When will investors buy?

[patientlywaiting]

Here’s a good post by 4plexowner. I took the liberty to give it its own thread because I feel it’s right on target.

Some posters here feel that investors will soon put a floor on prices. But they forget that:

1) Like other investors, true RE investors want a mininum guaranteed return on their money.

2) Owning real estate is not a walk in the park. It takes real work to manage properties, the appreciation return far in the future.

——–
Submitted by 4plexowner on November 14, 2007 – 6:28am.
There are (at least) two factors to consider in this downturn – prices and time

A number of posters do price analysis based on the idea that investors will swoop in and put a floor under prices at some point

I like to think that I am one of the investors being referred to (since I certainly intend to swoop in when prices are right) and I can assure you that I WON’T be buying prior to 2010/2011

If property prices dropped to 100 times rents tomorrow I still wouldn’t be buying – we aren’t anywhere near a bottom so 100 times rents tomorrow would suggest to me that we were headed for 75 times rents in 2011/2012 – and I expect monthly rents to be lower at that point not higher

Are there investors that will buy at 150 times rents? Sure.

Will smart investors buy at 150 times rents prior to 2010? I don’t think so.

Time will tell …

[yes, I know that 75 times rents is ludicrously low – I also know that there is some serious economic doo-doo going on right now that has the potential to dramatically change the way real estate is valued – don’t be a knife-catcher!]

[(former)FormerSanDiegan]

The 100x monthly rent is a rule of thumb. As with all rules of thumb, it is fairly gross and is actually dependent on a number of factors. A primary factor is interest rates.

For example, a property for which monthly rents are 100x the purchase price corresponds to gross rent of 12%. In a world where CDs are paying 5% that would be a screaming bargain for a SFR. If interest rates climb to 15%, it would no longer be a bargain and an investor would expect more like 60x or 75x the monthly rent in a 15% interest rate world.

In my opinion the bottom for SFRs to make sense from an investor standpoint could lie between 60x to 150x monthly rent depending on interest rates at the time. I would not use this factor alone to decide when to buy.

Best thing to do is to run today’s prices at today’s interest rates. Then see what a 1% change in rates does to you and assess then likelihood of that happening. At today’s interest rates, prices are still about 20% higher than where I would buy as an investment (Central SD).

[(former)FormerSanDiegan]

The 100x monthly rent is a rule of thumb. As with all rules of thumb, it is fairly gross and is actually dependent on a number of factors. A primary factor is interest rates.

For example, a property for which monthly rents are 100x the purchase price corresponds to gross rent of 12%. In a world where CDs are paying 5% that would be a screaming bargain for a SFR. If interest rates climb to 15%, it would no longer be a bargain and an investor would expect more like 60x or 75x the monthly rent in a 15% interest rate world.

In my opinion the bottom for SFRs to make sense from an investor standpoint could lie between 60x to 150x monthly rent depending on interest rates at the time. I would not use this factor alone to decide when to buy.

Best thing to do is to run today’s prices at today’s interest rates. Then see what a 1% change in rates does to you and assess then likelihood of that happening. At today’s interest rates, prices are still about 20% higher than where I would buy as an investment (Central SD).

[(former)FormerSanDiegan]

The 100x monthly rent is a rule of thumb. As with all rules of thumb, it is fairly gross and is actually dependent on a number of factors. A primary factor is interest rates.

For example, a property for which monthly rents are 100x the purchase price corresponds to gross rent of 12%. In a world where CDs are paying 5% that would be a screaming bargain for a SFR. If interest rates climb to 15%, it would no longer be a bargain and an investor would expect more like 60x or 75x the monthly rent in a 15% interest rate world.

In my opinion the bottom for SFRs to make sense from an investor standpoint could lie between 60x to 150x monthly rent depending on interest rates at the time. I would not use this factor alone to decide when to buy.

Best thing to do is to run today’s prices at today’s interest rates. Then see what a 1% change in rates does to you and assess then likelihood of that happening. At today’s interest rates, prices are still about 20% higher than where I would buy as an investment (Central SD).

[(former)FormerSanDiegan]

The 100x monthly rent is a rule of thumb. As with all rules of thumb, it is fairly gross and is actually dependent on a number of factors. A primary factor is interest rates.

For example, a property for which monthly rents are 100x the purchase price corresponds to gross rent of 12%. In a world where CDs are paying 5% that would be a screaming bargain for a SFR. If interest rates climb to 15%, it would no longer be a bargain and an investor would expect more like 60x or 75x the monthly rent in a 15% interest rate world.

In my opinion the bottom for SFRs to make sense from an investor standpoint could lie between 60x to 150x monthly rent depending on interest rates at the time. I would not use this factor alone to decide when to buy.

Best thing to do is to run today’s prices at today’s interest rates. Then see what a 1% change in rates does to you and assess then likelihood of that happening. At today’s interest rates, prices are still about 20% higher than where I would buy as an investment (Central SD).

[Author]

Posts