I would like to share with an interesting blog post I read this week at The Housing Chronicles Blog, and at the site of local realtor, Shevy Akason, who has been profiling properties at or below rental parity.
The newly immobile United States
I have asked Shevy to provide both a recently closed good deal in the area plus a property currently for sale. As he closes his deals, they will be featured as the closed deal. I have asked him for this to show (1) there are good deals happening in the market and (2) there are still properties available that make good cashflow investments. The currently available deal may not be a property he recommends for one reason or another, but it is illustrative of what can be found in the market if you look.
I was also particularly impressed by the article posted in yesterday’s comments providing some perspective on the financial mess here in the US: The Quiet Coup.
Here Comes the Sun — The Beatles
Did you know that you can find the floorplan of every new home in Southern California online? As a member of the Building Industry Association, I know about the website NewHomesMatch.com. Unfortunately, nobody else does. I have offered to help call attention the site by linking to them here on the IHB, but I have not heard back from them yet. I thought that perhaps the weekend open thread was a good opportunity to send them some traffic, so please, go check out their beta site at NewHomesMatch.com and let me know what you think. When they get back in touch with me, I will make sure they see your comments.
My wife found a new realtor ad on YouTube. He appears to be trying to appeal to women…
It is a warm and sunny weekend. Get out and enjoy it š
it seems to me that one of the fundamental questions here is whether you can find a house that will rent out for more than your cost of ownership. Am I right that that is the question? or is it just is it cheaper to rent than to own?
the reason i ask that is because getting a mortgage means you have to state that the house is owner occupied and if you rent it out you are in violation of the terms of your mortgage. it also puts you in violation of your homeowners insurance. the alternative is a commercial loan and commercial insurance but i think these are a lot higher.
so really we’re not talking about whether your can buy it and rent it out, right?
Another way of looking at these is to consider you are an all cash buyer and compare your return to what you would earn in other investment types. I think properties that work in this scenario can be found currently.
Properties that work using leverage (commercial loan and commercial insurance) would be few and far between. But in a few years, as lending loosens a little and prices come down, the leveraged investor may be back in business.
There are really two questions.
For an owner-occupant, the question is whether or not the property would rent for more than your cost of ownership. There are several of these properties in less desirable neighborhoods around OC. Eventually, most if not all properties in OC will be at or below rental parity.
For a cashflow investor, the question is whether or not the property can be rented out for a profit. This does assume a larger downpayment and a higher interest rate because you will not be able to finance this as an owner-occupant. There are two useful metrics for evaluating the deal: (1) the unlevered cap rate and (2) the cash-on-cash return for a leveraged transaction.
The unlevered cap rate is the rate or return an all-cash buyer would get on the investment. It is a baseline investment evaluation.
The cash-on-cash return is the rate or return comparing the net income of the property to the actual cash investment (downpayment). This is the more useful metric because it shows you what return your money is earning.
With very low interest rates, it is possible to lever up cashflow properties to obtain outstanding returns. This is a great time to be purchasing cashflow investments with long-term fixed-rate financing. This will be true as long as this crash drags on. In fact, this is the main reason the FED is lowing interest rates so much. We need cashflow investors to mop up the mess in areas where the price crash has been particularly bad.
Thanks for the more complete explanation. One additional thought, the outstanding returns of the leveraged investor come at a higher risk. Something the current mess is making plainly obvious.
If you look at the calculator on Shevy Akason’s site, mortgage interest is 5%. Unless I’m mistaken, investors aren’t going to get loans that low (unless you lie and say it’s owner occupied), so I look at Shevy’s numbers as best case, not real world numbers. So properties may still have a bit to fall to bring out cash flow investors.
Hi Alan:
Good point, however I used 6% in both of this weeks posts. Moreover, interest rate does not affect cap rate, only cash on cash returns.
I noticed this property in Victorville at 85% off peak. The purchase price is less than my annual rent. Oddly, it does not appear to have been trashed or set on fire.
http://www.redfin.com/CA/Victorville/15051-Tatum-Rd-92395/home/3761234
15051 Tatum Rd
Victor Valley, CA 92395
Price: $29,900
Beds: 3
Baths: 1
Sq. Ft.: 1,040
$/Sq. Ft.: $29
Lot Size: 8,978 Sq. Ft.
Property Type: Detached, Single Family Residence
Year Built: 1953
Stories: 1
Area: Victor Valley
County: San Bernardino
Two years ago, you couldn’t have gotten a house at this price in SoCal, even in Trona next to a meth lab. http://www.satanslaundromat.com/sl/archives/000181.html
OMG. I have stumbled upon the funniest thread on the internets. Trona can’t be all bad to provoke a reaction like that!
Only stupid people invest in single family rentals. The smart money invests in multiple family dwellings. The bottom line is that it is an apples to oranges comparision.
I’m disappointed that I did not have time this weekend to get in on this open thread. LC’s comment is particularly interesting. What kind of multi-family properties do you invest in?
Can you be more specific regarding why you prefer multi-family over single family homes? Of course I know the advantages and disadvantage of each, however, Iām curious as to why you have such a strong opinion. I know there are a number of extremely successful multi-family investors.
