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Is buying low P/E stocks the equivalent of buying rental properties in midwest?


muscleman
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I recently started learning real estate investing and everyone says i should have a 10%+ cash on cash return. Those properties don't seem to exist on the West coast so people told me to look at the mid west. Rental properties on the west coast can barely cover the mortgage.

I am thinking, doesn't that seem like the equivalent of buying low p/e stocks? Do investors buying rental properties in the mid west really do much better than investors buying properties on the west coast? It just doesn't feel like a yes to me.

 

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I recently started learning real estate investing and everyone says i should have a 10%+ cash on cash return. Those properties don't seem to exist on the West coast so people told me to look at the mid west. Rental properties on the west coast can barely cover the mortgage.

I am thinking, doesn't that seem like the equivalent of buying low p/e stocks? Do investors buying rental properties in the mid west really do much better than investors buying properties on the west coast? It just doesn't feel like a yes to me.

 

As someone who lives in the midwest, I'll warn you that stuff is usually cheap for a reason.  There is no lack of intelligent real estate investors with deep pockets who invest in the midwest region.  In fact, there is no lack of unskilled real estate speculators with deep pockets who operate in the midwest.  Just to say "midwest real estate is cheap" is a very broad statement.  Is it east St. Louis or Kansas side of Kansas City?

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The difference is that people in the Midwest normally use their brain to price-in real estate while people on West Coast (same for Toronto and Vancouver by the way) use their rear view mirror of price appreciation.

 

I was doing the math with a friend yesterday and in Toronto, the average rent to property value is around 2.6% right now. This doesn't cover expenses and certainly not capital repayment. Thesis is all built on price appreciation and with such high leverage on most residential real estate loans is a recipe for disaster on any decline in value.

 

By the way, rents are heading down to in places like San Francisco. Watchout below!

 

Cardboard

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The difference is that people in the Midwest normally use their brain to price-in real estate while people on West Coast (same for Toronto and Vancouver by the way) use their rear view mirror of price appreciation.

 

I was doing the math with a friend yesterday and in Toronto, the average rent to property value is around 2.6% right now. This doesn't cover expenses and certainly not capital repayment. Thesis is all built on price appreciation and with such high leverage on most residential real estate loans is a recipe for disaster on any decline in value.

 

By the way, rents are heading down to in places like San Francisco. Watchout below!

 

Cardboard

 

Truth is somewhere in the middle.  Virtually unlimited supply in Mid West means you can just keep building outwards.

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bought my house at a 3 cap w/ 97% leverage in 2019. best real estate investment i've made thus far.

 

get at me flyover scum with your low taxes, fiscal health, and reasonable cost of living! gross!

 

That's a filthy ROE! Like Robinhood daytrading type of ROE in illiquid real estate.  How did you swing the 97% LTV?  That's incredible.  You have to share your banker with me.

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bought my house at a 3 cap w/ 97% leverage in 2019. best real estate investment i've made thus far.

 

get at me flyover scum with your low taxes, fiscal health, and reasonable cost of living! gross!

 

That's a filthy ROE! Like Robinhood daytrading type of ROE in illiquid real estate.  How did you swing the 97% LTV?  That's incredible.  You have to share your banker with me.

 

I think he is doing an FHA loan, which requires 3.5% down payment. Nothing below 3.5% is possible.

 

 

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Yield or growth? Not much different than the stock market. Like the stock market, there are in betweens as well.

 

+1

 

I think your best values exist somewhere in between.

 

Where is that place that's been low-priced for a while but maybe new infrastructure or new investment is driving green shoots of development? Maybe you'll be able to buy at a price where there is little to no upside built into the price but there is a reasonable argument that additional redevelopment hits your neighborhood in the next 5 years.

 

I would also make another comparison to the stock market in that its not a housing market as much as it is a market of houses. Everyone has different motivations for selling their home/property so if you can identify a seller who prizes liquidity over the best price, you can get a deal. Maybe not at this exact moment in time with the way the market is, but in general things don't move so fast that you can't find people who need liquidity.

 

I recently advised my friends to buy a house in a certain part of Charlotte where 2,000+ sq ft homes were selling for less than $250,000. The area recently had some new infrastructure (a transit rail) put in, there has been some early momentum in prices in the area, and you can see some evidence of people renovating or flipping homes. It also is an area that has historically been considered a bad part of town, and I wouldn't be surprised if you see suspicious characters walking the main roads sometimes and maybe the shopping in that immediate area isn't that great but you're 15 minutes from downtown Charlotte. My buddy instead chose to buy a $400,000 home that had been renovated somewhat in a part of town that is not that great in my opinion, is farther from downtown, but is closer to other areas that have recently developed.

 

It's too early to tell who is "right" but I think many people are uncomfortable being uncomfortable. In real estate, your friends might joke around and call you a slumlord, and no one is going to look at the homes you buy and say "Wow" but these areas that are on the fringe of development have been very successful for me.

