Date: Mon, 8 Jan 2007 09:17:06 -0600
From: Ignoramus15864 
Subject: Re: Returns on apartment rentals
Newsgroups: misc.invest.financial-plan
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On Sun, 7 Jan 2007 15:08:49 -0600, Jose Bailen  wrote:
>
>> Yes, $2,200 rent on a $500k apartment sounds very unappealing. Sounds
>> about as bad stocks right now (in terms of earnings per dollar
>> invested)
>>
>> I will research local prices a little. I will talk to some friends who
>> are in related businesses, as well. What I like about this is a lot of
>> tax writeoff possibilities and a relatively steady income.
>
> It may help if you compare the return of this investment with other
> potential investments -such as stocks- as well as the interest rate you
> would pay if you had to get a loan to buy the building (about 6.2
> percent at end-2006). This means that you would pay a real rate of
> around 4 percent (expected inflation is around 2 percent a year). You
> would need to charge a rent of 4 percent of the value of the home plus
> expenses just to balance your investment. My feeling is that such rent
> is too high, given current market conditions (another sign that the
> housing market is overvalued).
>
> This paper by Shiller -written 9 months ago- provides some insight
> about long-term trends in the housing market (prices and rents):
>
> http://economistsview.typepad.com/economistsview/2006/03/shiller_longter.html
>

Thanks. I looked a little bit at my local real estate listings and
apartment listings. Admittedly did not do a very fine job at
statistics gathering. One bedroom apartments in a certain area of
multifamily buildings are listed for about $125,000. I figure that if
I negotiate patiently, and pay cash, I could buy one for $115,000 or
so, especially given current "housing slump".

Rent on such an apartment is approximately $720 per month. 

On a year to year basis, this means 7.5% return. With sensible tax
related maneuvers, it might be bumped a little bit into 8%
area. Assuming modest 2% per year appreciation (we are in a housing
slump, so prices are less than at the peak), it goes to about 10 cents
on the dollar invested, per year. This does not figure in property
taxes, upkeep expenses, bad tenant expenses, etc etc. All in all,
definitely not a rocket investment, though it is much better than
having cash in a CD account.

As for stocks being an alternative, they are of course an alternative,
but not a huge bargain either. Most of my money that is invested in
stocks (which is about half of my savings) is invested in one stock
only, that's done okay over the years. Unfortunately, it is not cheap
now and I would not be adding to it. 

Stocks have done very well in the past, but that does not say much
about how they will do in the future. 

i

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