[surveyor]

westview thoughts…

It wasn’t a bad neighborhood when I lived there. The Tampico houses are bigger than the Compass Point houses/apartments. Just realize the trade-off with the area – cramped close to your neighbors and really sucky parking.

When I bought in 2001, the place cost $265k. The highest my property assessed at was $520k, but it seems to be dropping now to around $480k or less. Considering I put 5% down on the property when I bought it, it was a great deal at the time. Still, my family was/is growing and I needed more space so I bought somewhere else. My wife and I were actually contemplating buying in Tampico, when it was being built, but they raised the next phase’s price from $300k to $325k and so we were priced out.

My property is in a pretty good location – the common area park was right in front and the driveway did fit a car. Still, I had to hear my guests complain about finding parking when I had my daughters’ birthday parties at my house… And this was before they instituted fines, tickets, and decals for parking.

When I first bought, the two houses beside mine were owned and lived in by doctors. They moved, and the properties became rentals. Let me assure you that the people living in there now are not doctors or comparable income level.

If you are easily peeved by neighbor’s noise, by the parking situation, and the high amount of rentals, this is not a place to recommend.

I have a large family where our minimum get-togethers range in the 20 to 30 person range, so that place just didn’t cut it.

[surveyor]

westview thoughts…

It wasn’t a bad neighborhood when I lived there. The Tampico houses are bigger than the Compass Point houses/apartments. Just realize the trade-off with the area – cramped close to your neighbors and really sucky parking.

When I bought in 2001, the place cost $265k. The highest my property assessed at was $520k, but it seems to be dropping now to around $480k or less. Considering I put 5% down on the property when I bought it, it was a great deal at the time. Still, my family was/is growing and I needed more space so I bought somewhere else. My wife and I were actually contemplating buying in Tampico, when it was being built, but they raised the next phase’s price from $300k to $325k and so we were priced out.

My property is in a pretty good location – the common area park was right in front and the driveway did fit a car. Still, I had to hear my guests complain about finding parking when I had my daughters’ birthday parties at my house… And this was before they instituted fines, tickets, and decals for parking.

When I first bought, the two houses beside mine were owned and lived in by doctors. They moved, and the properties became rentals. Let me assure you that the people living in there now are not doctors or comparable income level.

If you are easily peeved by neighbor’s noise, by the parking situation, and the high amount of rentals, this is not a place to recommend.

I have a large family where our minimum get-togethers range in the 20 to 30 person range, so that place just didn’t cut it.

[surveyor]

Tampico

I believe the area you are looking at is called Tampico. Like most of the Westview neighborhood, it is essentially a large house on a very small lot. The Tampico area is better than the other areas around it and it probably has less of the houses rented than the other Westview areas, but it is still I would say pretty expensive…

There are maybe a couple of kid playgrounds in the subdivision, but there is a tennis court and playareas across the street.

The area itself is not bad, but there are a lot of fast drivers on Westview Parkway. The house is new, which is nice, but you may not like the really small backyard and the being only about 10-16 feet away from your neighbors.

I believe it is Scripps Ranch High School zoned, but the other schools (Hage Elementary and others) are a bit above mediocre, and are San Diego Unified Schools.

There has been a rising crime rate in the area.

I don’t know the specific HOA for Tampico, but I know the neighboring HOA is kind of strict. Not truly nazi, but it is strict. One thing to note: PARKING SUCKS. There are only a few parking spaces available and you cannot park on the street, the street being basically entirely marked as a fire lane. So if you are going to have guests, they will have to fight for parking within or park outside in Westview Parkway (where I passed by this place last year seeing a nice BMW SCRUNCHED because someone rear ended it while it was parked). Because of the limited parking, the HOA has to issue “parking decals” if your guests are going to be there for more than a few days and if they are going to be parking their car there. Oh, and as a resident, you certainly cannot park your car there for more than a day otherwise they will FINE you. So if you think that you can have a couple of people park their car there over Thanksgiving and be fine, well, you are wrong, they have ticketed people over the holiday. Admittedly, this did not happen in Tampico, but in a neighboring HOA, but I can’t imagine them not doing the same policy, considering how close the HOA’s are.

