patrick.net

Are the rental properties you are currently looking at have a positive cash flow for the current owner? What about your finances? If you bought the property, with the numbers provided to you by the current owner, would you be cash flow positive?

If the current owner has positive cash flow, I feel he/she may be selling out of speculation of rents falling to the point where he/she won't have positive cash flow.

I agree with you that asking rents are high because of high mortgages currently held by owners. But with current salaries, high rents can be sustained. Maybe our unemployment issue is not because a company doesn't have work for an employee - but more like a job not being worth $100k/year to them. They may hire someone for a job that was lost for $45k/year, but are not because it's below expectations. I think there may be a salary bubble. Until people start demanding less money, the unemployment rate will stay high.

smart investor invests for cash flow, which allows them invest even more. The capital takes care of itself eventually.

Many feel bad about REITs during the downturn, and all kind of sorry bankrupcy story generally from purchases made in 2006 -2007 purchase. Most don't realize they were primarily rolled over from 1031 exchanges, cashed out the gains, refinanced and shifted 90% of the risk to the banks at the same time. They may very well go bankrupt, but who cares, it's all the banks money. The cash and gain is secured and rolled into a new REIT and ready to go.

So, this time is different, then. Those were the last words of many fools for thousands of years. The fact remains, that no govt can fight the K-cycle. Never did. Never will.

The cycle was from 1929-2000, which is 71 years. The reason the cycle was longer, this time, is because the k-cycle is tied to life-expectancy, and, since, life-expectancy increased, so did the time period. The problem with this chart is that it is measuring GDP in dollars, which, were trashed by the FED. If you plot this cycle in terms of real currency, like gold, you will see that the k-cycle winter really did start in 2000.

Like I said, gold is the only true test of GNP. I trust gold much more than I trust Bernanke and his lying CPI numbers. Show me the GNP chart in terms of gold price, and, then, we'll talk.

"Like I said, gold is the only true test of GNP. I trust gold much more than I trust Bernanke and his lying CPI numbers. Show me the GNP chart in terms of gold price, and, then, we’ll talk."

You lost me there. Generally I don't believe inflation can be measured by gold price alone. Just apply the #'s and it doesn't make sense again.

That's because you are looking at numbers which you are being fed from the govt. Both CPI & DGP numbers are wrong. Gold may not tell you that there is inflation on the street today, but gold price, in the long term, will always track inflation. It took 1oz of gold to buy a tailored suit back in 1900, and it takes 1oz to buy one now.

You are a gold bug for the wrong reason. China has nothing to do with gold going up today. In fact, when China implodes, gold will continue to go up, because gold has it's day in the sun when there is most uncertainty out there. Deflation is actually much better for gold than inflation ever was.

Now back to your CPI numbers. CPI is complete dog crap, just like any other numbers published by the gov't. Is my computer suddenly 50% cheaper just because the Pentium CPU went from 1Ghz to 2Ghz? The gov't certainly thinks so. If the price of beaf goes up, we don't want that to affect the CPI, so we substitute beaf for chicken. If chicken goes up, we substitute in soy chicken.

In the absence of the gold standard, gold is allowed to float like a commodity. Everything has its fair-market value and speculative value. If prices are allowed to get overextended, they will inevitably fall back to their fair-market value, and overshoot their fair-market value. The fair-market value of gold now, is about $1000/oz. $1250 has about $250 worth of speculative value built-in. When gold goes to $3000, there will be $2000 worth of speculative value, and gold will crash back to it's fair-market value and lower. The fair-market value will go up in inflation, and it is the fair-market value which is the "true" measure of inflation. Actually, the very "true" measure of inflation is the money supply explosion minus the real economic growth. But since the FED is hiding both numbers from us, we cannot judge inflation from these numbers either.

If you want to see what's really going on in the economy, just open the door to your house, and walk out on the street. I see people unemployed for 4-5 years. I see people having $50K balance on their credit cards, and still spending money on worthless trinkets. I see lots of people not paying their mortgages, and using all that money to buy things that they don't really need. I see very few people who want to do hard work, and I see lots of people who still think that money can be made from sitting around on the couch all day long and watching their 2x4's go up in value.

dunnross says

If you want to see what’s really going on in the economy, just open the door to your house, and walk out on the street. I see people unemployed for 4-5 years. I see people having $50K balance on their credit cards, and still spending money on worthless trinkets. I see lots of people not paying their mortgages, and using all that money to buy things that they don’t really need. I see very few people who want to do hard work, and I see lots of people who still think that money can be made from sitting around on the couch all day long and watching their 2×4’s go up in value.

