Bizweek: Now buy an investment property.

User Forum Topic
Submitted by patb on April 22, 2009 - 10:22pm

well, At least I know it's still not time to buy something.

http://www.businessweek.com/print/lifest...

"Now you invest so you can reap big rewards when the economy rebounds"
should be replaced by "IF the economy rebounds".

seriously, this article is useful data mixed with Utter Shit, you would think
David Lereah wrote this.

Come on, "Out-of-town investors are coming in to take advantage of the low prices. Jeremy Burgess, a former baker at a Safeway supermarket, and his partners have made a business of finding investments for buyers who don't know the ins and outs of the risky market."

Does that remind anyone of the Buy-to-Let schemes that sank england?
If you aren't in town, how do you manage the property?

I've been dubious about potential investments in properties
in the DC area, just because they are on the wrong side of some
nasty local commutes. Even driving 15 miles can take an hour
in this traffic.

I sure don't want to be schlepping down I-95 just because the
tenant is locked out. Now how does some Schmo, manage something
in another time zone? That's Serinism.

"But investors have been finding good income-producing properties geared to the area's many college students—a factor that also applies to other big university towns such as Columbus, Jacksonville, Houston, and Orlando. One investor, for example, is buying a 760-square-foot one-bedroom unit with four rooms for $222,000 in Boston's Brighton neighborhood, near Boston College and Boston University. The condo fee is $465 a month, and the taxes are $150 a month. The buyer is hoping to rent it out for $1,600, which should cover the costs, McCreary said."

Lets see, 222K, put 20% down, so finance 162K, that at 6% gives you a
975 mortgage (30 year, amortized, with a 1.5% kicked because it's not residential).

975 Principal and Interest
465 Condo fee (Mello Roos)
150 (Taxes)
----

1590 gross monthly costs.

Rent of 1600? Okay

But, unless the condo covers Insurance, thats 150/month also.

Advertising, figure that's $50/month. or if a broker finds the tenant,
well, you are looking at 160/month there.

Maintenance. Most of that is covered in the condo fee, but, as things get
older (Fridge, Stove,cabinets, toilets, tiles, floor covering) you need to pay
that, so figure 1% for maintenance so add $200/month deferred cost.

Then Down time. Figure 90% rental utilization. so take 160/month off
your income.

Honestly sounds like this guy is looking to lose $550/month for a
long time. That's almost a mortgage payment there.

y

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Condo insurance should be
Submitted by jonnycsd on April 23, 2009 - 12:33am.

Condo insurance should be much less than 150 a month. I pay only 30 a month on a 3br 3ba that I rent out. My spend on advertising is ZERO - I use craigslist.com which is free, and it generates huge response. Also, they wont have MeloRoos in MA, this is a uniquely California cost, created by the CA legislature as a way to get around Prop 13 limits on property tax increases.

I suspect you are being a bit
Submitted by scott-at-alumni on April 23, 2009 - 7:10am.

I suspect you are being a bit pessimistic about all the costs. Big city mgmt fees, at least in the SFBay area, often run around 7-8%, so that's $112, not $160. Advertising via craigslist is more than sufficient. Maintenance number seems high - I've got 3 older (pre-1980) SFHs rented and I haven't had major problems yet, except for 1 furnace replacement, in 10 years of renting them out. And how did the 1% for maintenance become $200/month? I must have missed something. 1% would be less than $200/year.

Look, all in all, I agree the guy will lose some money. But it's all relative. If he deducts all those costs, as well as depreciation, every year on his taxes, it's a nice way to offset some small percentage of income, while you have someone pay you for all your interest and some of your principal on a property. If he thinks he's buying close to a bottom, and he thinks he's keeping it for a while, it's not a bad deal.

Cheers,
Scott

I looked into 'buy to rent'
Submitted by qwerty007 on April 23, 2009 - 8:34am.