(full disclosure: one of my rental properties is in the neighboring HOA and my previous tenants were always getting nailed for parking because they had their girlfriends/boyfriends over and there wasn’t enough parking in the front of the property so they had to use the guest parking).

Hope that helps!

[surveyor]

Tampico

I believe the area you are looking at is called Tampico. Like most of the Westview neighborhood, it is essentially a large house on a very small lot. The Tampico area is better than the other areas around it and it probably has less of the houses rented than the other Westview areas, but it is still I would say pretty expensive…

There are maybe a couple of kid playgrounds in the subdivision, but there is a tennis court and playareas across the street.

The area itself is not bad, but there are a lot of fast drivers on Westview Parkway. The house is new, which is nice, but you may not like the really small backyard and the being only about 10-16 feet away from your neighbors.

I believe it is Scripps Ranch High School zoned, but the other schools (Hage Elementary and others) are a bit above mediocre, and are San Diego Unified Schools.

There has been a rising crime rate in the area.

I don’t know the specific HOA for Tampico, but I know the neighboring HOA is kind of strict. Not truly nazi, but it is strict. One thing to note: PARKING SUCKS. There are only a few parking spaces available and you cannot park on the street, the street being basically entirely marked as a fire lane. So if you are going to have guests, they will have to fight for parking within or park outside in Westview Parkway (where I passed by this place last year seeing a nice BMW SCRUNCHED because someone rear ended it while it was parked). Because of the limited parking, the HOA has to issue “parking decals” if your guests are going to be there for more than a few days and if they are going to be parking their car there. Oh, and as a resident, you certainly cannot park your car there for more than a day otherwise they will FINE you. So if you think that you can have a couple of people park their car there over Thanksgiving and be fine, well, you are wrong, they have ticketed people over the holiday. Admittedly, this did not happen in Tampico, but in a neighboring HOA, but I can’t imagine them not doing the same policy, considering how close the HOA’s are.

(full disclosure: one of my rental properties is in the neighboring HOA and my previous tenants were always getting nailed for parking because they had their girlfriends/boyfriends over and there wasn’t enough parking in the front of the property so they had to use the guest parking).

Hope that helps!

[surveyor]

more notes

I think everyone here knows how people will often invest in things that they have little to no knowledge about. I have come across real estate investors who can’t even tell me how much cash flow their property makes or are shocked to find out that they have to calculate depreciation!

So I think that by using the ROE calculation above, you can at least have a better idea on how to evaluate properties as to their potential using real numbers and realistic expectations. Collect and analyze the numbers, see how hard the money works for you, and then choose whether or not to invest.

[surveyor]

optimal conditions

By optimal conditions, I mean:

1) You can handle the cash flow (if negative). It is ok to buy a property for appreciation if the cash flow is negative. However, you just have to realize that the location of the property gives you that feature. If you can’t handle it, buy something that cash flows more or go buy in a place where the cash flow is positive. There are also locations in the U.S. which have terrific cash flow but their appreciation is actually negative (the rust belt). You can mix and match properties in order to diversify your real estate holdings.

2) Property is economically rented (meaning that the tenants in there are actually paying rent, not just in there to give the illusion of being fully rented).

3) Per unit cost does not exceed $175k (the lower the better!)

4) Not in a bad neighborhood!

5) Timing the market (if you buy at what you perceive to be a good time to buy into the market).

6) Investor capital. If there are a lot of investors buying in the area, avoid! For example, there was a lot of investors buying in Arizona and Florida and they propped up the prices. If I know a huge amount of investors are going there, I tend to stay away from it.

