who is buying now?

[bobby]

yeah.. no on hunters point. I don’t like risk. rather pay a little more to be safe.

as mentioned by scaredy, some folks don’t want to get hands dirty for a variety of reason. Doesn’t mean they shouldn’t invest in rental.

[bobby]

[quote=Jazzman]I would think the only time to become a landlord in the Bay area was 20 years ago. The rent to price ratio is 20% above it’s historical average, and I’d suspect that is a very conservative number.

Here’s a hypothetical investment analysis. You can argue the variability of some the individual items, but for a home valued at $500k, with a rent of $2,000 a month, the picture may look some thing like this.

Market or Appraised Value”$500,000″
Purchase Price “$500,000”
Initial Equity

Down Payment 10%
Amount Financed “$450,000”
Down Payment Amount “$50,000”
Closing Costs & Fees “$3,500”
Total Cash Investment “$53,500”

Interest Rate (30 yr Fixed) 4%
Debt Service (P&I) Monthly “$2,021”
Debt Service (P&I) Yearly “$24,248”

Monthly Rent (GSI) “$2,000”
Annual Property Tax “$5,000”
Annual Utilities “$200”
Annual Landscaping “$500”
Annual Insurance Premium “$600”

Vacancy Rate (% of GSI) 8%
Maintenance Rate (% of GSI) 5%
Property Mgmt Rate (% of GSI) 8%

Gross Scheduled Income (GSI) “$24,000”
Less Vacancy Amount “$(1,999)”
Gross Operating Income (GOI) “$22,001”

Annual Operating Expenses
Property Management “$(1,760)”
Annual Property Taxes “$(5,000)”
Annual Utilities “$200)”
Annual Landscaping “$(500)”
Annual Insurance Premium “$(600)”
Repairs & Maintenance “$(1,100)”
Total Operating Expenses “$(9,160)”

Net Operating Income “$12,841”
Less Debt Service “$(24,248)”
Before-Tax Cash Flow (BTCF) “$(11,408)”

Cash-On-Cash ROI -21.32%

Last two years price increases make investing a challenge now even in places like Las Vegas, where prices corrected by 60%, which is twice the drop of metropolitan CA.[/quote]

thanks for interesting analysis.

Looked at some properties today but way too much. Thinking about buying less expensive but further away.

[Doofrat]

[quote=bobby][quote=flu]The only question you need to ask yourself is

do the numbers work out with a decent positive cash flow for any random tenant.

Also imho, if I were you, I’d do myself a favor and rent to a complete stranger, not someone I have any sort of relationship with (professional or otherwise).

Either you’re not going to be happy because you won’t be able to get the best price you can get, or the other person isn’t going to be happy, because they think you’re trying to take advantage of the relationship with you….or both…[/quote]

thanks for advice. will take into account and seek advice from friends also.
the numbers definitely don’t work out. ie the “mortgage”* will be higher than rent. Not to mention taxes and maintenance.

*I put “mortgage” b/c this will be all cash transaction.[/quote]

Why do an all cash transaction when interest rates are so low? Looking at interest rates tracking house prices over the last couple of years, the monthly payment seems to have stayed the same, tracking the prices pretty closely relative to interest rates. If you do all cash, it seems you’re paying a premium price that’s premium due to low rates, but not getting the benefit of the low rate? Or is it because the rates on an investment property are too high?

[spdrun]

For one thing, you could buy all-cash for expediency’s and simplicity’s sake, but later refi into a low-rate loan. Cash could also be extracted by financing against another property bought for cash or paid off.

Not having to deal with loan contingencies gives the buyer a better hand with the seller.