Do you prefer duplexes, fourplexes or only 100 units plus?
the aticle in the atlantic.com is truly eye-opening
Isn’t that a fantastic article? It really puts our current situation in a historic and international perspective. IMO, the author is spot-on with his analysis.
Long read, but worth it. Too bad 99.9% of the general public is too dim, too busy, or too distracted to really care about understanding any of this in real-life terms. I haven’t found very many people who care to even have an inteligent conversation about these things… But don’t get them started on Octomom – that they know!
I just re-thought that, and I should have said “99.999% of the US don’t care or don’t understand” because that leaves about 3,000 people, which is the number of readers of THIS blog š
To me it’s less scary that few people would take the time to read that insightful article, and more scary that American’s can’t accept what a 5th grader can understand: you can’t get out of debt with more debt.
If you liked the Atlantic Article check out The Baseline Scenario – the writers, of which the author of the Atlantic article is one, is a very well written, objective and easy to understand blog. They have alot of great stuff. My wife subscribes to their NPR podcast for a daily briefing on key economics. Sure beats the shrill shouting heads on CNBC.
The Atlantic Article hits it on the head with the connected financial elites designing and leading various countries into deep trouble.
IMHO: Yesterdays, T. secretary TG’s bailout plan is BO’s plan. That plan smells. The taxpayers will be double paying for the meltdown. Loss on pension (assess transferred to investment banker), then bailout of banks by the BO plan (enriching banker) and getting stuck with the bill and debt to pay off accepting the bad loans through national debt.
Cash flow investers can hang-on of a long time even when the market is dropping. Just has to watch out the inflation, law changes, regulation and taxes will not increase expenses to make it unprofitable and also loss money on lowering house prices.
according to mi figures he has over estimated the rent of $1,600…take a closer look at numbers and time to rent out. In a rental market in which rents are dropping I would say it should rent out at approximately $1250 to $1300 tops. So we have over estimated rent, nothing for vacancy which looks to run about 1 to 2 months when vacant and it is hard to find and 20% down. Most lenders want a minimum of 30% down in this lending climate for non-owner. the joy of managing a low end unit. After all the adjustments and appreciation of zero for the next 3 to 5 years the whole thing changes dramatically! I have owned and managed rentals for over 25 years. I could be wrong he could be right…what do you think?
Those are definitely drawbacks of low-end units. That particular property is not one Shevy would recommend for anyone other than a more sophisticated investor with property management experience. It is a good example of the kind of opportunities in the market today.
The analysis he provides doesn’t include appreciation, so that doesn’t change the equation, but the erosion of income certainly would. Even if you figure $1,200 in rent, that is a GRM of 100. It is hard to beat that.
Like someone said above, pretend it’s an all cash investment and see if buying and managing it is better than putting it as an investment in something else.
Careful Irvine Renter, posting that quiet coup article could get you labeled a communist. Seriously though, nationalization is the only way to save the banks at this point. The current plan will delay the inevitable at best and make the necessary changes impossible at worst. As far as home prices go, I am under the impression that your previous predictions had the bottom (the base valuation) tied to rents,inflation and ultimately rising paychecks. However given the rise in unemployment and looming threat of deflation, could the bottom end up being a lot lower than you predicted?
“However given the rise in unemployment and looming threat of deflation, could the bottom end up being a lot lower than you predicted? ”
It certainly could. Those factors are really taking their toll in fringe markets and less-desirable neighborhoods. We have such an extreme case of kool aid intoxication here that psychology is really fighting against market forces. I doubt the kool aid will win in the end.
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Thanks for the tip on NewHomesMatch. Looks like they still need to work out a few bugs, though — on the property I tried out, clicking on “Floor Plans” just brought up a very small empty on-page popup with a close button. Tried IE as well as Firefox and got the same behavior. Then tried another property, but that page managed to crash my Firefox. Tried the page again in IE, but the “Plans” section was greyed out on that one. Tried a third property and “Plans” was greyed out there too. Same with the fourth. Gave up at that point, but look forward to this site being useful in the future.
Now if only there were a site that archived floorplans for new homes while they’re available online and then gave access to them when the houses are being sold used. Closest I’ve seen to this is a few of the nicer realtor sites, but of course they only have plans for properties they’re listing, and of course not for all of them.
That “Construction of our New Home” video was kind of cool, though I would have preferred to hear their commentary, rather than the horrible song they put over it.
That ad for the Mocca classifieds was gross.
I’ve never seen so many homes available for sale under $100K (using Redfin). A lot of them in the fringe areas (Hesperia, Palmdale, Hemet) but quite a few in the L.A. area (mostly around southcentral). Quite easy to find sub-$50,000 homes too.
IR,
Check out this NYT article “Banks Starting to Walk Away on Foreclosures”. Don’t think it will happen in Irvine unless the economy gets really bad so that there are riots and looting but it sure could happen in the depressed areas of the IE. Pretty sneeky of the banks… property is worth less than the cost of forclosure, repair, maintenance, taxes so walk away from forclosure without telling the mortgagee he/she’s still responsible but will never be able to sell because the bank retains a lein on the property in perpetuity.
http://www.nytimes.com/2009/03/30/us/30walkaway.html?_r=1&hpw;