Real Estate Bubble

[lentinman]

A thought on rental properties:

Much of what has driven this bubble is the influx of average people into the market who are buying properties and renting them - expecting that if they can remain cash flow neutral, that they can win in the long run with price appreciation on the property.

But, there are fewer and fewer rental properties with decent cash flow. As more and more potential renters buy, that means greater and greater competition among owners to get renters. They simply have to take less money, whether by more incentives or lower rents or both.

The opposite side of that is that the cost to buy properties is escalating. So, you are paying more and more while getting less and less. This phenomenon is EXACTLY why I abandoned my notion of investing in Florida last summer. The cash flow numbers were terrible and only going to get worse.

In that particular market, they were even worse than worse because the typical renter there is ONLY a service oriented person who makes very little money. There is virtually no corporate exposure. Where I live now, you do still have young professional people that make decent money so there is still a little bit helping the rental market. But, not there.

I suspect that lots of people in Florida have invested in rentals just for the appreciation. Even if they sit empty, they still gain - theoretically. If the bubble pops in Florida, there will be some serious blood in the streets because the rental market will never be cash flow positive unless there are a lot of bankruptcies that allow people to first buy properties unbelievably cheap. If just a small percentage of the massive numbers of second and third homes that exist in Florida were to come onto the market - coupled with the high number of properties that are owned by people just for rentals (whether vacant or not) and/or price appreciation... if just a small percentage of these properties suddenly went on the market due to a slowdown, you would have a serious problem even in a market like Florida where boomers continue to flock.

Len