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Originally Posted by Flash68
Agree with most of your analysis here. I've been looking for add'l rental properties since I bought my last one in late 2014 but the bidding and pricing is just insane in the areas I want. But with the low fixed rates, and skyrocketing local rental rates, I am still looking for something "acceptable" to me in terms of my own analysis and requirements -- neighborhood (path of progress), tenant situation (vacant vs occupied), etc -- as my target area is about the most anti-landlord you can find. But I welcome that as it keeps most of the scaredy cats away or those unwilling to deal with that.
I know I could sell my 4 plex I bought 18 months ago for $200-300k more, but I have an incredible 30 year fixed rate so will hold it. I mean, what would I buy with the proceeds anyway?
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Beware what happens to VALUES of property when the interest rates begin to rise... people will be shocked to see what happens to the value of the properties as the rates price people out of the payment.
I think we're in an interest rate bubble on property. While the buyers since the big bust have real down payments and real credit... Incomes have not really been rising. The historically low interest rates has made that "okay"... But I think there's another shoe to drop when we see these rates begin to rise.
I personally think the FED understands this dilemma! The damage that will be done to BOND holders, the housing market, and the stock market could be complete carnage. Of course this is all dependent on the speed and percentage of any rise in rates. And again - I think the FED is well aware of what all of these interrelationships are.
The "cap rate" on rentals is always price dependent. As rates rise the cap rate required to make a building attractive will also have to rise... which means the value will need to decrease if the rental rates can't be raised. This has been the way of the world since the beginning of time so it shouldn't come as a surprise to anyone. Of course it's a bit more complicated than this because there's also the NOI (Net Operating Income) What's left after the COSTS to maintain, insure, manage the building (rental). NOI and Cap Rate are what determine the value of a commercial property. The market value is determined by dividing the NOI by the AVERAGE CAP RATE for similar properties in the area. Unlike trying to determine the value of a single family home - which is based on similar homes of similar condition that have sold recently... That really doesn't exist for commercial properties. So there has to be some way of calculating the "value" of a property and the Net Operating Income divided by the average cap rate is about the only way to make this determination.
Of course - it's always more complicated.... because you might be buying a run down building in an area of nicer buildings - and you can clean it up and raise the rates etc. But you'd still need to determine the end result to know what you can pay for it "as is" and then add your costs for fixing it up - and you'd have to know what the units are going to rent for after you're done.
We recently did this for a building in Seattle. It was the ugly one on the street - needed updating. This is capital intensive, income disruptive, and takes professional management! The results can be surprisingly good if done correctly! Like most things - if it was that easy - the fat chicks would be doing it.