Shut UP Already! The Sky IS NOT Falling!

I’m confused. I really am.

 

I’ve been getting a rash of grief lately from the Chicken Little crowd here over my bullishness about buying suburban rental homes here in Metro Detroit.

 

They’re running up and down the street like little girls with their dresses up over their heads screaming “The Sky is Falling. They Sky is Falling!”.

 

I suppose that it’s easy to do when you put your brain in neutral. That protects you from the facts I guess.

 

The point that I’m trying to make (again and again) is that this area will rebound. It survived a much worse situation back in the 70’s and 80’s, and Michigan rebounded to lead the nation in growth and had the lowest unemployment rate of any state in the 90’s. It’ll be back.

 

But those that can’t learn from the past will never be convinced, and they’ll continue to scream their overreactions from the rooftops.

 

But from a real estate perspective, and in particular rental real estate, the proof, as usual, is in the math.

 

Chicken Littles – stop reading here – facts to follow.

 

First – you should understand that the premise of holding rental properties is that they are long-term investments. Like 15-20 years long.

 

So unlike the people that are in and out of the market every week, people that invest in rental properties buy. Then they hold. That’s it. It’s not sexy. It’s not complex.

 

And second, you should understand the math.

 

I’ll use the last rental property that I bought as an example.

 

I bought it for $69,250. It needed no rehab and all the mechanical systems (furnace, a/c, electrical, plumbing, etc) are in bullet proof condition. My experience with other properties in this condition over the last several years indicates that annual repairs and maintenance will be insignificant.

 

I rented it for $1000 per month BEFORE I closed on it (slightly below market to what I call a “permanent renter” – more on that later in another post). My principal, interest, taxes, and insurance come to $825 per month, so there’s $175 per month in cash flow to either put in my pocket or use on maintenance.

 

My point is – this property cash flows nicely at that price.

 

So let’s suspend all reality and common sense for a moment and listen to the Chicken Littles and suppose that housing prices fall an additional 20% across the board here. Fine.

 

So the value of this rental home falls from $69,250 to $55,400.

 

Time to jump off the roof, right?

 

Maybe for the Chicken Littles, because they’re focused on the short-term and can’t see beyond what’s right in front of them.

 

 I however,  don’t care.

 

Well why not? I’ve just lost 20% of the value of my asset, haven’t I?

 

Because the house cash flows where I bought it. So a reduction in the property value has ZERO impact on my profitability!

 

I even have room to lower the rent if the rental market drops, so only a total and complete collapse of the rental market here will impact me. Is that likely? No – because as the housing market has collapsed here the rental market has strengthened, and rents are rising.

 

So I’m simply at a loss why this is so hard to understand.

 

I hope this clarifies things. For most I’m sure that it did.

 

For the Chicken Little crowd though, I’m sure that it didn’t get through, because they always base their overreactions on never-seen and not possible Armageddon Scenarios.

 

So once and for all – shut up Chicken Littles. The sky is NOT falling!

 

Why not try being part of the solution for a change instead of exacerbating the problem?

 

 

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