Rental real estate in inflationary times
Rental real estate in inflationary times
I'm not asking for market timing advice but rather data and framework to help me decide.
I have a rental single-family house in the greater Houston area which I bought just before the 2014 oil crash. I became an accidental landlord in 2018 and since then the house is tenant occupied. The house has appreciated to close to 35-50% of its purchase price in 2014 when looking at comparative listings to Redfin/Zillow estimates. I have an opportunity to sell the house in July or try to rent it again. The house has always been slightly cash flow negative ever since we put it for rent due to rent, reduced mortgage amortization period and expenses. House is lightly used for its 15 years of existence but it is about the time big expenses can rear their ugly head - AC, carpet, may be roof.
Pros of selling:
- Cash out the capital appreciation with the real estate market still looking hot (for a seller)
- Get cash ready to deploy in equities given reduced market levels
Cons of selling:
- Giving up a low-ish 3.75% mortgage rate (~17 years remaining) in times of higher interest rates
- Reduced diversification (selling RE, will likely buy equities over time)
I'd like to get perspectives on:
- If I sell, what would I be giving up by giving up on the relatively low 3.75% interest rate in inflationary times?
- Why are commercial landlords (Berkshire Hathaway et. al.) continuing to buy? Or are they?
- Assuming high and stable inflation (just watched Aswath Damodaran's latest video), real estate has been a historically good bet to hold or appreciate value. Would keeping the rental be a risk-off move?
I have a rental single-family house in the greater Houston area which I bought just before the 2014 oil crash. I became an accidental landlord in 2018 and since then the house is tenant occupied. The house has appreciated to close to 35-50% of its purchase price in 2014 when looking at comparative listings to Redfin/Zillow estimates. I have an opportunity to sell the house in July or try to rent it again. The house has always been slightly cash flow negative ever since we put it for rent due to rent, reduced mortgage amortization period and expenses. House is lightly used for its 15 years of existence but it is about the time big expenses can rear their ugly head - AC, carpet, may be roof.
Pros of selling:
- Cash out the capital appreciation with the real estate market still looking hot (for a seller)
- Get cash ready to deploy in equities given reduced market levels
Cons of selling:
- Giving up a low-ish 3.75% mortgage rate (~17 years remaining) in times of higher interest rates
- Reduced diversification (selling RE, will likely buy equities over time)
I'd like to get perspectives on:
- If I sell, what would I be giving up by giving up on the relatively low 3.75% interest rate in inflationary times?
- Why are commercial landlords (Berkshire Hathaway et. al.) continuing to buy? Or are they?
- Assuming high and stable inflation (just watched Aswath Damodaran's latest video), real estate has been a historically good bet to hold or appreciate value. Would keeping the rental be a risk-off move?
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Re: Rental real estate in inflationary times
To me, 3.75% doesn’t seem low enough to keep me from removing a headache.
Are you asking about corporations buying single family homes to rent?
Are you asking about corporations buying single family homes to rent?
Re: Rental real estate in inflationary times
watching this.
i’m in a similar boat. moving to another town.
should i sell or keep my current place.
i’m in a similar boat. moving to another town.
should i sell or keep my current place.
Re: Rental real estate in inflationary times
watching this.
i’m in a similar boat. moving to another town.
should i sell or keep my current place.
i’m in a similar boat. moving to another town.
should i sell or keep my current place.
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Re: Rental real estate in inflationary times
Cash flow negative can often be a poor business decision.slbnoob wrote: ↑Sun May 08, 2022 6:28 pm I'm not asking for market timing advice but rather data and framework to help me decide.
I have a rental single-family house in the greater Houston area which I bought just before the 2014 oil crash. I became an accidental landlord in 2018 and since then the house is tenant occupied. The house has appreciated to close to 35-50% of its purchase price in 2014 when looking at comparative listings to Redfin/Zillow estimates. I have an opportunity to sell the house in July or try to rent it again. The house has always been slightly cash flow negative ever since we put it for rent due to rent, reduced mortgage amortization period and expenses. House is lightly used for its 15 years of existence but it is about the time big expenses can rear their ugly head - AC, carpet, may be roof.
Pros of selling:
- Cash out the capital appreciation with the real estate market still looking hot (for a seller)
- Get cash ready to deploy in equities given reduced market levels
Cons of selling:
- Giving up a low-ish 3.75% mortgage rate (~17 years remaining) in times of higher interest rates
- Reduced diversification (selling RE, will likely buy equities over time)
I'd like to get perspectives on:
- If I sell, what would I be giving up by giving up on the relatively low 3.75% interest rate in inflationary times?
- Why are commercial landlords (Berkshire Hathaway et. al.) continuing to buy? Or are they?
- Assuming high and stable inflation (just watched Aswath Damodaran's latest video), real estate has been a historically good bet to hold or appreciate value. Would keeping the rental be a risk-off move?
Sell.
J
Re: Rental real estate in inflationary times
Yes. Why are they buying now? What is it that they are betting on when they want to buy it from me? Is it the standard "inflation good for RE" argument as I noted above?artpennypacker wrote: ↑Sun May 08, 2022 7:52 pm To me, 3.75% doesn’t seem low enough to keep me from removing a headache.
Are you asking about corporations buying single family homes to rent?
Re: Rental real estate in inflationary times
I would agree, but the higher order effect here is that the capital appreciation on the house can more than offset the (slight) negative cash flow. Also, does the argument "for high and stable inflation, real estate has been a historically good bet to hold or appreciate value" hold?Sandtrap wrote: ↑Sun May 08, 2022 8:27 pmCash flow negative can often be a poor business decision.slbnoob wrote: ↑Sun May 08, 2022 6:28 pm I'm not asking for market timing advice but rather data and framework to help me decide.
