4 ms·

> A $3 million house that would have rented for $5,000 a year ago $5k/mo for a $3M home is a cap rate of just 2%. That's pretty terrible in itself. Now it's $4

by meritt 8y ago

> A $3 million house that would have rented for $5,000 a year ago $5k/mo for a $3M home is a cap rate of just 2%. That's pretty terrible in itself. Now it's $4k/mo or 1.6%? How on earth is that financially sustainable at either amount?

pcurve 8y ago
yeah I was shocked to read that. Even for a $1million house, $5k/mon rent wouldn't make much sense.
kitcar 8y ago
In many cases the owners do not view it as an investment, it's a store of wealth that is difficult for the government of their home country to seize. Hence even if they lose money every year it's better then the alternative -
- adventured 8y ago
  There's no value for the Chinese Government in seizing foreign personal homes of that sort. It's tens of billions of dollars, a trivial sum to them right now. They do not need that money. They need to strictly contain domestic capital from pouring overseas, which has largely been accomplished. And they need controls in place to restrict people from being able to easily flee, which they've also largely accomplished (social scores, heavy tracking, etc). For the most part it doesn't matter if you have a house in Vancouver if they can change a score and prevent you from ever flying away. If you have the audacity to try it anyway, they've probably got your family. Which is something they've used on many occasions to induce Chinese nationals to return.
  - toomuchtodo 8y ago
    You might be misunderstanding the use case. The Chinese with wealth moved their wealth out of China to real estate in London, Canada, and parts of the US specifically to put it out of reach of the Chinese government and to avoid the capital outflow controls you refer to. Once safely outside of the PRC's reach, it's trivial to move the wealth around using corporate entity ownership (among other methods).
    - adventured 8y ago
      I don't misunderstand. I said that even if they've managed to get their capital outside of China, it doesn't matter. If they flee, China still can induce their return. It's not trivial to move capital around using foreign corporate entities, when they track all of your communication within China. If they even so much as get a hint of that going on, and it bothers them in the least, they can do anything they like to you at that point. The hint of suspicion is more than enough, if it suits them. Being able to move capital around is meaningless, if you're not entirely physically free yourself as well. Your scenario is only a sure thing, if you've escaped your capital and everyone you care about.
      - deleted 8y ago
        [deleted]
      - derefr 8y ago
        You’re assuming that the person trying to expropriate wealth cares about being able to spend it themselves, rather than e.g. their family who already lives in Canada being able to spend it while they sit in jail. Think in terms of nobility: what’s more important, your head or your dynasty?
        flycaliguy 8y ago
        I went to university with the kids. Buying a family into a western education is part of the process and part of the investment beyond the capitol.
        seanmcdirmid 8y ago
        China has tried to fight against this by banning naked officials (whose families are abroad). There are still way too many exceptions, of course, as this is a pretty unworkable rule. It also doesn't apply to private business people on the other side of the corruption equation.
deleted 8y ago
[deleted]
roel_v 8y ago
Depends on your cost of capital.
ryanworl 8y ago
You can sustain low cap rates if your model includes significant appreciation and you can stomach negative/zero cash flow.
Finnucane 8y ago
These houses weren’t purchased to rent out. They were safe deposit boxes for cash. The expectations were that they would just keep going up in value. Their rent value didn’t matter.
- reaperducer 8y ago
  Could be both. The house where I rent is owned by a woman in China who phoned up a local real estate management company, bought the first 20 houses on their list, and wired them the money. It's probably more complicated than that, but that's the short form story the management company told me. The company also said it's very common.
  - mistermann 8y ago
    And yet we're told by the MSM that foreign ownership is 5%, makes one wonder if situations like this are even statistically detectable. If this article is remotely true and this is the start of a trend set off by having no rules whatsoever and then suddenly a whole bunch of not terribly well thought out rules, it's going to be interesting to see how this all plays out, especially when good old "fear is stronger than greed" investor psychology kicks in, all in an environment of steadily increasing interest rates.
    - reaperducer 8y ago
      makes one wonder if situations like this are even statistically detectable. I don’t know about Canada, but forming as domestic shell company to make your real estate holdings look local is pretty easy in the United States, and can be done online.
    - corny 8y ago
      It's not just the MSM, it's the CMHC and Stats Canada. https://www.cmhc-schl.gc.ca/en/data-and-research/publications-and-reports/housing-market-insight-canada https://www.cmhc-schl.gc.ca/en/data-and-research/publication... Also, what's not mentioned in that report is the percentage of purchases by foreign-owners last year or the year before. The 4.8% number is total Vancouver residential foreign-ownership - it's just a snapshot.
Tiktaalik 8y ago
It's not which is why many think these houses were bought not to rent out at all, but at inflated costs to park capital or launder money. Now that there's a tax on empty housing and an upcoming speculation tax persons the carrying costs on empty homes is high enough that some are clearly looking to get out of their investment.
refurb 8y ago
It’s not sustainable and driven entirely by speculation. It’s far cheaper to rent in Vancouver than to buy.
acangiano 8y ago
In the BC interior (say the Okanagan), where houses are cheaper, a $750K house would rent out for $3000/mo. In Vancouver proper, it's common to pay $3K for a nice 800 sq ft condo. I understand it doesn't scale linearly and these are mostly foreign investors moving money out of their country, but still... I have a hard time believing you can rent a $3M mansion for just $5K a month anywhere near Vancouver.
- s0rce 8y ago
  Random data point, but you certainly can't in the bay area (I just checked a few listings around my place in Piedmont). a $3M house is around 8k/month.
- Jack000 8y ago
  I think craigslist listings tend to be on the expensive side because more expensive listings stay up for longer. I rent a 1500sqft condo in this building for 3k a month (listed at 2M) https://bccondos.net/1238-richards https://bccondos.net/1238-richards
- gdilla 8y ago
  Disagree. Our house here is just under $3M - not a mansion, but a big house with ocean view in a desirable neighborhood. We just finished renting it out for 4 years at $4500/month.
onetimemanytime 8y ago
Makes no business sense, especially when you add taxes and maintenance. BUT it makes sense if you have 40 such homes bought with drug or corruption money (hello China!) Who cares if you lose 4% a year (maybe rising values make up for it, maybe not) at least you have something in a relatively safe place and out of China /Russia. Plus, it's not like the saved for 20 years to buy them...easy money.

