Graham Stephan got his start as a real estate agent, bought several properties, and then built a personal brand around his YouTube channel. He was making plenty of deals when interest rates were at record lows, but he recently explained in an interview why he isn't touching real estate right now.
"You could rent the same house for half the price," Stephan mentioned as he went into an example of a Las Vegas property.
The Current Market Makes Negative Cash Flow More Likely
Stephan said that you can rent a $700,000 property for $2,800 per month in Las Vegas. He said that the rent is much cheaper than what your mortgage would be, which would result in negative cash flow.
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Real estate investors rely on positive cash flow to keep their investments and scale their portfolios. If cash flow stays negative for too long, investors may be forced to sell at undesirable prices.
Stephan said that he would be right in line to sell all of his properties if he didn't have record-low interest rates. This story demonstrates how much of a role interest rates play in housing costs. Higher rates make it more difficult to take out mortgages that result in positive cash flow.
Invisible Housing Costs
Many people refer to a house as the biggest investment you can make, but it isn't always profitable. Mortgage payments go away eventually, but there are a bunch of invisible costs that you won't notice right away.
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These costs hurt cash flow, and in the current real estate environment, they make bad investments even worse. Not only are rent payments much lower than mortgage payments, but real estate investors also have to contend with home repairs, maintenance costs, property taxes, and insurance.
Investors can earn similar returns in the stock market, and some real estate investors are doing just that. Stephan regularly recommends buying index funds and waiting for the money to grow over time. Not only have index funds been effective in the long run, but they're also far easier to manage than real estate.
Rent Has Been Getting Stable
There was plenty of commotion about rising rents amid the pandemic and in the aftermath of record money printing. However, rent has gotten more stable this year. Data from CRE Daily indicates that the national monthly rent growth rate slowed to 0.26% in May, which is half of the rate hike seen last year.
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Rent has been mostly stable in the U.S., but pandemic winners like Austin, Texas, Denver, and Phoenix, have seen the deepest rent cuts this year. A high cost of living and low fertility rates combined with people already living paycheck to paycheck may not offer many opportunities for rent prices to jump higher in the future, potentially making it wise for real estate investors to stay on the sidelines.
Amplified efforts to deport illegal immigrants can make it even more difficult for rent prices to climb. President Donald Trump has been cracking down on illegal immigrants living in public housing and canceled a $188 million federal grant that New York City was using to support migrant shelters. These efforts will increase the amount of available housing, giving landlords less leverage to hike rent prices.
It's no wonder Stephan is staying on the sidelines and waiting for the real estate market to improve.
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