7) YOUR WIFE. You will need to gauge your wife or significant others’ risk tolerance. You do not want to all of a sudden find yourself facing an angry spouse asking “why did you buy this property?”. If you think your wife might find it too risky, either educate her or buy a “safe” real estate investment.

I’m sure there’s more but that’s all I can think of.

[surveyor]

Tennessee

I’ve heard good things about Tennessee’s real estate market. It’s getting decent appreciation, and there are a lot of good cash flow properties there. ROE’s are running about 30% to even 40% in some properties (which are usually not SFR’s or condos). Even if you run the numbers from the properties listed on loopnet.com, you’ll get 25% ROE’s. I’ve seen cost-per-units there from $30k to $60k. If I had some extra money, I would have bought in Tennessee. Alabama has cheaper properties but the demographics make raising the rent difficult. Tennessee has more room to grow in that capacity.

As for the real estate work, it’s hard the first year or two, and it certainly puts a lot of demand on your time. There are a few people I’ve tried to inspire to get into real estate investing, but they’re the complete opposite – they are way too negative and they see the difficulties instead of the future rewards. For anybody who is curious about it, I would say they should look into it sooner rather than later. In real estate the most important thing is time.

[surveyor]

LR loan reduction

Loan Reduction is the amount of interest that you save by paying back a portion of the principal. So basically multiply the principal paid back in one year with the interest rate. Made an error in that post above, the LR should only be about $110. So the ROE above is actually 13%.
I usually set LR at 0 anyways. It’s so low.

Yes, the more price drops you see, the better it becomes as an investment. Rent will usually go up about 4% or 3% a year though so you usually have to run the numbers once a year to see how it’s doing.

Regarding the difference between an SFH and a condo, there are advantages to either properties. SFH usually appreciate better than condos (being the first to rise and the last to fall). SFH’s are also easier to sell. Condos usually appreciate last and fall first in prices. Condos are also harder to sell, because you are competing with every other condo owner next to you. Because appreciation is what most real estate investors are after, condos don’t do as good of a job appreciating than SFH’s.

It looks like you want to look into real estate investing. You should start reading up on it so that you can position yourself well into the next few years. I recommend Lisa Vander’s book “The Real Guide to Making Millions in Real Estate” but most real estate investor beginner books will do.

I definitely agree with SD Realtor where most of the seasoned investors have left California or at least stopped buying. I still see a lot of novice investors running around buying $600k homes because they thought it was a good rental property (yikes!). I really don’t think San Diego and parts of California will ever really cash flow from now on (but I reserve the right to be wrong).

From my research, North Carolina is actually a negative cash flow location and you will make most of your money from the high appreciation. The real estate cycle there is near the top if not at the top from my observations. Still, it is a lot easier to buy an investment property in North Carolina (where prices are around $200k to $300k) whereas California has comparable prices of $800k. North Carolina still has a decent amount of growth left in it.

So from what I’ve seen:

High appreciation but low to negative cash flow: North Carolina, South Carolina (I have a four-plex there), Georgia, Texas.

Avoid!: California, Nevada, Florida, New York, New Jersey, Arizona (these are the bubble areas).

Cash flow but low appreciation: Alabama, Tennessee, Missouri, Idaho and some parts of Texas.

I’ve been trying to buy some four plexes in Huntsville, Alabama for the past month now, but my realtor hasn’t been sending me any properties (he’s probably keeping the good ones to himself, dangit). The ROE’s I’m getting for area is running around 30%.

But as 4plexowner will tell you, owning out of state is a PITA…

(is it friday yet)…

[surveyor]

So to answer your question:

or is it really true that getting someone else to pay off the borrowed investment capital drastically increase the profit margin? It is like someone paying for the margin to buy stocks while the account holder is reaping all the profit…

Yes, someone is paying your expenses and you are reaping the appreciation/cash flow/tax advantages. This is generally called leverage and it is how real estate can be used as a powerful way to make money.

