The flaw in this question is that you are trying to apply logic and history to develop a real estate valuation method based on rental price. This can be done but you’ve chosen a house in San Diego to apply it to, this cannot be done.

Here’s my best guess, take your 2150 rent. I don’t know what it includes besides rent (gardner, trash, hoa, pest control service, etc.) add those things up and subtract from your rent. My guess is affordable for most would be 15-20% more than rent for principle and interest. The tax and insurance will be offset by the new deduction plus a little more and that will cover repairs and maint.

If you can afford to rent for 2150 you would buy for 2500 to 2800 (principal and interest). The extra 350 to 650 a month would hurt for a few years but would be offset over time because your payment would be protected. Your actual payment will be higher but the tax break will bring you back around your P&I as your true outlay. You don’t need a downpayment to rent so you can’t compare it to a loan with a downpayment in this scenario, but you should have one in reality. You also need to use 30 yr fixed to get your numbers. 400k at 6% 30 yr, $2400 P&I

my guess is 425 to 450 and it’s inline with fundamentals for for a 2150 renter, 400k it’s a no brainer, more than 475, keep renting. Now’s the part where you tell me the owner wants to sell it for 850K because he forgot to take his crazy pills.

I believe the tool that would work best for you is a gross rent multiplier (GRM). The reason I say that is because working with a GRM is a lot easier to do than trying to work with an overall rate – aka “cap rate”. In order to even use an overall rate, you have to analyze the income stream down to its net income level, which means coming up with fixed and variable expense ratios.

A GRM only requires you to figure out the market rents for a property, which for a single family residence is hard enough.

At the bottom of the last cycle, GRMs were running as low as 120, meaning the properties were selling for 120 times their monthly rent; or 10x their annual gross. The typical range was about 140-150 or so, depending on the area. Now the bottom of the last cycle represented an extreme low point at which the pricing trends were undervalued relative to the long term trendlines for population, wages and pricing.

At peak, pricing resulted in GRMs topping out in the 350 -370 (!!) ranges for those residential properties that would typically be rented. That’s obviously more than double the low point, and is yet another indication why the relationship between rents/prices will eventually correct.

I think that if you can wait until prices drop to result in a GRM of 175 or below you’ll be a lot closer to what a property will be worth relative to the long term trend that will extend beyond any individual cycle. BTW, the difference between 150 and 175 is substantial: $2,000/month x 150 = $300,000; $2,000/month x 175 = $350,000.

It’ll be interesting to see if rents contract at the same time prices are correcting. So far they haven’t.

“It’ll be interesting to see if rents contract at the same time prices are correcting. So far they haven’t.”

Are you suggesting that there’s a decent chance that rent will contract b/c there is a surplus of SFH & condos ?

Also, do not forget the opportunity cost of the lost down payment. For example, 20% of 400K is 80K which will return $4K in interest when invested in no-risk 6-month CDs in the first year alone; that number grows of course as the interest compounds. This can offset some of the tax break (the interest is taxable) and effectively lowers the current rent. Shares or bonds could return even more of course. My guess is that the true cost of the property assuming a normal lending environment (20% down, 6.5% interest) is more like $330K and maybe less.

rents seem to be going up here in temecula.

when i was looking for a hoseu to rent about one year ago, a nice 3 BD or 4 BD home was in the 1600-1800 range. now the same house is 1800-2100.

the house i currently rent is on the “small” side for temecual,, it’s “only” 1900 sq ft.. and it was listed at 1400… now for $1400 you might get a 2 bedroom aprt. to rent an equivalent house now, i’d expect to pay 1800 minimum.

i’ve looked hard lately in this area and most houses athat re unde 1800/month are what i would consider “stripped” homes…lineleum, no appliances, crummier areas. if you find a well optioned home, loaded wtih upgrades… tile, granite, appliances, nice location, landscaping – you’re looking at 1800-2000/month minimum.

using a 200x rent at 1800/month you wind up with many of these SFR houses in temecula area selling at 360000.

right now, many of these hoems ar elisting at 450-500.

on a side – there are two houses for sale near me – they are on the same street – exact same house – almost identical in terms of upgrades….you would take one or the other – neither is any better than the other.

one listing for $475k.
the other is a short sale advertised on MLS at $399. bet the guy selling at 475k is PISSED….

i think pricing in temecula for thse homes will bottom out near 300-350k….

i don’t see these ultra fixed up himes in nice parts of temecula selling for 200-250 or even 275k…

to be that cheap they would need to rent out at 1300/month or something…and apartmetns are more than that right now.

My personal experience only dates back one complete cycle prior to this one, so I have no information regarding the GRMs back in the early 1980s. Sorry.

Applying GRMs to single family residences is not normally considered a reliable or accurate method of valuation. Part of this is due to the variations of rationality involved at different times, and part is due to the difficulty in really pinning down the rental rates. The only reason I brought it up is because our original question involved trying to figure out how to establish a reasonable baseline.

Exploiting the relationships between income and sales price works quite well when the property types are typically rental-driven. Inasmuch as the commercial property types have generally followed the same trends as the residential, albeit at somewhat of a lag, the trends that are showing in the commercial markets can be compared to the residential trends as a secondary indicator. Commercial income multipliers have increased in the same way, and those increases are attributed to investor agressiveness and the expectations for continued price appreciation. Why else would an investor buy a property that doesn’t currently cash flow, if not for the expectation of making those losses up at the time of sale as a result of price increases?

temecula guy-

are you familiar with harveston? these homes in harveston, that now list for $400-500k..

where do you see them selling at the “bottom” of this decline?

do you see rents going down or staying flat?

i’ve still got the chance to buy that 1900 sq ft one story home, totally loaded with upgrades, sweet location – for $350k. i have yet to see anything – anything – in harveston for that price except attached condos. this is a free standing house – loaded with granite, flooring, high end shutters, ceiling fans, landscaping, stamped concrete…appliances… it’s only a 3BD/2BA…but it’s a one story…which i like…

maybe in 3 years these homes will be selling for $200??

the house is in the sausalito tract. streets are edenton, oak park, sarasota… in 92591.