I have a rental single-family house in the greater Houston area which I bought just before the 2014 oil crash. I became an accidental landlord in 2018 and since then the house is tenant occupied. The house has appreciated to close to 35-50% of its purchase price in 2014 when looking at comparative listings to Redfin/Zillow estimates. I have an opportunity to sell the house in July or try to rent it again. The house has always been slightly cash flow negative ever since we put it for rent due to rent, reduced mortgage amortization period and expenses. House is lightly used for its 15 years of existence but it is about the time big expenses can rear their ugly head - AC, carpet, may be roof.
Pros of selling:
- Cash out the capital appreciation with the real estate market still looking hot (for a seller)
- Get cash ready to deploy in equities given reduced market levels
Cons of selling:
- Giving up a low-ish 3.75% mortgage rate (~17 years remaining) in times of higher interest rates
- Reduced diversification (selling RE, will likely buy equities over time)
I'd like to get perspectives on:
- If I sell, what would I be giving up by giving up on the relatively low 3.75% interest rate in inflationary times?
- Why are commercial landlords (Berkshire Hathaway et. al.) continuing to buy? Or are they?
- Assuming high and stable inflation (just watched Aswath Damodaran's latest video), real estate has been a historically good bet to hold or appreciate value. Would keeping the rental be a risk-off move?
Sell.
J
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Re: Rental real estate in inflationary times
Good pointslbnoob wrote: ↑Sun May 08, 2022 9:21 pmI would agree, but the higher order effect here is that the capital appreciation on the house can more than offset the (slight) negative cash flow. Also, does the argument "for high and stable inflation, real estate has been a historically good bet to hold or appreciate value" hold?Sandtrap wrote: ↑Sun May 08, 2022 8:27 pmCash flow negative can often be a poor business decision.slbnoob wrote: ↑Sun May 08, 2022 6:28 pm I'm not asking for market timing advice but rather data and framework to help me decide.
I have a rental single-family house in the greater Houston area which I bought just before the 2014 oil crash. I became an accidental landlord in 2018 and since then the house is tenant occupied. The house has appreciated to close to 35-50% of its purchase price in 2014 when looking at comparative listings to Redfin/Zillow estimates. I have an opportunity to sell the house in July or try to rent it again. The house has always been slightly cash flow negative ever since we put it for rent due to rent, reduced mortgage amortization period and expenses. House is lightly used for its 15 years of existence but it is about the time big expenses can rear their ugly head - AC, carpet, may be roof.
Pros of selling:
- Cash out the capital appreciation with the real estate market still looking hot (for a seller)
- Get cash ready to deploy in equities given reduced market levels
Cons of selling:
- Giving up a low-ish 3.75% mortgage rate (~17 years remaining) in times of higher interest rates
- Reduced diversification (selling RE, will likely buy equities over time)
I'd like to get perspectives on:
- If I sell, what would I be giving up by giving up on the relatively low 3.75% interest rate in inflationary times?
- Why are commercial landlords (Berkshire Hathaway et. al.) continuing to buy? Or are they?
- Assuming high and stable inflation (just watched Aswath Damodaran's latest video), real estate has been a historically good bet to hold or appreciate value. Would keeping the rental be a risk-off move?
Sell.
J
Well said.
J
Re: Rental real estate in inflationary times
Question, why would your diversification decline if you sold the SFH & bought equities? It would seem to me that a total stock market index fund would increase your diversification. No?
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Re: Rental real estate in inflationary times
These corporations didn't just start buying now and their actions have little to do with any immediate view on inflation. Invitation Homes & American Homes 4 Rent are two of the largest institutional investors in the single-family rental business & they started buying homes back in ~'11-'12; when the economy was healing, homes were dirt cheap and could be purchased in scale via large foreclosure auctions. They've been buying ever since. There are just a lot more of these type of investors now, they're bigger, and they're competing more in the open market -- so all of this just makes them more visible.slbnoob wrote: ↑Sun May 08, 2022 9:19 pmYes. Why are they buying now? What is it that they are betting on when they want to buy it from me? Is it the standard "inflation good for RE" argument as I noted above?artpennypacker wrote: ↑Sun May 08, 2022 7:52 pm To me, 3.75% doesn’t seem low enough to keep me from removing a headache.
Are you asking about corporations buying single family homes to rent?
These corporations have built up large, scaled platforms, e.g. large staff of regional property managers, maintenance crews, cheaper prices for housing materials /goods, etc.. They can take most half-decent homes in half-decent neighborhoods and get a decent return from them (long as the rental market holds up). What is a good investment for these corporations - e.g. maybe your rental - is not necessarily a good investment for you. If you have interest, you can look at the quarterly/annual reports Invitation Homes & American Homes 4 Rent put out (they're both publicly traded REITs). Among other things, they discuss their outlook for the single family rental sector in their reporting..
as an aside, there has been lots of research on how well real estate hedges against or benefits from high inflation. The short answer would probably be, "it depends." If high inflation is at least partly due to very strong economic growth, it can be a great thing; the past year has seen record rental growth for apartments and many other real estate sectors.. but if higher inflation is coupled with rising rates, and slowing growth, it's a much more dicey situation, not as easy to raise rents and higher rates can negatively impact real estate valuations
Last edited by frostyblue on Sun May 08, 2022 10:50 pm, edited 1 time in total.
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Re: Rental real estate in inflationary times
Personally, I would keep it. I think that owning some rental property is a good thing.
I don't think it's likely to give you better returns than the market.
I don't think it's likely to give you better returns than the market.
Re: Rental real estate in inflationary times
Can you raise rents further?
Rents have been going up across the country. If you can charge more than you are now, does that change the cash flow situation?
Rents have been going up across the country. If you can charge more than you are now, does that change the cash flow situation?
