Proper Rental pricing

[CardiffBaseball]

I have a quick question, as I cannot remember what the proper price to charge is on a rental.

Was it 8% of the value of the home?

Also for sdrealtor or someone with access can you let me know what the house at 1835 Playa Riviera in Cardiff, sold for? This would give me an idea of where I am.

Also I am guessing the total rent payment figured should at least be reduced by your marginal tax rates, for which you’d be able to write off some of the payment.

[(former)FormerSanDiegan]

There is no proper price to charge as a percentage of purchase price. The resale market and the rental market define it for you.

The current rate for SFR in San Diego is in the 3.5-5% range. E.g. a ~500K house in Clairemont rents for $1700 per month or $20,400 per year. Compared to house value thats about 4%. (I use Clairemont because that area has been very near the SD median for the last decade).

[sdcellar]

According to Zillow, it sold for $689,000 on 08/29/2006

[CardiffBaseball]

My point in asking was that I thought there was some standard calculation out there that if you can’t get 8% of the outstanding value, then the renter is ahead on the deal?

While 4% is what the market seems to be asking, isn’t that a losing propostion in a flat or declining market? At least for new investors it must be a deterrent.

[no_such_reality]

Cardiff, yes, there is a rule of thumb to calculate if a rental is a good investment. It’s a 8-13%. The rule of thumb is a Cash on Cash return using a Gross Rent Multiplier. In the current housing market, they’ve been out of whack for years. Even in the normal market, California has tended to the high end (low return).

Basically, the purchase price of the rental should be between 8-13 times the Gross Rents. SFR’s tend to be a little higher (10-15X). However, in the current market SFR’s are tending towards 20-25X due to the speculators thinking they’ll make a year’s worth of appreciation (10-20%) on a million dollar unit and flip it after carrying a 1 year ARM with a 1% teaser.

Literally, I gave up looking last year after seeing unit after unit where the rents wouldn’t cover the mortgage payment on a 1% loan. You check the financing scoop and the owner has had it one year with a 1% loan buying the the previous year and marking it up 10-15%.

[(former)FormerSanDiegan]

CardiffBaseball –

While 4% is what the market seems to be asking, isn’t that a losing propostion in a flat or declining market? At least for new investors it must be a deterrent.

You are absolutely correct. Now that appreciation is out the window there are no investors buying for cash flow because they can get more on their investment in an ING account or a CD.

As for a “standard calculation” for determining whether the renter is ahead on the deal, that number changes with time, depending on interest rates, rents, and potential for appreciation.

If you are talking about rent vs buy, then you would need to compute the PITI (principal, interest Tax and Insurance) payment and comapre it to monthly rent after taxes, as well as account for any opportunity costs for tying up a downpayment. By this calculation a number in the 7-8% range or so in today’s environment is probably reasonable.

From an investor standpoint, if I could get 8% return on a property today, I would probably buy it, because that means it’s about 40% cheaper (in terms of return on investment) than most property in San Diego. This is in-line with the range described above.

[sdrealtor]

CB,
It sold for $689,000. Once the price was reduced to $689,000 it sold within 2 weeks. The buyers put down 20%.

[CardiffBaseball]

If that house sold for $689, then I’ll be renting a long time or leaving SoCal, which would be pretty easy to do in my field. Sure the coastal areas aren’t supposed to drop that much but this place only went from $755 to $689, for a tiny home sitting right on top of I-5.

Since the $755 was FSBO and the $689 was by Realtor, the owner got a lot less out of it but I can’t help but stare that someone sees that place as worth that much. A couple of nice upgrades, but still less than 1100 Sq. Feet., one-butt kitchen. Maybe they are have or plan to have kids and wanted in the school system.

I guess now I get to watch how long it takes for the girl who has homes on Bulrush (over a year for sale) and Freda to unload. She went back to FSBO, and might be running out of cash, though she still has plenty of play. She clearly didn’t invest that much in the homes.

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