Don't wanna throw in the towel

July 29, 2006 3:05 PM

Out-of-the-box ideas for buying income real estate during the bubble?

I'm a small fry investor in income real estate (a few apartments), and have been sidelined from buying due to an unpleasant reason: prices are so frikkingly, vertigo-inducingly high that I couldn't scratch out a good rental flow even with the best of loan terms.

What's the most favorable approach to this conundrum? Buy real estate in out-of-the-way spots, like the Midwest, that aren't booming yet? Switch to stocks and bonds? Fixer-uppers and foreclosures? Distressed properties? Weird real estate like self-storage? Or simply wait for the bubble to collapse?

Now that income real estate brings in returns equal to CDs, some wags are saying that buying real estate for tenant income is doomed. I like to be hopeful. Any ideas?

posted by Gordion Knott to work & money (8 comments total)

I've bought some older mobile homes and rent them out cheap, with conditions to buy after a year or so. I bought one for 4500, rent at 200 a month, in another year i'll have my money back and I'll sell it off.
posted by muddylemon at 3:34 PM on July 29, 2006

Buy a condo in a complex that has yet to be built. You'll only have to put down a deposit of say, $5000 or so, and not have to pay any further costs until it's built. By the time it *is* built (which could be a few years away - these things always take longer than planned), the condo will be worth substantially more than you paid for it, and you can sell it for a big profit.
posted by orange swan at 4:33 PM on July 29, 2006

The US bubble is already beginning to collapse. It is not going to be pretty. I would advise: do not buy real estate now, at least in (most places in) America. Park the money in something safe and boring and wait it out for about 2-3 years.

Based on the stupidly extensive research I've been doing on it for the last year or so, I would say that orange swan's advice is exactly wrong at this point. In my humble, of course, it is the worst possible time in several decades to buy real estate in (again, most places in) America, and in the Vancouver/Lower Mainland region of BC in Canada.
posted by stavrosthewonderchicken at 7:35 PM on July 29, 2006

Regarding orange swan's unbuilt condo suggestion, be aware that developers are not idiots, and will often put in contract terms that strictly forbid you from reselling for a certain period.
posted by MrZero at 7:53 PM on July 29, 2006

Gordion Knott: I have a few properties to sell, if you're buying -- sure they've appreciated 15%/annum for the past seven, but there's a few more years of growth in them yet, no doubt. Oh, don't worry about me, I'll be ok without them, you just seem like a fine young man who deserves a break, and yessirree sir, taking on these properties will be a phenomenal opportunity for a man such as yourself.

But seriously: I'd stay out of real estate, and be wary that any leads or ideas are just folks trying to fool you into holding the bag. The self storage idea is the best you've put out there, but its viability is tremendously dependent on the local competitive landscape and thus you'd need to do a ton of research before deciding if it was a good idea.

Even if the bubble hits a soft landing the part-timers are going to have a hard time making worthwhile returns in most markets. There may be some great bargains down the pipe in the foreclosure market, but its worth missing the first bargains out the gate to make sure they're really bargains.
posted by little miss manners at 8:29 PM on July 29, 2006

I agree that the US property market (as well as that in many other G7 countries) is woefully overpriced, but have you considered Real Estate Investment Trusts, or REITs at all?

I only invest for income myself, and REITs allow me to gain exposure to real estate, but without the associated operational risk. I can also diversify geographically, and gain exposure to commerical real estate again without having to do all of the leg work myself.

Think of the tortise and the hare; a REIT will return a steady percentage each year and while you'll miss out on the opportunity for, as some folks put it, "a big profit", you'll trade that upside chance for steady, regular dividend.

Lest you think we're talking small change here, I'm currently earning about 12.3% on my portfolio; that cash flow adds up remarkably fast over time.
posted by Mutant at 2:00 AM on July 30, 2006

As for REITs, yes, I've considered them, and even owned a few many years ago. But I've noticed that REITs are highly "appreciation dependent" -- they go up when prices are up, down when prices fall. Even though REITs invest in some income properties (office buildings and the like), rental incomes don't seem to reflect in the returns of the REITs. In fact, when prices were low in the 90s and the rental return was good, REITs seemed to decline for a few years!

As for the best pricing for real estate to make money on income, I've found that it's best to seek a 10%-plus cap rate ("cap rate" being a term for the rate of return after you've subtracted the loan payment, etc.). Anything less, and your return will suffer if you have a tough year (and boy, have I been having one this year thanks to a broke water heater and rocketing fuel costs!)

Double digit cap rates were available in the Nineties, but it'll be a few years before we're back in this territory, IMO.
posted by Gordion Knott at 4:06 AM on July 30, 2006

Yeah, definitely wait. As there's no real way to short-sell real estate, stick to other things right now. In Canada we can contribute to retirement savings/investment plans which allow you to shelter income tax-free and then buy a a (first home purchase only I think) home with the money in the account without paying any penalty for extracting the money. If there's a scheme in the US which is similar, I'd do that and buy a fund or two with the money in that account.

If you must buy, stay away from suburbs on the city's periphery. In Canada, especially, the demand for housing in the inner city areas (such as Vancouver, Calgary, Toronto etc) won't subside, whereas the houses in communter suburbs will likely depreciate (or at least appreciate slower) as fuel prices rise and demand for that lifestyle decreases in the decades to come.
posted by jimmythefish at 9:58 AM on July 30, 2006