(Another) Real estate question.

[AlcateL]

Hi all, I recently got my bankroll into a state where I can cash out 130,000 dollars (or more like will have $130,000) Which is about £70,000 for me. I was always going to buy a house close to where I live (Shenfield, Brentwood in Essex - good for commuters) for about £190,000 (120,000 mortgage of course) and rent it out - which I could get about £800 a month for. However my uncle who's a builder in mineappolis believes the rental market in America would be alot better for me to get into - He believes for $280,000 (which is infact less than the price of the property I was looking at here) I could get $1600 a month in rent. (Apparantly these properties are increasing in value by 7% a year as well which is alot for America.

I was wondering if anyone had any thoughts on what I'd be better off doing - my uncle would upkeep the house and charge me the minimum he could of course. The main thought for me is that the rent %age is alot higher in the US dollar for dollar than it is in the UK. However the property market is increasing at a faster rate in the UK as opposed to the US. Equally the UK has a much higher percentage of home owners as opposed to renters than the US (I believe?)

Thanks in advance.
Luke.

[DesertCat]

What are interest rates like in the UK? In the U.S. they've been on an upswing that's stopped a speculative market in it's tracks, and created huge amounts of inventory in some areas, making future appreciation those areas unlikely for years.

In your UK scenario, you can get 9600 pounds a year on a 190,000 pound investment. That's about 5%, before deducting taxes, vacancy, and maintanence costs. If your interest rate was 6%, you'd be subsidizing a loss of 2%-3% a year, or at least 4,000 pounds a year, with only the hope of appreciation to bail you out. Sounds like a terrible deal to me.

Maybe you can average a 5%+ appreciation over the next decade (maybe not), but you are paying a ton each year while you wait. Don't get blinded by a couple decades of abnormal property appreciation rates driven solely by declining interest rates. Rates are still pretty low, so they are unlikely to decline significantly during the duration of your ownership. In the U.S. they are likely to rise due to our fiscal policies, which is going to retard appreciation.

Now notice I ignore your downpayment to make the analysis simple, but that doesn't change much. Your downpayment should be able to earn a risk free return of at least 5%, you are forfeiting that when you put it down, so the cost of your downpayment is similar to your mortgage.

The U.S. property returns about 6.5% in gross rents. Minus taxes, your uncles fees, vacancies, you are still in a hole. You are still dependant upon appreciation to make a profit, esp since your mortgage rate could be higher than 7%, depending upon your credit, income and down payment. And that 7% appreciation is likely to be a fairy tale for the next few years at least. With a substantial downpayment, you might have a breakeven investment, which means you earn no cash return on that big downpayment.

A good goal for investing in a property is to find one that generates positive cash flow. You'd like to find one where the rents are closer to 8% of purchase price, then you should be able to get positive cash flow every month. If the real estate market declines, doesn't matter, you make money. If the market is flat, doesn't matter, you make money. If the market takes off, you make even more.

And don't be tempted by short term adjustable mortgage rates to make the numbers work better. Eventually they'll adjust and you'll be stuck with the property, trying to make the numbers work while paying the prevalent interest rate. Even if you use an ARM, think of the mortgage in terms of the rate it will adjust to, not the "teaser rate" you start with.

[haakee]

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And that 7% appreciation is likely to be a fairy tale for the next few years at least.

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Maybe you should be more blunt on this point. For all the people who ask real estate questions on here: property price appreciation that exceeds wage inflation by a non-trivial margin is almost definitely unsustainable over extended periods of time. And wherever you're looking to buy property is probably not "different" even though "everybody wants to live there" or "they're not making anymore land" or whatever your realtor tells you.

[Evan]

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"they're not making anymore land"

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I always loved this line. Like there are a bunch of people running around going, "Guys, they stopped making land, better hurry up and buy a bunch!"

[SossMan]

[ QUOTE ]
[ QUOTE ]
And that 7% appreciation is likely to be a fairy tale for the next few years at least.

[/ QUOTE ]

Maybe you should be more blunt on this point. For all the people who ask real estate questions on here: property price appreciation that exceeds wage inflation by a non-trivial margin is almost definitely unsustainable over extended periods of time. And wherever you're looking to buy property is probably not "different" even though "everybody wants to live there" or "they're not making anymore land" or whatever your realtor tells you.

[/ QUOTE ]

I'm in real estate finance and sales in the bay area. It's pretty amazing what 5 years of cheap money and 20% YOY appreciation will do to otherwise smart people's logic and reasoning.
There are lots and lots of shops going out of business right now because they can't deal w/ a 'regular' market.

[eastbay]

[ QUOTE ]

I'm in real estate finance and sales in the bay area. It's pretty amazing what 5 years of cheap money and 20% YOY appreciation will do to otherwise smart people's logic and reasoning.
There are lots and lots of shops going out of business right now because they can't deal w/ a 'regular' market.

[/ QUOTE ]

The number of RE, mortgage and title shops that opened near me in the past 3 years was just ridiculous. It was like every other shop window in the new strips, if not more than that. It's got to be overserved by a such a huge margin at this point now that the cooling is well underway.

eastbay