Breakeven opportunites are closer than you think

[sdrealtor]

A client of mine and I were looking at 2BR condos for her son and potentially as an investment. With 20% down and 30 year fixed financing, we found units that we believe could be purchased or will soon be able to (within 90 days) with carrying costs around $1500 to 1600/month in an area where rents begin around $1400/month. It’s closer than you think and kind of shocked even me.

[an]

Please tell us where.

[sdrealtor]

Sorry but if it works, I will probably grab one and let a friend take one too.

[Daniel]

Sdrealtor,

I must say I’m not too surprised. The low end of the market (condos) is actually closer to turn cash-flow positive than the rest of the market. This is because condos are more volatile, get hit harder, and everyone nowadays hates them.

Also, rental demand is quite good at the low end, but not so much at the high end. Good luck turning cash-flow positive on a $800K property! The gross rental yield could be as high as 6% on a condo, but it is almost certainly below 4% on an expensive property.

Daniel

[Diego Mamani]

Are you factoring in the opportunity cost of the 20% down payment? Besides, your client should know that he won’t be building much equity when buying at the peak of the cycle. When the son gets out of college in 4 or 5 years, he’ll probably sell for less. And all those interest payments and lost earnings on the 20% down payment, will be money down the drain.

Back in the 80s I read in Jane Bryant Quinn’s book that condos are the last to appreciate in boom periods, and the first to depreciate in busts. All the data I’ve observed since then verifies it.

[Daniel]

Diego asked…

“Are you factoring in the opportunity cost of the 20% down payment?”

I very much doubt it. Opportunity cost is something most people have trouble factoring in. I know people who bought their houses 10 years ago, have tiny mortgages, and point to their mortgage payments as proof that it is cheaper to buy than to rent.

[an]

Also, is this break even after the tax deduction or before?

[Diego Mamani]

Yes, the tax deduction helps. But against it you must consider HOA fees, property taxes, maintenance costs.

[Daniel]

After the deduction, I’m sure. Condo prices didn’t already drop THAT much, did they? 🙂

[lamoneyguy]

Yes, sdrealtor, we want to know the details. Not where the properties are, but the numbers. Purchase price, HOA, loan terms to get cash flow positive or close. Very interesting.

~lamoneyguy

[sdrealtor]

My client knows exactly what they are doing. Son is not in college, has a stable job/career he has had for over 6 years, needs a place to live and will get a roomate that will pay $600 to $700/month. It is within 2 miles of where he grew up, his job is and where we wants to live. If he needs to move in a few years, the place would still breakeven for the parents, will generate a tax loss and will be a good long term asset. As rents rise with inflation it should actually kick off some income in the not too distant future. We dont know what will happen and it works for them. The reason why it works is because condos have depreciated first. At the price we hope to get, it would be approx 25 to 30% off the peak.

[(former)FormerSanDiegan]

Purchase price (or range) please.

This is a critical piece of info to evaluate GRM or rent-to-price multiples or cash-on-cash return from an investment property to determine the degree of the current sell-off.

Thanks.

[PerryChase]

sdrealtor, I'm also looking for one such property for my auntie/relatives to spend retirement times in San Diego. So far I've not seen anything close to fitting the bill.

The tax loss is a bunch of bull and I completely ignore it when assessing my options.  If I get a tax advantage, I consider it compensation for my troubles in owning/managing the property. In my mind, I think of tax benefits and maintenance and improvement costs as a wash.

If you clients rent out the place to their son, they have to deal with depreciation, recapture etc…  What a pain!

Oh, and in my mind, having the privacy of your own space is not the same as sharing it with roomates to help cover the mortgage.  It's a quality of life issue.    You only live once and, to me, physical comfort and enjoying quality food cannot be compromised. 

 

[(former)FormerSanDiegan]

sdr –

I’d like to see the purchase price range to evaluate where we are in the cycle.

I own a rental property (SFR) that I purchased about 5 years ago that currently has positive cash flow. I like to run numbers every 6 months or so to gauge the market. I haven’t been able to find anything (SFR) that cash-flowed since about 2001. During the run-up condos were even more difficult to cash-flow, but now you’ve piqued my curiosity.

I did a “guesstimate” on what I thought this property should go for, to produce monthly rent in the 1400 range and carrying coasts in the 1500-1600 range. Assuming 20% down, interest-only 30-year fixed, and a combined $300 for HOA and insurance, I come up with a purchase price of around 300,000-325,000. Mortgage ~ 1300/month I/O $300 per month HOA & Insurance.

Can you confirm or deny whether I am close ?

[PerryChase]

FormerSanDiegan,  those are also the numbers that I'm looking at.  $300k is my price point for a good condo/townhouse.  

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