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Re: Rental real estate in inflationary times
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This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
Re: Rental real estate in inflationary times
OPslbnoob wrote: ↑Sun May 08, 2022 6:28 pm I'm not asking for market timing advice but rather data and framework to help me decide.
I have a rental single-family house in the greater Houston area which I bought just before the 2014 oil crash. I became an accidental landlord in 2018 and since then the house is tenant occupied. The house has appreciated to close to 35-50% of its purchase price in 2014 when looking at comparative listings to Redfin/Zillow estimates. I have an opportunity to sell the house in July or try to rent it again. The house has always been slightly cash flow negative ever since we put it for rent due to rent, reduced mortgage amortization period and expenses. House is lightly used for its 15 years of existence but it is about the time big expenses can rear their ugly head - AC, carpet, may be roof.
Pros of selling:
- Cash out the capital appreciation with the real estate market still looking hot (for a seller)
- Get cash ready to deploy in equities given reduced market levels
Cons of selling:
- Giving up a low-ish 3.75% mortgage rate (~17 years remaining) in times of higher interest rates
- Reduced diversification (selling RE, will likely buy equities over time)
I'd like to get perspectives on:
- If I sell, what would I be giving up by giving up on the relatively low 3.75% interest rate in inflationary times?
- Why are commercial landlords (Berkshire Hathaway et. al.) continuing to buy? Or are they?
- Assuming high and stable inflation (just watched Aswath Damodaran's latest video), real estate has been a historically good bet to hold or appreciate value. Would keeping the rental be a risk-off move?
Re negative cash flow, are you showing principal payments in the expenses side? Share your numbers. 2014 property in Houston should be positive
AV111
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Re: Rental real estate in inflationary times
I know you say that you aren't market timing, but it seems like much of your thinking smells like market timing (cash out while RE is still hot, buy stocks at reduced market levels, how will RE perform in inflationary times, etc).slbnoob wrote: ↑Sun May 08, 2022 6:28 pm Pros of selling:
- Cash out the capital appreciation with the real estate market still looking hot (for a seller)
- Get cash ready to deploy in equities given reduced market levels
Cons of selling:
- Giving up a low-ish 3.75% mortgage rate (~17 years remaining) in times of higher interest rates
- Reduced diversification (selling RE, will likely buy equities over time)
Here is an alternative way of thinking about it.
In your head, you must have some idea of what you want your asset allocation to be, specifically your real estate allocation. Is the current value of your rental far above that target? If so, then you might want to sell/rebalance. If not, maybe you stay the course.
I fully understand that you can't (easily) sell off part of your rental property, so if you do sell, you'd go from X% to 0%. However, you can always sell the rental property and then invest part of the proceeds in a more liquid real estate investment (ex: REIT's, etc) if you want a certain level of real estate exposure as part of your asset allocation.
If you frame it up as an asset allocation question, I think that fully removes market timing from the decision making process, and puts your thinking more in-line with standards BH principles.
Re: Rental real estate in inflationary times
What are the four distinct ways?AerialWombat wrote: ↑Sun May 08, 2022 11:27 pmReal estate is a completely different asset class than stocks. It’s not correlated to the stock market. It doesn’t behave like stocks. Direct rental ownership has tax characteristics that are very different from stocks. Real estate generates returns in four distinct ways, instead of two. And much more.
Real estate is just as different from stocks as bonds and gold are.
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Re: Rental real estate in inflationary times
Unless you can increase the rent to make the property cash flow positive, sell it immediately.
The Sensible Steward
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Re: Rental real estate in inflationary times
It's cash flow negative. The only way the OP can make money now is if the underlying real estate increases in value faster than the negative cash flow. That's speculative, so the property should be sold.SouthernInvestor wrote: ↑Sun May 08, 2022 10:41 pm Personally, I would keep it. I think that owning some rental property is a good thing.
I don't think it's likely to give you better returns than the market.
Not all RE is a good investment.
The Sensible Steward
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Re: Rental real estate in inflationary times
""for high and stable inflation, real estate has been a historically good bet to hold or appreciate value"Sandtrap wrote: ↑Sun May 08, 2022 9:39 pmGood pointslbnoob wrote: ↑Sun May 08, 2022 9:21 pmI would agree, but the higher order effect here is that the capital appreciation on the house can more than offset the (slight) negative cash flow. Also, does the argument "for high and stable inflation, real estate has been a historically good bet to hold or appreciate value" hold?Sandtrap wrote: ↑Sun May 08, 2022 8:27 pmCash flow negative can often be a poor business decision.slbnoob wrote: ↑Sun May 08, 2022 6:28 pm I'm not asking for market timing advice but rather data and framework to help me decide.
I have a rental single-family house in the greater Houston area which I bought just before the 2014 oil crash. I became an accidental landlord in 2018 and since then the house is tenant occupied. The house has appreciated to close to 35-50% of its purchase price in 2014 when looking at comparative listings to Redfin/Zillow estimates. I have an opportunity to sell the house in July or try to rent it again. The house has always been slightly cash flow negative ever since we put it for rent due to rent, reduced mortgage amortization period and expenses. House is lightly used for its 15 years of existence but it is about the time big expenses can rear their ugly head - AC, carpet, may be roof.
Pros of selling:
- Cash out the capital appreciation with the real estate market still looking hot (for a seller)
- Get cash ready to deploy in equities given reduced market levels
Cons of selling:
- Giving up a low-ish 3.75% mortgage rate (~17 years remaining) in times of higher interest rates
- Reduced diversification (selling RE, will likely buy equities over time)
I'd like to get perspectives on:
- If I sell, what would I be giving up by giving up on the relatively low 3.75% interest rate in inflationary times?
- Why are commercial landlords (Berkshire Hathaway et. al.) continuing to buy? Or are they?
- Assuming high and stable inflation (just watched Aswath Damodaran's latest video), real estate has been a historically good bet to hold or appreciate value. Would keeping the rental be a risk-off move?