by meritt 8y ago

pcurve 8y ago

yeah I was shocked to read that. Even for a $1million house, $5k/mon rent wouldn't make much sense.

kitcar 8y ago

In many cases the owners do not view it as an investment, it's a store of wealth that is difficult for the government of their home country to seize. Hence even if they lose money every year it's better then the alternative -

adventured 8y ago
There's no value for the Chinese Government in seizing foreign personal homes of that sort. It's tens of billions of dollars, a trivial sum to them right now. They do not need that money. They need to strictly contain domestic capital from pouring overseas, which has largely been accomplished. And they need controls in place to restrict people from being able to easily flee, which they've also largely accomplished (social scores, heavy tracking, etc). For the most part it doesn't matter if you have a house in Vancouver if they can change a score and prevent you from ever flying away. If you have the audacity to try it anyway, they've probably got your family. Which is something they've used on many occasions to induce Chinese nationals to return.
- toomuchtodo 8y ago
  You might be misunderstanding the use case. The Chinese with wealth moved their wealth out of China to real estate in London, Canada, and parts of the US specifically to put it out of reach of the Chinese government and to avoid the capital outflow controls you refer to. Once safely outside of the PRC's reach, it's trivial to move the wealth around using corporate entity ownership (among other methods).
  - adventured 8y ago
    I don't misunderstand. I said that even if they've managed to get their capital outside of China, it doesn't matter. If they flee, China still can induce their return. It's not trivial to move capital around using foreign corporate entities, when they track all of your communication within China. If they even so much as get a hint of that going on, and it bothers them in the least, they can do anything they like to you at that point. The hint of suspicion is more than enough, if it suits them. Being able to move capital around is meaningless, if you're not entirely physically free yourself as well. Your scenario is only a sure thing, if you've escaped your capital and everyone you care about.
    - deleted 8y ago
      [deleted]
    - derefr 8y ago
      You’re assuming that the person trying to expropriate wealth cares about being able to spend it themselves, rather than e.g. their family who already lives in Canada being able to spend it while they sit in jail. Think in terms of nobility: what’s more important, your head or your dynasty?
      - flycaliguy 8y ago
        I went to university with the kids. Buying a family into a western education is part of the process and part of the investment beyond the capitol.
      - seanmcdirmid 8y ago
        China has tried to fight against this by banning naked officials (whose families are abroad). There are still way too many exceptions, of course, as this is a pretty unworkable rule. It also doesn't apply to private business people on the other side of the corruption equation.

