I don’t think we’ll have a bunch of investors scooping up properties in freefall, especially when rental rates are falling as tens of thousands of San Diegans are leaving town or added to the unemployment rolls. Rental prices will stay flat or go down in 2007 and 2008.
Besides, how many people have got 100K to put down on a house? The opportunity cost of that money has to be considered too. You can’t just think that the cost of the $500K house is only $400K, bec. you took a $400K mortgage. You’ve got to think that the entire $500K is costing you 6%, and is the tenant going to cover that?
Who would want to buy rental property when the media is full of median price dropping 10-20% year over year? When rental rates are falling? When the only people who would rent are those evicted from their homes in foreclosure, and stories of non-paying tenants get more common? How many high FICO, stable job types of tenants would remain in 2008?
Once the market is desireable to investors, wouldn’t it also be desireable to first time buyers, and bubble sitters? They would buy, so where is the rental pool?
And let’s remember buyer psychology. There will be fear of further price drops.
Another consideration is the number of investors out there. How many homes will be bought by people who want to live in them, vs. people who want to rent them out. Is it typical to have so many rental homes, as we had in this last cycle? If the usual stock of rental homes is 5% of homes, and we were at 35% of homes due to speculator frenzy, then we have a big oversupply of homes that needs to be absorbed and not as many investors as needed to make significant price movements.
Your idea does merit further discussion. Perhaps you could lay out the plan how someone would earn 7% on a $320K house. If that were a guranteed rate, after taxes and maintenance and costs of having the place empty between tenants, that could be a draw for some people.
I was told that a house should cost 8x annual rent, to be cash flow positive. The $320K house in your example should provide you with an annual rent of $40K, or $3,333/month. That seem like a high payment for a $320K house, since we tenants are used to paying about half of the mortgage value. For example, the house we rented last year in my favorite neighborhood, Green Valley in Poway, cost $2500/month. At 8x rent stream, the landlord should have paid $240K, but she bought it for $650K. (It was underpriced, not listed on MLS yet, so she got a good deal. It was worth a $800K at least in the summer of 04 when she bought it).
Anyway, if she gets $2500/mo rental income from the tenant, which includes gardener, pool, and insurance, she gets net only $2200. Add taxes and maintenance. So, how much should that house be worth for her to break even? How much should she pay for that house to make the 7% you mention?
I’d love the input of the landlords on this forum, and how they decided to buy in the last downturn.