Sell.
J
Well said.
J
That's an interesting argument. One would think that the higher interest rates by the Fed to combat high inflation would hurt the real estate market. I suppose if house prices rise, more people rent, which would be broadly good for landlords, but landlords still often have mortgages too, don't they?
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Re: Rental real estate in inflationary times
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Last edited by AerialWombat on Mon May 23, 2022 2:35 am, edited 1 time in total.
This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
Re: Rental real estate in inflationary times
Calculate your total asset increase less expenses. Over the last 8 years ample profit should be realized. Find the right renters or hire a property mgr.
Re: Rental real estate in inflationary times
Also, could you please explain more the bolded/italicized part? 35-50% of its purchase price means that if you paid, say, $300k, it is now worth somewhere from $105k - $150k. I'm having a hard time believing that's what you meant, although obviously every specific piece of RE is unique.slbnoob wrote: ↑Sun May 08, 2022 6:28 pm I'm not asking for market timing advice but rather data and framework to help me decide.
I have a rental single-family house in the greater Houston area which I bought just before the 2014 oil crash. I became an accidental landlord in 2018 and since then the house is tenant occupied. The house has appreciated to close to 35-50% of its purchase price in 2014 when looking at comparative listings to Redfin/Zillow estimates. I have an opportunity to sell the house in July or try to rent it again. The house has always been slightly cash flow negative ever since we put it for rent due to rent, reduced mortgage amortization period and expenses. House is lightly used for its 15 years of existence but it is about the time big expenses can rear their ugly head - AC, carpet, may be roof.
Pros of selling:
- Cash out the capital appreciation with the real estate market still looking hot (for a seller)
- Get cash ready to deploy in equities given reduced market levels
Cons of selling:
- Giving up a low-ish 3.75% mortgage rate (~17 years remaining) in times of higher interest rates
- Reduced diversification (selling RE, will likely buy equities over time)
I'd like to get perspectives on:
- If I sell, what would I be giving up by giving up on the relatively low 3.75% interest rate in inflationary times?
- Why are commercial landlords (Berkshire Hathaway et. al.) continuing to buy? Or are they?
- Assuming high and stable inflation (just watched Aswath Damodaran's latest video), real estate has been a historically good bet to hold or appreciate value. Would keeping the rental be a risk-off move?
Re: Rental real estate in inflationary times
Sure. I should have said "appreciated by" instead of "appreciated to". Point being, depending on what measure I use for estimating current value, the house is probably worth around $420k-460k currently.rocket354 wrote: ↑Mon May 09, 2022 10:01 amAlso, could you please explain more the bolded/italicized part? 35-50% of its purchase price means that if you paid, say, $300k, it is now worth somewhere from $105k - $150k. I'm having a hard time believing that's what you meant, although obviously every specific piece of RE is unique.slbnoob wrote: ↑Sun May 08, 2022 6:28 pm I'm not asking for market timing advice but rather data and framework to help me decide.
I have a rental single-family house in the greater Houston area which I bought just before the 2014 oil crash. I became an accidental landlord in 2018 and since then the house is tenant occupied. The house has appreciated to close to 35-50% of its purchase price in 2014 when looking at comparative listings to Redfin/Zillow estimates. I have an opportunity to sell the house in July or try to rent it again. The house has always been slightly cash flow negative ever since we put it for rent due to rent, reduced mortgage amortization period and expenses. House is lightly used for its 15 years of existence but it is about the time big expenses can rear their ugly head - AC, carpet, may be roof.
Pros of selling:
- Cash out the capital appreciation with the real estate market still looking hot (for a seller)
- Get cash ready to deploy in equities given reduced market levels
Cons of selling:
- Giving up a low-ish 3.75% mortgage rate (~17 years remaining) in times of higher interest rates
- Reduced diversification (selling RE, will likely buy equities over time)
I'd like to get perspectives on:
- If I sell, what would I be giving up by giving up on the relatively low 3.75% interest rate in inflationary times?
- Why are commercial landlords (Berkshire Hathaway et. al.) continuing to buy? Or are they?
- Assuming high and stable inflation (just watched Aswath Damodaran's latest video), real estate has been a historically good bet to hold or appreciate value. Would keeping the rental be a risk-off move?
Re: Rental real estate in inflationary times
AerialWombat wrote: ↑Mon May 09, 2022 9:27 amCash flow from rents, cash flow from depreciation, debt paydown by rents, appreciation.London wrote: ↑Mon May 09, 2022 8:09 amWhat are the four distinct ways?AerialWombat wrote: ↑Sun May 08, 2022 11:27 pmReal estate is a completely different asset class than stocks. It’s not correlated to the stock market. It doesn’t behave like stocks. Direct rental ownership has tax characteristics that are very different from stocks. Real estate generates returns in four distinct ways, instead of two. And much more.
Real estate is just as different from stocks as bonds and gold are.
My current situation is as follows:
Cash flow from rents: slightly negative, about $1-2k loss per year,
Cash flow from depreciation: deferred, realizable when I sell house or when income > expenses
Debt paydown by rents: about $7k per year, putting overall rental proposition in the positive (even though cash flow is negative)
Appreciation: 35-50% appreciation over past 8 years, most of it in the last 2 years.
A rent increase of $200 can make me cash flow positive but I'd likely go to a $150 rent increase if I do rent it again this summer.
Last edited by slbnoob on Mon May 09, 2022 10:42 am, edited 1 time in total.
