by Drew Sygit
In a previous post, I described the concept of “yield,” a quick way of calculating how much of your investment you’ll be able to get back each year, expressed as a percentage. Once you’ve built up 100%, anything you pocket past that is pure profit. We talked about the fact that “the dream” is to have a property with a high yield, nested in a neighborhood full of properties with a modest yield. But today, we’re going to go “under the hood” a bit and look at couple of factors that will help you decide whether your yield will stay as good as it is today.
House Prices and Supply Elasticity
Yield tends to go up as a function of elasticity of housing supply. Supply elasticity isn’t an easy thing to understand, but it essentially means “when the price of a thing changes, how quickly does the amount of that thing on the market change to match?” So if the price of houses is rising, a high-elasticity market will quickly put new houses up for sale (which tends to decrease prices). If the price of houses is falling, a high-elasticity market will quickly remove houses for sale (which tends to increase prices). On the other hand, a low-elasticity market means that the amount of something available doesn’t change — at least, not quickly — as prices change.
Supply elasticity can trigger increases in yield under two conditions:
- When housing prices are going up and elasticity is low (meaning that the market isn’t adding enough houses to damper price increases), purchasing a house may not be affordable. More people will then rent because rental payments are lower than housing payments.
- When housing prices are doing down and elasticity is high (meaning that the market is effectively keeping the housing supply down in response to lower prices), people can’t always find a house in order to buy one. Dozens of buyers for each house and houses getting snapped up in weeks instead of months make for lots of would-be buyers that are renting because they have no choice.
The net effect is that property investors, given either of those conditions, will mostly turn toward the strategy of renting their houses out in order to maximize profits. This means that hunting down neighborhoods with the appropriate kind of elasticity for your economic environment can help your long-term rental yield remain where you want it.
Distress Sales and Distressed Supply
The ratio of “distressed sales” (short sales, REO homes, and other sales that are going for below-market value due to some exigent circumstances) to normal sales is another solid indicator of yield performance in the short term. The greater the percentage of distressed houses in an area, the more predictably the people in that area will be renting, which means greater yield.
But more importantly, the concept of “distressed supply” — the number of houses being sold under distress and the rate at which they’re selling — is relevant. Because the supply of distressed houses is mostly limited (given that the vast majority of distressed houses entered the market in response to a one-time market crash around 2008), the distressed-to-normal ratio will approach one over time. As it does, yield will predictably decrease — so for the best long-term outlook, renting in an area with lots of distressed houses (or that isn’t selling those houses very quickly at all) is a solid strategy.
Of course, markets all change over time and nothing is ever certain, but by looking hard at the attributes of the neighborhood you’re considering investing in, you can gain some insight into which of a few solid options will probably still be solid a decade or more from now.
(All you savvy number crunches, please note we’re not covering rental market saturation in this post!)
What do you think about these concepts? How does your rental market measure up?
Leave your comments below!
Interested in Finding out More? Reach out below
Address: 1415 Main St. #823, Grandview, MO 64030
Ireland Investments llc
This information is intended only for the use of the intended recipient(s) and it may be privileged and confidential. Please note that any views or opinions presented in this post are solely those of the author and do not necessarily represent those of the company. This is reposted information and is not original thought of Ireland Investments or anyone associated with the business.
Popular areas we service;
Kansas city Missouri, Overland Park Kansas, Kansas city Kansas, Olathe Kansas, Independence Missouri, Shawnee Kansas, Blue Springs Missouri, Lenexa Kansas, Leavenworth, Kansas, Leawood Kansas, Liberty Missouri, Raytown Missouri, Gladstone Missouri, Grandview Missouri, Belton Missouri, Prairie Village Kansas, Gardner Kansas, Raymore Missouri, Grain Valley Missouri, Ottawa, Kansas, Lansing Kansas, Excelsior Springs Missouri, Merriam Kansas, Harrisonville Missouri, Cameron Missouri, Mission Kansas, Kearney Missouri, Smithville Missouri, Pleasant Hill Missouri, Oak Grove Missouri, Bonner Springs Kansas, Roeland Park Kansas, Parkville Missouri, De Soto Kansas, Richmond Missouri, Greenwood Missouri, Paola Kansas, Basehor Kansas, Tonganoxie Kansas, Odessa Missouri, Peculiar Missouri, Platte City, Missouri, Higginsville Missouri, Lexington Missouri, Edwardsville Kansas, North Kansas City Missouri, Osawatomie Kansas, Louisburg Kansas, Fairway Kansas, Mission Hills Kansas, Sugar Creek Missouri, Riverside Missouri, Buckner Missouri, Pleasant Valley Missouri, Lawson Missouri, Plattsburg Missouri, Lake Lotawana Missouri, Weatherby Lake Missouri, Wellsville Kansas, Edgerton Kansas, Westwood Kansas, Garden City Missouri, Gower Missouri, Claycomo Missouri, Lone Jack Missouri, Drexel Missouri, Lake Tapawingo Missouri, Glenaire Missouri, Dearborn Missouri, Avondale Missouri, Osborn Missouri, Sibley Missouri, Oaks Missouri, Unity Village Missouri, Levasy Missouri, Randolf Missouri, River Bend Missouri, Jackson County Missouri, Johnson County Kansas, Clay County Missouri, Wyandotte County Kansas, Cass County Missouri, Platte County Missouri, Leavenworth County Kansas, Miami county Kansas, Lafayette County Missouri, Ray County Missouri, Clinton County Missouri, Bates County Missouri, Linn County Kansas, Caldwell County Missouri, Crossroads Real estate, 18th and vine Real estate, Hospital Hill real estate, library district real estate, longfellow real estate, dutch hill real estate, quality hill real estate, river market real estate union hill real estate, Greater downtown KCMO real estate, East Side KCMO real estate, Midtown KCMO real estate, Westport Real estate, Hyde Park real estate, Northeast KCMO real estate, Northland real estate, Plaza Real estate, South Kansas City Real estate, Fairway Kansas real estate, Kansas city Kansas real estate, lake quivira Kansas real estate, Lenexa Kansas real estate, Mission hills Kansas real estate, overland park Kansas real estate, prairie village Kansas real estate, Shawnee Kansas real estate, weatherby lake Missouri real estate, westwood Kansas real estate
real estate, business, entrepreneur, investment, Fix and Flip, hustle, real estate investor, real estate investing, real estate life, Renovation, remodeling, construction, remodel, Property manager, property management, home improvement, realtor, Real estate agent, broker, landlord, startup, marketing, design, work, motivation, Housing, Home inspection, cash flow, entrepreneurship, property development, wealth, invest, investor, success, finance, cash, buy and hold, property investment, property investor, maintenance, home maintenance, maintenance man, rental, rental property, rental properties, DIY, do it yourself, business owner, real estate coach, home remodel, new build, accounting, real estate law, tenants, marketing, landlord tenant law, real estate marketing, realty, getting into real estate, deals, real estate deals, how to invest, million dollar listing, Money, marketing, cap rate, return on investment, website, advertising, promotion, single family, multifamily, commercial real estate, 1031 exchange, screen tenants, rents, rental income, repairs, background check, due diligence, refinance, mortgage loan, financing real estate, lenders, real estate lenders, hard money lender, unconventional financing, credit score, credit report, credit repair, taxes, real estate portfolio, investment portfolio, diversify portfolio, PMI, ROI, Privet money, Privet mortgage insurance, real estate insurance, landlord insurance
Leave a Reply