deleted 8y ago

[deleted]

roel_v 8y ago

Depends on your cost of capital.

ryanworl 8y ago

You can sustain low cap rates if your model includes significant appreciation and you can stomach negative/zero cash flow.

Finnucane 8y ago

These houses weren’t purchased to rent out. They were safe deposit boxes for cash. The expectations were that they would just keep going up in value. Their rent value didn’t matter.

reaperducer 8y ago
Could be both. The house where I rent is owned by a woman in China who phoned up a local real estate management company, bought the first 20 houses on their list, and wired them the money. It's probably more complicated than that, but that's the short form story the management company told me. The company also said it's very common.
- mistermann 8y ago
  And yet we're told by the MSM that foreign ownership is 5%, makes one wonder if situations like this are even statistically detectable. If this article is remotely true and this is the start of a trend set off by having no rules whatsoever and then suddenly a whole bunch of not terribly well thought out rules, it's going to be interesting to see how this all plays out, especially when good old "fear is stronger than greed" investor psychology kicks in, all in an environment of steadily increasing interest rates.
  - reaperducer 8y ago
    makes one wonder if situations like this are even statistically detectable. I don’t know about Canada, but forming as domestic shell company to make your real estate holdings look local is pretty easy in the United States, and can be done online.
  - corny 8y ago
    It's not just the MSM, it's the CMHC and Stats Canada. https://www.cmhc-schl.gc.ca/en/data-and-research/publications-and-reports/housing-market-insight-canada https://www.cmhc-schl.gc.ca/en/data-and-research/publication... Also, what's not mentioned in that report is the percentage of purchases by foreign-owners last year or the year before. The 4.8% number is total Vancouver residential foreign-ownership - it's just a snapshot.

Tiktaalik 8y ago

It's not which is why many think these houses were bought not to rent out at all, but at inflated costs to park capital or launder money. Now that there's a tax on empty housing and an upcoming speculation tax persons the carrying costs on empty homes is high enough that some are clearly looking to get out of their investment.

refurb 8y ago

It’s not sustainable and driven entirely by speculation. It’s far cheaper to rent in Vancouver than to buy.

acangiano 8y ago

In the BC interior (say the Okanagan), where houses are cheaper, a $750K house would rent out for $3000/mo. In Vancouver proper, it's common to pay $3K for a nice 800 sq ft condo. I understand it doesn't scale linearly and these are mostly foreign investors moving money out of their country, but still... I have a hard time believing you can rent a $3M mansion for just $5K a month anywhere near Vancouver.

s0rce 8y ago
Random data point, but you certainly can't in the bay area (I just checked a few listings around my place in Piedmont). a $3M house is around 8k/month.
Jack000 8y ago
I think craigslist listings tend to be on the expensive side because more expensive listings stay up for longer. I rent a 1500sqft condo in this building for 3k a month (listed at 2M) https://bccondos.net/1238-richards https://bccondos.net/1238-richards
gdilla 8y ago
Disagree. Our house here is just under $3M - not a mansion, but a big house with ocean view in a desirable neighborhood. We just finished renting it out for 4 years at $4500/month.

onetimemanytime 8y ago

Makes no business sense, especially when you add taxes and maintenance. BUT it makes sense if you have 40 such homes bought with drug or corruption money (hello China!) Who cares if you lose 4% a year (maybe rising values make up for it, maybe not) at least you have something in a relatively safe place and out of China /Russia. Plus, it's not like the saved for 20 years to buy them...easy money.