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Re: Rental real estate in inflationary times
Thanks. To be clear, I very much am market-timing, just that I didn't need market timing advise per se, but data and perspectives. I have thought about REITs as an alternative, but those don't appear all that more compelling compared to broader equities. As another commenter mentioned, RE just has distinct characteristics. Another reason, I am hesitating selling is that I may never be able to get back into RE, especially at the mortgage rate I have.humblecoder wrote: ↑Mon May 09, 2022 7:53 amI know you say that you aren't market timing, but it seems like much of your thinking smells like market timing (cash out while RE is still hot, buy stocks at reduced market levels, how will RE perform in inflationary times, etc).slbnoob wrote: ↑Sun May 08, 2022 6:28 pm Pros of selling:
- Cash out the capital appreciation with the real estate market still looking hot (for a seller)
- Get cash ready to deploy in equities given reduced market levels
Cons of selling:
- Giving up a low-ish 3.75% mortgage rate (~17 years remaining) in times of higher interest rates
- Reduced diversification (selling RE, will likely buy equities over time)
Here is an alternative way of thinking about it.
In your head, you must have some idea of what you want your asset allocation to be, specifically your real estate allocation. Is the current value of your rental far above that target? If so, then you might want to sell/rebalance. If not, maybe you stay the course.
I fully understand that you can't (easily) sell off part of your rental property, so if you do sell, you'd go from X% to 0%. However, you can always sell the rental property and then invest part of the proceeds in a more liquid real estate investment (ex: REIT's, etc) if you want a certain level of real estate exposure as part of your asset allocation.
If you frame it up as an asset allocation question, I think that fully removes market timing from the decision making process, and puts your thinking more in-line with standards BH principles.
Re: Rental real estate in inflationary times
With how much rent has gone up in just this last year (arguable if it's sustainable but lets go with it) I don't see how you can still be cash flow negative on a property from 2014.
I say keep it if nothing else but for diversification purposes.
I say keep it if nothing else but for diversification purposes.
Re: Rental real estate in inflationary times
Yeah, if I decide to keep it, it won't be because of higher expected returns but mostly as a hedge (against high and stable inflation) and "diversification".SouthernInvestor wrote: ↑Sun May 08, 2022 10:41 pm Personally, I would keep it. I think that owning some rental property is a good thing.
I don't think it's likely to give you better returns than the market.
Re: Rental real estate in inflationary times
Thank you for this data. I will look into these public REITs' outlook for single family homes.frostyblue wrote: ↑Sun May 08, 2022 10:34 pmThese corporations didn't just start buying now and their actions have little to do with any immediate view on inflation. Invitation Homes & American Homes 4 Rent are two of the largest institutional investors in the single-family rental business & they started buying homes back in ~'11-'12; when the economy was healing, homes were dirt cheap and could be purchased in scale via large foreclosure auctions. They've been buying ever since. There are just a lot more of these type of investors now, they're bigger, and they're competing more in the open market -- so all of this just makes them more visible.slbnoob wrote: ↑Sun May 08, 2022 9:19 pmYes. Why are they buying now? What is it that they are betting on when they want to buy it from me? Is it the standard "inflation good for RE" argument as I noted above?artpennypacker wrote: ↑Sun May 08, 2022 7:52 pm To me, 3.75% doesn’t seem low enough to keep me from removing a headache.
Are you asking about corporations buying single family homes to rent?
These corporations have built up large, scaled platforms, e.g. large staff of regional property managers, maintenance crews, cheaper prices for housing materials /goods, etc.. They can take most half-decent homes in half-decent neighborhoods and get a decent return from them (long as the rental market holds up). What is a good investment for these corporations - e.g. maybe your rental - is not necessarily a good investment for you. If you have interest, you can look at the quarterly/annual reports Invitation Homes & American Homes 4 Rent put out (they're both publicly traded REITs). Among other things, they discuss their outlook for the single family rental sector in their reporting..
as an aside, there has been lots of research on how well real estate hedges against or benefits from high inflation. The short answer would probably be, "it depends." If high inflation is at least partly due to very strong economic growth, it can be a great thing; the past year has seen record rental growth for apartments and many other real estate sectors.. but if higher inflation is coupled with rising rates, and slowing growth, it's a much more dicey situation, not as easy to raise rents and higher rates can negatively impact real estate valuations
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Re: Rental real estate in inflationary times
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Re: Rental real estate in inflationary times
Point taken with regards to your clarification about market timing. My suggestion still stands. If you are still at (or in the vicinity) of your target asset allocation for real estate, then keep it. If you are heavily overweighted in RE, then consider selling.slbnoob wrote: ↑Mon May 09, 2022 10:40 amThanks. To be clear, I very much am market-timing, just that I didn't need market timing advise per se, but data and perspectives. I have thought about REITs as an alternative, but those don't appear all that more compelling compared to broader equities. As another commenter mentioned, RE just has distinct characteristics. Another reason, I am hesitating selling is that I may never be able to get back into RE, especially at the mortgage rate I have.humblecoder wrote: ↑Mon May 09, 2022 7:53 amI know you say that you aren't market timing, but it seems like much of your thinking smells like market timing (cash out while RE is still hot, buy stocks at reduced market levels, how will RE perform in inflationary times, etc).slbnoob wrote: ↑Sun May 08, 2022 6:28 pm Pros of selling:
- Cash out the capital appreciation with the real estate market still looking hot (for a seller)
- Get cash ready to deploy in equities given reduced market levels
Cons of selling:
- Giving up a low-ish 3.75% mortgage rate (~17 years remaining) in times of higher interest rates
- Reduced diversification (selling RE, will likely buy equities over time)
Here is an alternative way of thinking about it.
In your head, you must have some idea of what you want your asset allocation to be, specifically your real estate allocation. Is the current value of your rental far above that target? If so, then you might want to sell/rebalance. If not, maybe you stay the course.
I fully understand that you can't (easily) sell off part of your rental property, so if you do sell, you'd go from X% to 0%. However, you can always sell the rental property and then invest part of the proceeds in a more liquid real estate investment (ex: REIT's, etc) if you want a certain level of real estate exposure as part of your asset allocation.