I looked into 'buy to rent' in California, North Carolina and Texas. As a cash buyer my focus was on net returns, but as the original post suggests, finding a rental management company makes sense, particularly if you have no interest in day-to-day dealings with tenants. I found one such company in Orange County who were obviously doing so well they couldn't be bothered to return my emails. In North Carolina and Texas I found two companies that are selling tenanted income properties, both with reasonable returns, and offering full management services. The idea seems very attractive, but obviously, to get a proper feel for these companies you would need to visit their offices and view their properties. However, there remained a couple of nagging doubts. Why would a company able to find cheap properties, and achieve high rental returns, want to sell them on? Are these companies just trying to find ways to keep afloat in a depressed market, and will drop the management service once the market returns to normalcy?

That aside, for me the most sensible form of income property is the apartment, because they are low maintenance, and are found in the more traditional rental markets where populations are concentrated and transient. California is the antithesis of this, and I have struggled for some time to come to grips with it. While there are apartment style properties in downtown areas of LA, Pasadena and San Diego many are either way over-priced, have high HOA fees, or don't encourage rentals. In Pasadena, there are a few very nice apartment blocks but they are nearly all owned by the developer and therefore are not for sale. This strikes me as bizarre, and I have pretty much conceded that investing in California Real Estate is just for the pro's. There are simply too many people pursuing the same goals, and unless you are prepared to do a lot of leg work, the competition is too great for the casual investor, and focuses too much on leverage and appreciation potential, not cash flows.

I love how the rent "should"
Submitted by doofrat on April 23, 2009 - 10:08am.

I love how the rent "should" cover the costs. What a great investment!
Dump a bunch of money and lock yourself into a mortgage, high condo fees/taxes, take on a management headache. Then if the college students that are renting this place actually pay their rent and/or don't move out, you'll break even! Oh, and every purchase comes with a free loaf of delicious rosemary olive oil bread.

scott-at-alumni wrote:I
Submitted by patb on April 23, 2009 - 6:34pm.

scott-at-alumni wrote:
I suspect you are being a bit pessimistic about all the costs. Big city mgmt fees, at least in the SFBay area, often run around 7-8%, so that's $112, not $160. Advertising via craigslist is more than sufficient. Maintenance number seems high - I've got 3 older (pre-1980) SFHs rented and I haven't had major problems yet, except for 1 furnace replacement, in 10 years of renting them out. And how did the 1% for maintenance become $200/month? I must have missed something. 1% would be less than $200/year.

I usually figure Proeprty/casualty and Liability as running the same as
local taxes, if it's a bit lower, cool, as for 1% of the maintenance, what i was
thinking was 1% of the property value, per year. college kids are
rough on a project, so, it's a good number there.

i just don't like the idea of running a rental anywhere you can't
get to in 25 minutes.

patb wrote:scott-at-alumni
Submitted by Fearful on April 24, 2009 - 9:10am.

patb wrote:
scott-at-alumni wrote:
Maintenance number seems high - I've got 3 older (pre-1980) SFHs rented and I haven't had major problems yet, except for 1 furnace replacement, in 10 years of renting them out. And how did the 1% for maintenance become $200/month? I must have missed something. 1% would be less than $200/year.

I usually figure Proeprty/casualty and Liability as running the same as
local taxes, if it's a bit lower, cool, as for 1% of the maintenance, what i was
thinking was 1% of the property value, per year. college kids are
rough on a project, so, it's a good number there.

i just don't like the idea of running a rental anywhere you can't
get to in 25 minutes.


Absolutely those maintenance and overhead costs could be overstated. However, the original post article seems to miss the point, often repeated in these forums and among savvier investors, that real estate had better do a lot more than just cover the costs to offset the risk that a bad tenant gets in there and that the value of the property goes down. The real estate boom years mentality, which will take a long time to unwind, is that you can tolerate even negative cash flow because the value of the property goes up. Realistic is something more like that you demand 10-20% better than cash outflow to compensate for the risk.

What else do you expect from Business Week, let alone its Lifestyle section.