Real Estate Investing

[Yanks02]

I got into a debate about real estate investing last night with a couple of friends. Basically, they were saying that if you buy a house, rent it to someone for 30 years, they will have paid the mortgage for you and you own the house and can sell it for pure profit. while i agree with this to an extent, I feel that it is not this simple. But i don't know why.

I live in Boston and we were specifically talking about this market.

I think that real estate is a good investment over the long run, but I don't think it is a 100% lock to make money. Can someone help me out? Is it really this simple, or are they overlooking some big details?

[wmspringer]

[ QUOTE ]
I think that real estate is a good investment over the long run, but I don't think it is a 100% lock to make money. Can someone help me out? Is it really this simple, or are they overlooking some big details?

[/ QUOTE ]

Well, I've never owned rental property, but...

1) The rent may not cover your mortage completely, especially after you figure in taxes, insurance, and repairs.

2) The house may not be constantly occupied, and you're losing a lot of money when it's empty.

3) You're not guaranteed to be able to sell it when you want to.

[mbb]

Real estate is extremely cyclical. The strategy you describe works if you start at the bottom of the market. That's not where we are now.

But, for instance, I bought a four-unit rental property in a nice part of Orange County, California, about six years ago. I bought it for nothing down (actually, I put up a 10% down payment, but immediately refinanced it and got my 10% back, so after 60 days I had no cash invested.)

It's been paying for itself ever since. Rents cover the mortgages, repairs, vacancies, taxes, and everything else.

But if I tried to buy that building today, I'd have to put up about a 50% down payment to make it pay for itself, simply because ratios of sales prices to rents have gotten so crazy.

[ChromePony]

[ QUOTE ]
I got into a debate about real estate investing last night with a couple of friends. Basically, they were saying that if you buy a house, rent it to someone for 30 years, they will have paid the mortgage for you and you own the house and can sell it for pure profit. while i agree with this to an extent, I feel that it is not this simple. But i don't know why.

I live in Boston and we were specifically talking about this market.

I think that real estate is a good investment over the long run, but I don't think it is a 100% lock to make money. Can someone help me out? Is it really this simple, or are they overlooking some big details?

[/ QUOTE ]

I dont know a whole lot about this stuff but I do know that is expensive to maintain a house. If youre renting it you get to pay for the tenents plumbing problems, and you have to worry about keeping it occupide with people who pay rent in a timely fasion. On top of that you get to pay some property taxes that can run pretty high. Real estate in general is a great investment but its certainly more complicated than that.

[Thremp]

It is a very simplified view, but yes many people do make a living and a quite nice one by buying buildings and renting them and making sure they are able to fund things in the lean times in between.

Having a sufficient cash reserve to make it if your tenants peace out is very important :x

[Sifmole]

[ QUOTE ]
I dont know a whole lot about this stuff but I do know that is expensive to maintain a house. If youre renting it you get to pay for the tenents plumbing problems, and you have to worry about keeping it occupide with people who pay rent in a timely fasion. On top of that you get to pay some property taxes that can run pretty high. Real estate in general is a great investment but its certainly more complicated than that.

[/ QUOTE ]

One note about routine maintenance and repairs -- you get to deduct them as an investor, you don't as an owner.

[nyc999]

The standard rule of thumb for maintaining a home is 2% of the purchase price per year. However, if you kept the home for the full 30 years, you'd most likely make a good profit.

[107ofclubs]

This assumes that the value of the house goes up and that the rental market stays the same or goes up. For example say you spend 500,000 on a house and assume the house is rented so that after 360 (30 years) of rent you have paid for it. Your argument assumes that the house will still be worth 500k at the end of this period.

If the value of the house drops, more than likely the rent will have to go down too, but you would still be liable for the 500k mortgage, so you would lose out substantially during this period.

Over 30 years, one would have to assume that the market would steadily appreciate, so that the periods of low rent would be offset by periods of excess rent income.

Long story short, this is like any other type of investment and there are no guarantees but this is more stable. The increased risk, in my opinion is the large amount of capital it takes to get in versus what it takes to invest in stocks/currency/bonds/whatever

[italianstang]

[ QUOTE ]

But if I tried to buy that building today, I'd have to put up about a 50% down payment to make it pay for itself, simply because ratios of sales prices to rents have gotten so crazy in Southern California.

[/ QUOTE ]

[mbb]

[ QUOTE ]
[ QUOTE ]

But if I tried to buy that building today, I'd have to put up about a 50% down payment to make it pay for itself, simply because ratios of sales prices to rents have gotten so crazy in Southern California.

[/ QUOTE ]

[/ QUOTE ]

Yes, real estate prices are especially crazy in Southern California.

They're especially crazy nationwide. For evidence, look at this graph from the New York times, which shows that the relative value of houses to incomes is nearly twice as high as it has EVER been in American history.

http://graphics8.nytimes.com/images/...aph2.large.gif

Unless you believe that everybody can leave the table a winner, there's a massive correction coming.