high price-to-rent ratios is that your ability to cashflow is much more difficult. Even paying all cash, your cash-on-cash return is probably between 1-2% once you factor in management fees (your time should be accounted for).

If you want to invest in RE despite stretched valuations, there are certain types of commercial property that do well during recessions - self-storage for instance.  You have enough wealth to be considered a 'Qualified Investor', which would allow you to invest in private funds that specialize in commercial real estate.  With your REIT accounting background, you should be good at performing due diligence before deciding where to invest.  The drawback is your money will be tied up for a number of years, and you won't have direct control over the investment strategy like you would with a SFR rental.

Interest rates before the 2008 crash were around 3.5-4.5% so not that much higher than today.

Reuters News: Fed was hopeful on housing bubble in 2005: transcripts

As it turned out, the Fed continued to raise rates through the first half of 2006. Housing prices also continued to rise, and did not peak until mid-2006.

Analysts have faulted Greenspan for keeping rates too low for too long in the early 2000s, fueling the housing bubble whose collapse helped plunge the nation into the Great Recession.

In Greenspan's view, the Fed was better off standing by to mop up after bubbles. Attacking a potential bubble with rate hikes could damage the broad economy, he argued.
https://mobile.reuters.com/article/amp/idUSTRE70D6AX20110114

I fault greenspan for the 2000 stock bubble we had (even before it popped). But once it did pop, I believe he kept lowering rates because stocks were dropping like a lead balloon and he was trying to soften that which meant people moved money from stocks to housing. Remember he was always thinking stocks were in irrational exuberance nearly a decade before the top. He raised rates to try and fix that but then the OC declared BK because they had their pensions in bonds so he lowered rates to fix that problem which led to stocks going up.

Pretty much I blame the government for houses being so high now, preventing younger people from even affording anything anymore and the poor getting poorer.

I also blame them for the student debt problem. My feeling is if they didn't subsidize loans, institutions wouldn't charge so much. In the end it's everyone's choice whether to choose to take out loans or where to buy a house, but I fault the feds too.

In the end, I think we're headed for a bad ending....... once again.

It is one exclusive club. And we ain?t in it.

The policies clearly favor the super wealthy. All I can do riding on the tail coat for some wealth effects rub off. If not, we are too get left behind. So it will test people greeds level.

When will enough is enough. Sadly, greedy people will never realize this.

 

[Liar Loan]

Hey Liar, the 2004 crash was directly linked to NINJA loans and subprime, Lehman, etc...

Don't know what caused `89 (savings and loan?) 

This time around, bank originations are strict and tight with LTVs 80% or lower - so even with current insane valuations (any way you look at it - cap rates, ratio to median incomes, etc.) - just don't see RE specific knife drops.  What am I missing??

I would not invest in Irvine because price-to-rent ratios are on the high side historically and the prior two times they have reached these levels (1989, 2004), a crash ensued not too long after.  If you believe that Irvine is immune to crashes like many of the people here, then feel free to ignore fundamentals.  Maybe this time really is different.

The other problem with high price-to-rent ratios is that your ability to cashflow is much more difficult. Even paying all cash, your cash-on-cash return is probably between 1-2% once you factor in management fees (your time should be accounted for).

If you want to invest in RE despite stretched valuations, there are certain types of commercial property that do well during recessions - self-storage for instance.  You have enough wealth to be considered a 'Qualified Investor', which would allow you to invest in private funds that specialize in commercial real estate.  With your REIT accounting background, you should be good at performing due diligence before deciding where to invest.  The drawback is your money will be tied up for a number of years, and you won't have direct control over the investment strategy like you would with a SFR rental.

Banks are subject to tight lending standards, but 70-75% of new loans are originated by non-banks these days.  I'm not saying things are as wild n' crazy as they were in 2004, but they probably aren't as conservative as you are assuming.

For instance, median LTV isn't 80% or lower, but is actually 95% for new originations:
https://www.lendingtree.com/content...market-statistics-2020-ltv-at-origination.png

Median DTI is also slightly higher today than in 2004, despite mortgage rates being about half of what they were back then.

The Federal Reserve has been purchasing mortgages for most of the past 10 years.  If they actually are serious about stopping those purchases, that will cause either DTI's to skyrocket, or the purchasing power of home buyers to drop substantially.  This is because so much of today's affordability is artificial, just like in 2004, but for different reasons.  In a sense, it's not the S&L's or subprime lenders acting irresponsibly this time, but the entire banking system due to the distorted incentives created by massive government intervention.

The Fed was able to keep the party going long past it's expiration date because inflation stayed so low for so long over the past 10 years, but now that's no longer the case.  We are back to early 80's level of inflation, so the Fed is backed into a corner and has to act fast.  They are walking a tightrope that can't be successfully walked in my opinion, so the way forward is a reset of asset prices to reflect values based on market fundamentals, not the free money giveaways of the past 10 years.

 

[Sidehussle]

Great insights, now if we can predict crash timing so can be ready with cash to buy!!! I love me a good clearance sale!

Hey Liar, the 2004 crash was directly linked to NINJA loans and subprime, Lehman, etc...

Don't know what caused `89 (savings and loan?) 

This time around, bank originations are strict and tight with LTVs 80% or lower - so even with current insane valuations (any way you look at it - cap rates, ratio to median incomes, etc.) - just don't see RE specific knife drops.  What am I missing??

I would not invest in Irvine because price-to-rent ratios are on the high side historically and the prior two times they have reached these levels (1989, 2004), a crash ensued not too long after.  If you believe that Irvine is immune to crashes like many of the people here, then feel free to ignore fundamentals.  Maybe this time really is different.

The other problem with high price-to-rent ratios is that your ability to cashflow is much more difficult. Even paying all cash, your cash-on-cash return is probably between 1-2% once you factor in management fees (your time should be accounted for).

If you want to invest in RE despite stretched valuations, there are certain types of commercial property that do well during recessions - self-storage for instance.  You have enough wealth to be considered a 'Qualified Investor', which would allow you to invest in private funds that specialize in commercial real estate.  With your REIT accounting background, you should be good at performing due diligence before deciding where to invest.  The drawback is your money will be tied up for a number of years, and you won't have direct control over the investment strategy like you would with a SFR rental.

Banks are subject to tight lending standards, but 70-75% of new loans are originated by non-banks these days.  I'm not saying things are as wild n' crazy as they were in 2004, but they probably aren't as conservative as you are assuming.

For instance, median LTV isn't 80% or lower, but is actually 95% for new originations:
https://www.lendingtree.com/content...market-statistics-2020-ltv-at-origination.png

Median DTI is also slightly higher today than in 2004, despite mortgage rates being about half of what they were back then.

The Federal Reserve has been purchasing mortgages for most of the past 10 years.  If they actually are serious about stopping those purchases, that will cause either DTI's to skyrocket, or the purchasing power of home buyers to drop substantially.  This is because so much of today's affordability is artificial, just like in 2004, but for different reasons.  In a sense, it's not the S&L's or subprime lenders acting irresponsibly this time, but the entire banking system due to the distorted incentives created by massive government intervention.

The Fed was able to keep the party going long past it's expiration date because inflation stayed so low for so long over the past 10 years, but now that's no longer the case.  We are back to early 80's level of inflation, so the Fed is backed into a corner and has to act fast.  They are walking a tightrope that can't be successfully walked in my opinion, so the way forward is a reset of asset prices to reflect values based on market fundamentals, not the free money giveaways of the past 10 years.