If you frame it up as an asset allocation question, I think that fully removes market timing from the decision making process, and puts your thinking more in-line with standards BH principles.
I used REIT as one example of a way to get RE exposure without holding properties directly, but there are other methods. Over the past decade, a number of online real estate investing syndicates have arisen. I won't name names but a quick google search will turn up some options in this space. Some are only available to accredited investors, though, so this might be a consideration. An option like this might be preferable since you can get some diversification across properties/geographies/etc. Right now, all of your RE eggs are in one basket.
Re: Rental real estate in inflationary times
That's unlikely to be true.slbnoob wrote: ↑Mon May 09, 2022 10:44 amYeah, if I decide to keep it, it won't be because of higher expected returns but mostly as a hedge (against high and stable inflation) and "diversification".SouthernInvestor wrote: ↑Sun May 08, 2022 10:41 pm Personally, I would keep it. I think that owning some rental property is a good thing.
I don't think it's likely to give you better returns than the market.
Is the price of the home less than 20% of your net worth? If it's not, it's close to a pure gamble and works in the opposite direction of a hedge or diversification.
Re: Rental real estate in inflationary times
OPslbnoob wrote: ↑Mon May 09, 2022 10:36 amAerialWombat wrote: ↑Mon May 09, 2022 9:27 amCash flow from rents, cash flow from depreciation, debt paydown by rents, appreciation.London wrote: ↑Mon May 09, 2022 8:09 amWhat are the four distinct ways?AerialWombat wrote: ↑Sun May 08, 2022 11:27 pmReal estate is a completely different asset class than stocks. It’s not correlated to the stock market. It doesn’t behave like stocks. Direct rental ownership has tax characteristics that are very different from stocks. Real estate generates returns in four distinct ways, instead of two. And much more.
Real estate is just as different from stocks as bonds and gold are.My current situation is as follows:
Cash flow from rents: slightly negative, about $1-2k loss per year,
Cash flow from depreciation: deferred, realizable when I sell house or when income > expenses
Debt paydown by rents: about $7k per year, putting overall rental proposition in the positive (even though cash flow is negative)
Appreciation: 35-50% appreciation over past 8 years, most of it in the last 2 years.
A rent increase of $200 can make me cash flow positive but I'd likely go to a $150 rent increase if I do rent it again this summer.
Also check how the market rents compare with the rent you are charging. If you are not able to profit by $200 or so after paying mortgage and other costs out of the market rent, sell now before inventory shoots up and prices go down
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Re: Rental real estate in inflationary times
I think a bigger question is do you like being a landlord.
As an accidental landlord myself for a home i got into in 2005 - 2020, I'm SOOO much happier not having to worry about tenants and the crap that I've had to deal with over the years. I'm pretty sure the stress of some of the situations took years out of my life.
As an accidental landlord myself for a home i got into in 2005 - 2020, I'm SOOO much happier not having to worry about tenants and the crap that I've had to deal with over the years. I'm pretty sure the stress of some of the situations took years out of my life.
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Re: Rental real estate in inflationary times
This is how I look at it. I rent out 1/3 of my 2-family house. I view it as a part time job that pays X dollars. After 12 years the paycheck is pretty good. Have had some stresses but mostly just more household stuff to fix when it breaks. That said, there's no way I'm doing the extra work if I'm cash flow negative. Too many hassles for that.avginvestor wrote: ↑Mon May 09, 2022 11:24 am I think a bigger question is do you like being a landlord.
As an accidental landlord myself for a home i got into in 2005 - 2020, I'm SOOO much happier not having to worry about tenants and the crap that I've had to deal with over the years. I'm pretty sure the stress of some of the situations took years out of my life.
Good luck OP.
Re: Rental real estate in inflationary times
LOL, please don't tell me I've been doing this all wrongAerialWombat wrote: ↑Mon May 09, 2022 10:52 amJust to clarify, are you saying that you’re not currently claiming the allowable depreciation as a Schedule E deduction each year, or that your income is high enough that you’re accumulating a passive activity loss carryover?
If the latter, all is well. If the former, all is not well.
I've trusted H&R Block all these years and have in fact been, carrying over passive activity losses every year. This loss is a combination of my (small) loss in rental income - expenses (incl. mortgage, insurance, property tax, etc.) and depreciation. I looked forward to realizing this loss to offset my earned income (through W2) when I disposed off / sold my house.
Does this sound OK? What is the "high enough income" you talk about?
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Re: Rental real estate in inflationary times
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Re: Rental real estate in inflationary times
slbnoob wrote: ↑Sun May 08, 2022 6:28 pm I'm not asking for market timing advice but rather data and framework to help me decide.
I have a rental single-family house in the greater Houston area which I bought just before the 2014 oil crash. I became an accidental landlord in 2018 and since then the house is tenant occupied. The house has appreciated to close to 35-50% of its purchase price in 2014 when looking at comparative listings to Redfin/Zillow estimates. I have an opportunity to sell the house in July or try to rent it again. The house has always been slightly cash flow negative ever since we put it for rent due to rent, reduced mortgage amortization period and expenses. House is lightly used for its 15 years of existence but it is about the time big expenses can rear their ugly head - AC, carpet, may be roof.
Pros of selling:
- Cash out the capital appreciation with the real estate market still looking hot (for a seller)
- Get cash ready to deploy in equities given reduced market levels
Cons of selling:
- Giving up a low-ish 3.75% mortgage rate (~17 years remaining) in times of higher interest rates
- Reduced diversification (selling RE, will likely buy equities over time)
I'd like to get perspectives on:
- If I sell, what would I be giving up by giving up on the relatively low 3.75% interest rate in inflationary times?
- Why are commercial landlords (Berkshire Hathaway et. al.) continuing to buy? Or are they?