However, as the calculation above shows, it is not as easy as you think and it requires a lot of knowledge to do.

But your general premise is more or less correct.

[surveyor]

ROE = (CF+AP+LR+TX)/DP

ROE=return on equity/investment
CF=cash flow
AP=appreciation
LR=loan reduction
TX=tax benefits
DP=downpayment

Using your example above (all numbers annualized and assuming 4% appreciation over TEN years)…

CF = (1185*12*0.95-(180+141)*12-2000-11496)=-3839 per year
CF = (yearly income* 5% vacancy rate – tax – assoc. – maintenance – amortized loan amount using 7% interest)

7% to 8% interest is normal for investment property. 6% is normal for owner occupied property. Also assuming that owner will be the property manager (property management fees would be an additional 10%*income hit to cash flow).

AP = (180000*0.04) = 7200

You can only use 4% appreciation if you are planning on holding the property for around 10 years. Otherwise you will have to calculate in 0% appreciation for the California market.

LR = 1562

TX = 180000/27.5*0.25 = 1636
TX = rough estimate! = (cost of property / 27.5 * tax rate)

Sooooooooooooooo….

ROE = (-3839 + 7200 + 1562 + 1636)/36000 = 18.2%

So by real estate terms, it is an ok investment. Cash flow sucks (as does everything in California). You’ll still come out ahead but that negative cash flow will be tough to maintain. Still 18.2% is a decent investment return unless you’re really good at picking stocks. Still there are hazards for owning property for ten years or more.

Most seasoned investors would not buy a property like this because of the negative $3839 cash flow per year ($-320 per month). Unless you are deliberating trying to decrease your taxes, probably not a good investment buy.

The cost of the property at which it would cash flow? $120k.

Anyways if you want to evaluate any property for its investment potential, use the calculation above. If a property goes to around 25% to 30% ROE, it is considered a good purchase (assuming optimal conditions!).

(is it lunch yet)….

[surveyor]

cashflow

I’ve found a lot of properties in those “rebound” cities that cash flow pretty well so the article isn’t that far off.

And isn’t cash flow how a lot of people here are saying how properties should be valuated?

[surveyor]

For the renting-out-the-house idea, if you take the lowering of your taxes into consideration, it could break even or at least minimize your negative cash flow. Also, with you renting out your house, you get access to all sorts of tax deductions.

Rough estimate, assuming you got your house for $500k, your income tax rate is around 30%, you could lower your income taxes by around $500 or more.

=shrug= Just a thought.

[surveyor]

FWIW

CNN had a story on how some small business and corporations are selling more product overseas because of the weak dollar, narrowing the trade gap. So it’s not all bad.

[surveyor]

actually i think rental prices will rise in the short term because of all of these people leaving homes and becoming renters. Yes, the empty home will become a rental at some point, but there will be a significant lag. The longer the lag between the homeowner leaving the house and the house becoming a rental, the more pressure on the rental price. It may take time for a bank to find a buyer/investor who will purchase the property and bring it to use. Combine that with the possible difficulty of obtaining financing for the property, and I see at least some pressure on rental prices.

Bottom line, these thousands and thousands of foreclosures are not going to be turned into rentals overnight (which is the scenario where the foreclosures would directly lower the price of renting).

The smart (and more experienced) landlords do run a credit check. In the beginning they may not want to rent to those who have a bankruptcy or some sort of financial problem, but will have to make considerations for it as time goes on. AS long as the tenant can document his income, it shouldn’t be a big problem, though.

[surveyor]

sdr:

my usual afternoon beverage is now all over my monitor because of your comment. kudos.

on a related note:

is it me or are some of the posts starting to sound like the financial equivalent of hypochondriacs.

people, people, it will be YEARS before the doomsday scenarios play out, if at all! certainly there will be short term pain for those some, but the U.S. of frakkin’ A. ain’t going anywhere for awhile.

[Author]

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