[The-Shoveler]

FYI

http://www.wsj.com/articles/mortgage-applications-soar-as-consumers-snap-up-low-rates-1421236802

[spdrun]

Well, 49% up from a holiday week — has WSJ sunk to that low of a level? 🙂

[bobby]

[quote=doofrat]

Why do an all cash transaction when interest rates are so low? Looking at interest rates tracking house prices over the last couple of years, the monthly payment seems to have stayed the same, tracking the prices pretty closely relative to interest rates. If you do all cash, it seems you’re paying a premium price that’s premium due to low rates, but not getting the benefit of the low rate? Or is it because the rates on an investment property are too high?[/quote]

because I have the money sitting in a money market account earning 0.01% interest.
I think stock market is a bit frothy right now so don’t want to put money there.
we went to look at 3 properties this past weekend but were not interested in any of them.
will update in the future…

[Jazzman]

[quote=bobby][quote=doofrat]

Why do an all cash transaction when interest rates are so low? Looking at interest rates tracking house prices over the last couple of years, the monthly payment seems to have stayed the same, tracking the prices pretty closely relative to interest rates. If you do all cash, it seems you’re paying a premium price that’s premium due to low rates, but not getting the benefit of the low rate? Or is it because the rates on an investment property are too high?[/quote]

because I have the money sitting in a money market account earning 0.01% interest.
I think stock market is a bit frothy right now so don’t want to put money there.
we went to look at 3 properties this past weekend but were not interested in any of them.
will update in the future…[/quote]

My sentiments exactly. Share values are way too high. Bonds can only go one way from here. Cash earns nothing. What else is there? Hard money lending? Not for the timid. Sure you can get a loan, but the magnified gains on the capital you put in can just as easily be magnified losses. That’s the high risk nature of leveraged investing. Buying all cash is what many investors have been doing, because you are parking money in a tangible that is less volatile and a little more transparent than other forms of investment. The returns were (past tense) promising. Now it is more of a challenge thanks to a crowded market, but I believe not impossible.

Home prices are way too high in most of CA and other major metro areas, and I would steer clear of anywhere with herd investors. That is of course, unless you think prices will continue with an upwards momentum. Signs are, however, the tide may be turning. My rule of thumb is to aim for a cap rate of 5%. So for every $100k invested I want $1,000 rent a month. The lower price range (+/-$100k) can achieve this but the risk increases. The rent will cover all expenses (50% of income) including management (8-10%) and void periods (5-8%). With a CA budget you can buy multiple homes elsewhere and strive for a diversified portfolio. You will need time, patience, and expect a steep learning curve.

[CA renter]

[quote=Jazzman][quote=bobby][quote=doofrat]

Why do an all cash transaction when interest rates are so low? Looking at interest rates tracking house prices over the last couple of years, the monthly payment seems to have stayed the same, tracking the prices pretty closely relative to interest rates. If you do all cash, it seems you’re paying a premium price that’s premium due to low rates, but not getting the benefit of the low rate? Or is it because the rates on an investment property are too high?[/quote]

because I have the money sitting in a money market account earning 0.01% interest.
I think stock market is a bit frothy right now so don’t want to put money there.
we went to look at 3 properties this past weekend but were not interested in any of them.
will update in the future…[/quote]

My sentiments exactly. Share values are way too high. Bonds can only go one way from here. Cash earns nothing. What else is there? Hard money lending? Not for the timid. Sure you can get a loan, but the magnified gains on the capital you put in can just as easily be magnified losses. That’s the high risk nature of leveraged investing. Buying all cash is what many investors have been doing, because you are parking money in a tangible that is less volatile and a little more transparent than other forms of investment. The returns were (past tense) promising. Now it is more of a challenge thanks to a crowded market, but I believe not impossible.

Home prices are way too high in most of CA and other major metro areas, and I would steer clear of anywhere with herd investors. That is of course, unless you think prices will continue with an upwards momentum. Signs are, however, the tide may be turning. My rule of thumb is to aim for a cap rate of 5%. So for every $100k invested I want $1,000 rent a month. The lower price range (+/-$100k) can achieve this but the risk increases. The rent will cover all expenses (50% of income) including management (8-10%) and void periods (5-8%). With a CA budget you can buy multiple homes elsewhere and strive for a diversified portfolio. You will need time, patience, and expect a steep learning curve.[/quote]

+1

That’s why we paid cash, too. Beats the heck out of any other similarly risky assets/investments, even if one is just saving the 3-4% interest rate on the mortgage.

[Author]

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