- Assuming high and stable inflation (just watched Aswath Damodaran's latest video), real estate has been a historically good bet to hold or appreciate value. Would keeping the rental be a risk-off move?
How much per sqft are you charging for rent? I am from Houston as well (Cypress) and in a newly built community like Bridgeland, I see rent going at $1.08/sq ft. At 2.75 % APR, that would barely cover the mortgage and property taxes, leaving a couple of 100bucks. If you pay PMI, that gets little smaller. Not sure how old/new your property is, but as someone mentioned here already, can you increase your rent?
~ A struggling Oil Man
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Re: Rental real estate in inflationary times
Sounds like it’s time to add a CPA to your list of expenses! I finally had to surrender the job this year after years of TurboTax.slbnoob wrote: ↑Mon May 09, 2022 12:23 pmLOL, please don't tell me I've been doing this all wrongAerialWombat wrote: ↑Mon May 09, 2022 10:52 amJust to clarify, are you saying that you’re not currently claiming the allowable depreciation as a Schedule E deduction each year, or that your income is high enough that you’re accumulating a passive activity loss carryover?
If the latter, all is well. If the former, all is not well.
I've trusted H&R Block all these years and have in fact been, carrying over passive activity losses every year. This loss is a combination of my (small) loss in rental income - expenses (incl. mortgage, insurance, property tax, etc.) and depreciation. I looked forward to realizing this loss to offset my earned income (through W2) when I disposed off / sold my house.
Does this sound OK? What is the "high enough income" you talk about?
Re: Rental real estate in inflationary times
AerialWombat wrote: ↑Mon May 09, 2022 3:27 pmFor your reading pleasure:slbnoob wrote: ↑Mon May 09, 2022 12:23 pmLOL, please don't tell me I've been doing this all wrongAerialWombat wrote: ↑Mon May 09, 2022 10:52 amJust to clarify, are you saying that you’re not currently claiming the allowable depreciation as a Schedule E deduction each year, or that your income is high enough that you’re accumulating a passive activity loss carryover?
If the latter, all is well. If the former, all is not well.
I've trusted H&R Block all these years and have in fact been, carrying over passive activity losses every year. This loss is a combination of my (small) loss in rental income - expenses (incl. mortgage, insurance, property tax, etc.) and depreciation. I looked forward to realizing this loss to offset my earned income (through W2) when I disposed off / sold my house.
Does this sound OK? What is the "high enough income" you talk about?
https://www.irs.gov/publications/p925#e ... 1000104571
and
https://www.irs.gov/publications/p925#e ... 1000104575
Thanks for the links. Looks like I am doing the right thing. My MAGI is past the "phaseout" so I have to carry forward the passive losses.FreelancerNYC wrote: ↑Tue May 10, 2022 12:00 am Sounds like it’s time to add a CPA to your list of expenses! I finally had to surrender the job this year after years of TurboTax.
Re: Rental real estate in inflationary times
My property is in Katy and my rent is around 0.82, hoping to go up to $0.87/sq.ft. I doubt it can go much higher than this given comps around. As mentioned, the rent barely covers all expenses, losing $1k a year.Hallo basu wrote: ↑Mon May 09, 2022 11:42 pm How much per sqft are you charging for rent? I am from Houston as well (Cypress) and in a newly built community like Bridgeland, I see rent going at $1.08/sq ft. At 2.75 % APR, that would barely cover the mortgage and property taxes, leaving a couple of 100bucks. If you pay PMI, that gets little smaller. Not sure how old/new your property is, but as someone mentioned here already, can you increase your rent?
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Re: Rental real estate in inflationary times
A little negative cash flow in an inflationary environment is not a big deal. Real estate rents go up, you write off a bunch of your expenses against the income, and generally the property appreciates over time. I'd keep it.willthrill81 wrote: ↑Mon May 09, 2022 8:12 amIt's cash flow negative. The only way the OP can make money now is if the underlying real estate increases in value faster than the negative cash flow. That's speculative, so the property should be sold.SouthernInvestor wrote: ↑Sun May 08, 2022 10:41 pm Personally, I would keep it. I think that owning some rental property is a good thing.
I don't think it's likely to give you better returns than the market.
Not all RE is a good investment.
I find having part of my net worth in stocks, part in bonds/ FI, and part in real estate provides diversification.
An important key to investing is having a well-calibrated sense of your future regret.
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Re: Rental real estate in inflationary times
Not sure how old you are, or the rest of your financial picture, but I'd be inclined to keep it. The diversification factor (away from equities) is attractive. Rental real estate in the 1970's in many locations was great as stocks and bonds struggled and inflation persisted. And it hasn't been too bad in other timeframes either, less the Great Recession and maybe the mid-90's for a bit.slbnoob wrote: ↑Sun May 08, 2022 6:28 pm I'm not asking for market timing advice but rather data and framework to help me decide.
I have a rental single-family house in the greater Houston area which I bought just before the 2014 oil crash. I became an accidental landlord in 2018 and since then the house is tenant occupied. The house has appreciated to close to 35-50% of its purchase price in 2014 when looking at comparative listings to Redfin/Zillow estimates. I have an opportunity to sell the house in July or try to rent it again. The house has always been slightly cash flow negative ever since we put it for rent due to rent, reduced mortgage amortization period and expenses. House is lightly used for its 15 years of existence but it is about the time big expenses can rear their ugly head - AC, carpet, may be roof.
Pros of selling:
- Cash out the capital appreciation with the real estate market still looking hot (for a seller)
- Get cash ready to deploy in equities given reduced market levels
Cons of selling:
- Giving up a low-ish 3.75% mortgage rate (~17 years remaining) in times of higher interest rates
- Reduced diversification (selling RE, will likely buy equities over time)
I'd like to get perspectives on:
- If I sell, what would I be giving up by giving up on the relatively low 3.75% interest rate in inflationary times?
