[quote=bearishgurl][quote=no_such_reality]At that price point, the rental value exceeds the sale value. It’s about at the tipping point though. At that price point (outlined in the other thread), a new buyer can’t really purchase it with anything over 50% financing and make a return on capital after paying the stepped up taxes and costs. The net result, the homes change hands to new owners, not landlords.
As the price goes up, the rental value doesn’t keep up and the houses tend to resell and revamp instead of refurb and rent.
As another pointed out, rental market above certain amounts thin out quickly.[/quote]
I see your point but I thought most buy and hold investors today purchased their investment properties with all cash. Do you see small investors taking out purchase-money mortgages for a 1-4 unit investment property?[/quote]
1 Unit is an SFR or single hab condo. Anything else that is 2-4 uits is intended to be landlord owned, whether or not the landlord lives on premise. The math on those are about the same. All cash you can squeak, and I mean squeak a return out on them, but you aren’t rolling dole. Based on the info from my tax preparer, there are 20:1 people buying properties and losing money to those buying properties and making money. Most are buying the propery, owning the property and having a renter subsibize their purchase of it, but many are kicking in money every month to hold it and aren’t going to be getting to break even soon.
You can do the math. That $400,000 home, if it’s sold to a new person at $400,000. At $1750 rent, if it’s straight up rented twelve months, max is $21,000 a year before any expenses, which would be a 5.25% return on cap before taxes. Property taxes are $4000+, insurance another $100. Call it $5200 for taxes and insurance before anything else. You’re down to $15,800. or a return of 3.95%.
Now start adding expenses, do you need a landscaper? Roof reserve? New carpet? AC service? Furnance service? They all chew into it.
Carrying debt? a $200K loan at 3.75% carries $620/month in interest, that’s $7440 a year out the door. The good news is it’ll push your return up to 4.1%, but on half the size of capital.
The $550K property example renting for $2200-$2400, same boat.
They’re using heavy cash or all cash because if you don’t, you have to kick money in every month to cover the principal portion of the loan. Crunch the numbers: 30% down, loan at 3.75%, the interest is $870/month. insurance another $100, property tax another $330. You’re at $1300 and you haven’t had a single variable expense, with $450 left on “the rent” and a principal payment on the loan of $430 due. Sure you can experiment with an ARM or 15 year or 10/1 I/O but that’s gambling the timing moves in your favor.
