jason wrote:
Also, getting back to the risk involved - in a SHTF scenario, could I take a huge hit? Is anyone aware of a period, say, the past 100 years, in the US where owning a bunch of small rental homes would have done very poorly in regards to cash flow (I'm not worried if the values of the homes dip as long as my cash flow is steady)? Obviously, there are situations where, for example, you own a bunch of houses near a manufacturing plant, for example, and the plant closes, and the town becomes a ghost town, and all your houses become vacant. But I won't be owning houses in an area that relies on a particular company or industry.
Have you heard of the Great Depression? Maybe you should read up on it.
jason wrote:
Also, getting back to the risk involved - in a SHTF scenario, could I take a huge hit? Is anyone aware of a period, say, the past 100 years, in the US where owning a bunch of small rental homes would have done very poorly in regards to cash flow (I'm not worried if the values of the homes dip as long as my cash flow is steady)? Obviously, there are situations where, for example, you own a bunch of houses near a manufacturing plant, for example, and the plant closes, and the town becomes a ghost town, and all your houses become vacant. But I won't be owning houses in an area that relies on a particular company or industry.
Have you heard of the Great Depression? Maybe you should read up on it.
How did single family rentals perform during the great depression? Did rents drop a lot? Did vacancies skyrocket?
jason wrote:
Also, getting back to the risk involved - in a SHTF scenario, could I take a huge hit? Is anyone aware of a period, say, the past 100 years, in the US where owning a bunch of small rental homes would have done very poorly in regards to cash flow (I'm not worried if the values of the homes dip as long as my cash flow is steady)? Obviously, there are situations where, for example, you own a bunch of houses near a manufacturing plant, for example, and the plant closes, and the town becomes a ghost town, and all your houses become vacant. But I won't be owning houses in an area that relies on a particular company or industry.
Have you heard of the Great Depression? Maybe you should read up on it.
How did single family rentals perform during the great depression? Did rents drop a lot? Did vacancies skyrocket?
The above has nothing to say about vacancy rates but shows that during the worst of the Depression (circa 1930-33) rents declined at around 10% to 13% a year and they didn't stop declining (albeit only in single digit declines per year by that point) until around 1935 or 1936. This sounds bad but consider that during 1930-1933 overall prices for everything (not just real estate)--as measured by the CPI--were also declining yearly by high single digit or low double digit percentages so even if you got 30% less in rental income then if prices a a whole were down 20 or 25% you really only got about 5% to 10% less in rental income in real purchasing power terms.
Rents (if indeed they did drop much) during Japan's lost decades might be instructive as well but I have no idea where to find info on those.
EDIT: In Japan from 1990 to 2014, apparently office rents fell sharply (especially in Tokyo) when the bubble burst but residential rents barely fell at all; see pgs 6, 7, and 29 of http://www.kdr-reit.com/english/ir/kdr_ ... data_E.pdf
Last edited by D1984 on Tue Jan 05, 2016 12:56 am, edited 1 time in total.
I'd be more worried about the landlord-tenant laws in the area you're planning to invest in. If a tenant stops paying rent, what's the process to get them evicted, and how long will you be stuck with them living in the apartment rent-free? And, what's the average time a unit in the area sits empty (now, and going back to before 2008)?
I looked into renting my last apartment instead of selling it, since the building permits investor apartments. With the high coop maintenance charges relative to expected rent (about half), I figured that at best I'd get a 5% return, including depreciation benefits - and not counting potential tenant-induced shenanigans with NYC's extreme landlord-unfriendly laws limiting recourse. Honestly, after working the spreadsheet I really have no idea why anyone would want to become a NYC landlord. You should definitely get estimates for all the variables you can and then go through this same exercise before making any decisions.
"Democracy is two wolves and a lamb voting on what to have for lunch." -- Benjamin Franklin
CA law..... thirty days if the tenant has been living there less than one year 60 days if over one year... then if they don't leave as ordered, expect anywhere from a few weeks to a few months to get a court date, set an eviction and arrange for the sheriff to do a lock out.. your mileage may very depending on how good your lawyer is and (as Sophie mentioned) will vary from state to state,
and of course you may not be getting rent for that entire time, or longer, especially if the eviction is due to not paying rent. these costs have to be baked into the cake so that when it happens (it will happen) it can be weathered as a short term cost/loss.
it is definitely not a deal breaker that keeps people out of the landlord business but it is another whole area of job knowledge you need to be up on..
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The above has nothing to say about vacancy rates but shows that during the worst of the Depression (circa 1930-33) rents declined at around 10% to 13% a year and they didn't stop declining (albeit only in single digit declines per year by that point) until around 1935 or 1936. This sounds bad but consider that during 1930-1933 overall prices for everything (not just real estate)--as measured by the CPI--were also declining yearly by high single digit or low double digit percentages so even if you got 30% less in rental income then if prices a a whole were down 20 or 25% you really only got about 5% to 10% less in rental income in real purchasing power terms.
Rents (if indeed they did drop much) during Japan's lost decades might be instructive as well but I have no idea where to find info on those.
EDIT: In Japan from 1990 to 2014, apparently office rents fell sharply (especially in Tokyo) when the bubble burst but residential rents barely fell at all; see pgs 6, 7, and 29 of http://www.kdr-reit.com/english/ir/kdr_ ... data_E.pdf
Thanks. This is really helpful. I guess landlords did get clobbered during the Great Depression. I was also thinking about using leverage to get higher returns and also to avoid paying taxes (the depreciation deduction and the mortgage interest deduction typically put the net income in the negative), but I'm worried if another Great Depression plays out, I could end up bankrupt. It's one thing to pay cash for real estate and have to cover taxes and insurance during bad times (some risk of financial ruin, but probably small). It's another to have big mortgage payments to cover, as well, in an environment of high vacancies and falling rents.
jason wrote:
a large percentage of my overall net worth
A mistake right there. Diversify, diversify, diversify.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
these costs have to be baked into the cake so that when it happens (it will happen) it can be weathered as a short term cost/loss. 