I like this--when all your other arguments fail, resort to anecdotal evidence. Who can prove you wrong then?

Since when has Long Island real estate been reasonably priced? Not in my lifetime. The bloated real estate taxes and utilities make reasonable rents an economic impossibility. Blame it on your politicians who are more afraid of the public employee unions than they are the taxpayers. I.E. - when you pay your real estate taxes, either directly or via bloated rents, you are paying some bloated union members salary or their pension.

Assuming the Long Island area's return on investment percentage is too low based on high costs/demand. I suggest buying in a lower demand area, there are plenty of them where the numbers are muy bueno. Managing an out of the area property is easier than you think.

Borrowing from Patrick:

"The basic buying safety rule is to divide annual rent by the purchase price for the house:

http://patrick.net/housing/crash.html

Hope this helps...

For comparison, a house that sold for 125k in 1998 is now on the market for 340k, with minimal renovations/improvements. That house will probably only sell for 300k, but still overinflated.

I doubt many things have changed, but a mania in RE early on both coasts. The same increases occured in California, yet very little is justified for the rapid increases you are seeing on LI. Factor in at best with inflation raising to 30-40% that same home should be selling $200K at most today.

People who bought in SF BA used the most insane reasons to buy RE even after prices doubled from 1998 to 2000. I suspect your region saw similar events unfold. Yet whats changed.

thomas.wong1986 says

I suspect your region saw similar events unfold. Yet whats changed.

In 1997-98 interest rates were coming down OVER 8.0% of late 1996 and were still over 7%, compared to 4.5% now.

Since this is an investment idea, going with a 15 year

http://research.stlouisfed.org/fred2/series/MORTGAGE15NE

$125,000 has a nominal cost of $900/mo at 6.5%. while the same $900/mo can service ~$180,000 at 3.88%.

This "affordability" has a greater effect on the high end, but the high end tends to pull up the low end.

Also, the conforming loan limit was $227k in 1998 and is $730,000 now.

thomas.wong1986 says

That house will probably only sell for 300k, but still overinflated.

$300,000 @ 3.88% is a $1300/mo carrying cost. I don't think this is particularly "inflated".

zzyzzx says

when you pay your real estate taxes, either directly or via bloated rents

nah, rents will always be the going rate of what the renter can pay. The tax rate just determines whose pocket this rent ends up in, the LL's or the taxman's. This is one of the more settled questions of economics.

I used to live on Long Island for a few years, so I know a little about the rental market there.

First, illegal rentals are a known problem. People will rent out their basement, or even a room, for a anywhere from a few hundred to over a thousand a month. It skews the market. On the one hand it serves a puropose - it offers rents that the "lower third" of the income spectrum can afford. But one runs the risk of being evicted at a moments notice. On the other hand, it makes it tough to gauge "market rent".

For example - a managed apartment complex, charged almost $2000+ a month for rent (circa 2005) while some guy renting out his half finished basement (albeit illegal) would charge $1400 a month, plus free cable for more living space.

Renting is slightly different than owning in that, people pay what they can afford - sort of. In other words a extend family of six to eight migrant workers may band together and live in a 800 ft2 "apartment" - and spend 50% of their combined incomes to do it - but at the end of the day they still pay the rent.

Can they "afford" it - Yes. Is it "affordable" - no.

In short the "underground" rental network needs to factor in. If you have lived out on LI for any length of time you know this already, but it bears mentioning, as many who are posting don't realize the dynamics of the area.

I forgot about the illegal apartments on Long Island, but you are right and it does explain how some people manage to afford living there.

My rule of thumb on buying property after my own personal experience is to not buy unless you plan on living in it for the next 10 to 15 years. Buying means you can't leave if you want to have a family and need a bigger place and/or if the schools in that area are terrible.

I don't know much about New York real estate but rents in the bay area are high and overinflated, yet still cheaper than owning.

I also wouldn't buy unless you can meet Patrick's rule that you need 20% down and should pay no more than three times your gross annual salary.

Good luck to you!

Oh just realized that you plan on purchasing to rent. In that case I would say wait until things fall more. I don't think you can trust real estate as an investment. Invest in something you don't need to pay annual taxes on. Also I wouldn't buy an investment rental unless the rent at the time of purchase actually paid all of the costs to own.