 

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0-80% LTV w/ Wells Fargo @ 3.125% 30 yr amort, 10/1 ARM (fixed for first 10 years, can not go up by more than 500 bps in total or 200 bps / year)

 

80-97% LTV w/ Signature Federal Credit Union @ 5.25% 15 year amortization, 5 year balloon, all due in 5 years. The idea was that the balloon would not be a large amount of money for me in 5 years, but I didn’t want the full 20% down payment in 1 asset. i found signature federal credit union on a biggerpockets discussion as the most lenient highest LTV 2nd mortgage lender.

 

EDIT: I had to buy with 20% down (can’t have a 2nd lien in the DC bidding wars, sellers will take other offers, messes with the closing to be wrangling 2 lenders), then do the 97% LTV cash out a few months later

 

I must admit, I've since de-levered, reducing ROE, it's more like 93% at cost, 88% LTV at value now

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Yield or growth? Not much different than the stock market. Like the stock market, there are in betweens as well.

 

+1

 

I think your best values exist somewhere in between.

 

Where is that place that's been low-priced for a while but maybe new infrastructure or new investment is driving green shoots of development? Maybe you'll be able to buy at a price where there is little to no upside built into the price but there is a reasonable argument that additional redevelopment hits your neighborhood in the next 5 years.

 

I would also make another comparison to the stock market in that its not a housing market as much as it is a market of houses. Everyone has different motivations for selling their home/property so if you can identify a seller who prizes liquidity over the best price, you can get a deal. Maybe not at this exact moment in time with the way the market is, but in general things don't move so fast that you can't find people who need liquidity.

 

I recently advised my friends to buy a house in a certain part of Charlotte where 2,000+ sq ft homes were selling for less than $250,000. The area recently had some new infrastructure (a transit rail) put in, there has been some early momentum in prices in the area, and you can see some evidence of people renovating or flipping homes. It also is an area that has historically been considered a bad part of town, and I wouldn't be surprised if you see suspicious characters walking the main roads sometimes and maybe the shopping in that immediate area isn't that great but you're 15 minutes from downtown Charlotte. My buddy instead chose to buy a $400,000 home that had been renovated somewhat in a part of town that is not that great in my opinion, is farther from downtown, but is closer to other areas that have recently developed.

 

It's too early to tell who is "right" but I think many people are uncomfortable being uncomfortable. In real estate, your friends might joke around and call you a slumlord, and no one is going to look at the homes you buy and say "Wow" but these areas that are on the fringe of development have been very successful for me.

 

What part of town are you talking about? Where the gold line extension is going in?

 

 

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Yield or growth? Not much different than the stock market. Like the stock market, there are in betweens as well.

 

+1

 

I think your best values exist somewhere in between.

 

Where is that place that's been low-priced for a while but maybe new infrastructure or new investment is driving green shoots of development? Maybe you'll be able to buy at a price where there is little to no upside built into the price but there is a reasonable argument that additional redevelopment hits your neighborhood in the next 5 years.

 

I would also make another comparison to the stock market in that its not a housing market as much as it is a market of houses. Everyone has different motivations for selling their home/property so if you can identify a seller who prizes liquidity over the best price, you can get a deal. Maybe not at this exact moment in time with the way the market is, but in general things don't move so fast that you can't find people who need liquidity.

 

I recently advised my friends to buy a house in a certain part of Charlotte where 2,000+ sq ft homes were selling for less than $250,000. The area recently had some new infrastructure (a transit rail) put in, there has been some early momentum in prices in the area, and you can see some evidence of people renovating or flipping homes. It also is an area that has historically been considered a bad part of town, and I wouldn't be surprised if you see suspicious characters walking the main roads sometimes and maybe the shopping in that immediate area isn't that great but you're 15 minutes from downtown Charlotte. My buddy instead chose to buy a $400,000 home that had been renovated somewhat in a part of town that is not that great in my opinion, is farther from downtown, but is closer to other areas that have recently developed.

 

It's too early to tell who is "right" but I think many people are uncomfortable being uncomfortable. In real estate, your friends might joke around and call you a slumlord, and no one is going to look at the homes you buy and say "Wow" but these areas that are on the fringe of development have been very successful for me.

 

What part of town are you talking about? Where the gold line extension is going in?

 

What you are talking about might be sitting in St. Joe territory! Ive long owned shares, but no more. Ive flirted with buying some land out there, but haven't. That said, if you're looking for an inflection story, the Panhandle in FL is probably one of your best bets.

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It's the difference of buying for income versus capital appreciation.

 

You may not get much appreciation in the Midwest, but cash yields ar healthy.

 

You won't get much in the way of cash yields on the coasts, but the capital appreciation has historically made up for it.

 

I find I am more comfortable with the idea of cash yields and expected flexibility that they provide when things hit the fan

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