- Why are commercial landlords (Berkshire Hathaway et. al.) continuing to buy? Or are they?
- Assuming high and stable inflation (just watched Aswath Damodaran's latest video), real estate has been a historically good bet to hold or appreciate value. Would keeping the rental be a risk-off move?
An important key to investing is having a well-calibrated sense of your future regret.
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Re: Rental real estate in inflationary times
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Re: Rental real estate in inflationary times
True, but I've owned a lot of RE that was negative until it was positive, and that it was REALLY positive. YMMV.willthrill81 wrote: ↑Mon May 09, 2022 8:12 amIt's cash flow negative. The only way the OP can make money now is if the underlying real estate increases in value faster than the negative cash flow. That's speculative, so the property should be sold.SouthernInvestor wrote: ↑Sun May 08, 2022 10:41 pm Personally, I would keep it. I think that owning some rental property is a good thing.
I don't think it's likely to give you better returns than the market.
Not all RE is a good investment.
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Re: Rental real estate in inflationary times
How so? Did you finally pay off the mortgage? Did your rents suddenly jump up? Or are you counting home appreciation beyond inflation, which cannot be counted upon before it happens?SouthernInvestor wrote: ↑Fri May 13, 2022 1:42 pmTrue, but I've owned a lot of RE that was negative until it was positive, and that it was REALLY positive. YMMV.willthrill81 wrote: ↑Mon May 09, 2022 8:12 amIt's cash flow negative. The only way the OP can make money now is if the underlying real estate increases in value faster than the negative cash flow. That's speculative, so the property should be sold.SouthernInvestor wrote: ↑Sun May 08, 2022 10:41 pm Personally, I would keep it. I think that owning some rental property is a good thing.
I don't think it's likely to give you better returns than the market.
Not all RE is a good investment.
The Sensible Steward
Re: Rental real estate in inflationary times
A few things to think about:
You might be slightly negative on a cash flow basis, but you're also getting the depreciation write off. If you sell, you will obviously lose that write off-- and you'll also have recaptured depreciation for all the years you rented it, which will count as ordinary income. Big tax event.
You will also owe capital gains tax.
I was tempted to sell my rental property, which has almost doubled in value. When I realized the tax bite would be about $60K, I've paused. This property cash flows nicely, and is just 7 years old so there are some differences. But for now I'm keeping it.
Finally, don't worry about replacing the roof. You're in Texas, there will be a hailstorm, your insurance will cover it. It's not a huge deal. I figured that if I had a deductable for a new roof AND replaced carpet AND painted the place AND replaced the backyard fencing all in one year, it would still be be <12K. The changes I have to do ALL those in one year is pretty slim. So I've set aside part of the rent every month-- the reserves are in place. I sort of like an alternate income stream, and am horrified at paying $60K in taxes so I have not listed it for sale.
YMMV
You might be slightly negative on a cash flow basis, but you're also getting the depreciation write off. If you sell, you will obviously lose that write off-- and you'll also have recaptured depreciation for all the years you rented it, which will count as ordinary income. Big tax event.
You will also owe capital gains tax.
I was tempted to sell my rental property, which has almost doubled in value. When I realized the tax bite would be about $60K, I've paused. This property cash flows nicely, and is just 7 years old so there are some differences. But for now I'm keeping it.
Finally, don't worry about replacing the roof. You're in Texas, there will be a hailstorm, your insurance will cover it. It's not a huge deal. I figured that if I had a deductable for a new roof AND replaced carpet AND painted the place AND replaced the backyard fencing all in one year, it would still be be <12K. The changes I have to do ALL those in one year is pretty slim. So I've set aside part of the rent every month-- the reserves are in place. I sort of like an alternate income stream, and am horrified at paying $60K in taxes so I have not listed it for sale.
YMMV
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Re: Rental real estate in inflationary times
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Re: Rental real estate in inflationary times
I didn't see a response from the topic author on diversification... I'm just not sure how one single family house is diversified. We are not talking about a REIT index fund with hundreds of holdings managing thousands of properties.slbnoob wrote: ↑Mon May 09, 2022 10:36 amAerialWombat wrote: ↑Mon May 09, 2022 9:27 amCash flow from rents, cash flow from depreciation, debt paydown by rents, appreciation.London wrote: ↑Mon May 09, 2022 8:09 amWhat are the four distinct ways?AerialWombat wrote: ↑Sun May 08, 2022 11:27 pmReal estate is a completely different asset class than stocks. It’s not correlated to the stock market. It doesn’t behave like stocks. Direct rental ownership has tax characteristics that are very different from stocks. Real estate generates returns in four distinct ways, instead of two. And much more.
Real estate is just as different from stocks as bonds and gold are.My current situation is as follows:
Cash flow from rents: slightly negative, about $1-2k loss per year,
Cash flow from depreciation: deferred, realizable when I sell house or when income > expenses
Debt paydown by rents: about $7k per year, putting overall rental proposition in the positive (even though cash flow is negative)
Appreciation: 35-50% appreciation over past 8 years, most of it in the last 2 years.
A rent increase of $200 can make me cash flow positive but I'd likely go to a $150 rent increase if I do rent it again this summer.
Re: Rental real estate in inflationary times
In addition to costing you money, how much time is this rental costing you?
All those little moments and distractions, plus the big ones, add up time wise.
In my mind, any investment that isn't bringing pleasure, that is losing money, is also costing you your life.
Literally.
If it were me, I would add up the dollars lost since ownership, plus my time since ownership, and ask, "If this scenario was offered to me, would I take it?" and decide if paying in both time and $ is worth the diversification.
Again, if it were me (I don't like managing rentals and all those headaches, or paying someone else to do so at a loss) I would sell.
"A portfolio is like a bar of soap, the more it's handled, the less there is." Dr. William Bernstein