This was too fun to pass up… 🙂 So much to refute, too little time. In keeping with Rich’s motto, “In God We Trust. Everyone Else Bring Data,” I am calling B.S. on Felix’s posts.
Felix said:
I was expecting only $3400/mo but got $3800/mo..
Ran a search on Craigslist for rentals between $3,000 and $4,000. Since Felix’s house was easily rented for $3,800, it must be real nice!
Here’s an example in La Costa (5 br). Based on text and advertised rent, looks like it was originally marketed for rent at $4,200 and is now available for $3,900. Didn’t get bid-up like Felix’s place (however, it does have an ocean view, like Felix’s rental):
Back to the point. If Felix bought an investment property in the “San Diego area” with an ocean view, and could **easily** rent it out for $3,800 (he only expected $3,400), how much would that house cost?
Look at the above rentals. They would all list for $700K to over $1 million, and probably sell for around $800K (or more, in the case of $3,800 rentals).
Felix claims to have paid cash for the home. Let’s be **extremely** generous and say he paid $700K on a house that rents for $3,800.
At $700K, the property taxes would run at least $8750/yr. (1.25% of purchase price with additional bonds, etc. and it could go higher if prices rise). He says insurance costs him $1,500 annually, and has “minimal” HOAs…we’ll say $40/mo = $480/yr. Let’s add a very optimistic amount for maintenance and property management (he said he’s an “outsider” who purchased a rental in SD)…$500/yr. Assume “optimistic” vacancy of one month every three years ($3800 per month/36 months) at $105.56/mo=$1,267/yr. Add all those costs up, and we get $12,497/yr. Since he paid cash, there’s no mortgage deduction, so we’ll take 33% off the prop taxes ($2887.50), and we arrive at net expenses of $9,609.50 per year.
If he earns $3,800/month, that’s $45,600 annually. Deduct the $9,609.50in costs, and we arrive at a net “profit” of $35,990.50. I’m being generous on all the rent and purchase price assumptions, etc., so we won’t get into depreciation or deductions on maintenance.
With these very optimistic assumptions, Felix would earn about 5% on his investments ($35,990.50/$700,000 = ~5%).
Here’s the fun part… Home prices haven’t yet begun to fall in the higher-end areas. He would have been safer buying “investment” properties in the already hard-hit areas. If the higher-end prices drop just half as much as the lower end (by 50% or more, already), that $700K house stands to lose 25%, or $175,000 within the next ten years (FWIW, I think the higher-end will lose at least 40%, but that’s just a guess). How about rents dropping? Recession? “Unexpected” maintenance costs? Transaction and sales costs if he needed to sell?
All this for a return that Felix could have gotten with Treasuries just a short while ago — and no tenant hassles.
Other things he could do with that money? JP Morgan is issuing Principal Protected Notes on a basket of emerging market currencies with a 200% participation rate. It matures in two years, and you are guaranteed to get your principal back if JPM is still solvent. You will earn a decent return if the dollar falls against these currencies. NOT INVESTMENT ADVICE!!!! — he was asking what else he could do with his money. You can research more here, and follow links:
The Yen and Swiss Franc are up over 10% within the past few months. There’s oil, gold, silver, platinum, commodities, etc.
Of course, a trader who’s been watching the credit bubble would have made **very** good money shorting homebuilders, lenders/banks, ratings agencies, retailers, etc. This would net much, much more than 5%, and you wouldn’t have to deal with the hassles of landlording.
It’s interesting that someone who claims to be an active stock trader (since 1983) and partner in two “successful” small trading firms, would buy a rental with 100% cash and not know where to find an easier way to make a 5% return. Not to mention the claim that this downturn will be “well over” in 18 months.
