It is probably not too surprising that the asking rates for these rental properties - all actives pulled off the MLS - are far below what the monthly carrying costs would be if they were instead purchased with non-risky loans and 20% downpayments.
These properties also are intriguing since it doesn't seem likely that, even if successfully rented at their full monthly asking rates, any would collect nearly enough monthly income for the landlord to cover their carrying costs.
In essence, these properties would be generating negative cash flow for their owners while the tenants would be enjoying full, temporary use of them at a rate well below the cost of ownership. Not a good short-term picture for the landlords.
How then, are these landlords making ends meet? Unless you believe these properties were either purchased with cash or incredibly large downpayments, exotic loans are likely in play, since they could substantially bring down the carrying costs (for a while at least).
30962 Via Mirador, SJC, 92675
Asking rental rate: $5,900
Purchase price: $1,750,000
Purchase date: 5/12/05
Est. monthly holding costs*: $10,582
$ "saved" per month by renting: $4,682
179 Mcknight #4, L. Beach, 92651
Asking rental rate: $1,900
Purchase price: $720,000 (was this for the full complex or one unit?)
Purchase date: 5/18/2007
Est. holding costs: $3,893
$ "saved" by renting: $1,993
1911 Colina Salida Del Sol, SC, 92673
Asking rental rate: $4,100
Also for sale: $1,098,000
Purchase price: $1,125,000
Purchase date: 6/29/2006
Est. holding costs: $6,626
$ "saved" by renting: $2,526
*To calculate the monthly holding costs for the landlord, we assumed a very conservative 6.5%, 30-year fixed interest rate loan and a 20% downpayment. Property tax is based on the amounts at Zillow. HOA dues are based on those reported by comparable properties for sale, where available. If not available, no HOAs were included. Insurance was also not included. We assumed the landlord did not live in this property recently and for long enough to quality for a mortgage interest tax deduction.
Monday, December 17, 2007
How do they do it?
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4 comments:
Is the LB property for rent at $1900 per month or per week? If it is per month, then sign me up!!!
PS- I love your blog
Cher
The value of a property can be defined by how much rent it generates. The listings shown are good examples of a market out of balance by nearly 50%, maybe more in the case of the Laguna property. I've been scanning for investment properties since mid-year '08 and have found price completely out of whack with rent received. A goodly number of the investment properties on the market seem to be baby boomer holdings from way back that are hoping to hit a retirement home run. I can't blame them for that, but, I also can't buy them.
Making an investment pencil out in Orange County is a challenge. Most investors we have worked with in the last few years have had to put down at least 50% to make the numbers work. Some properties today are in the 40% down payment range.
FYI, your SJC property recently refied for $1.25M. Since it was recent, it probably had a higher rate attached. That will raise your projected costs, but the lower loan amount will likely even that out. The LB property is for one unit and has about $550K in loans on it. The SC property has about an $850K loan on it.
Some "investors" are not of the flip variety. They are folks who have money and need a place to park it and maybe will get the benefit of a loss come tax time. That may be this group here. They may be planning to hold on to these properties indefinitely.
straight digs - You make some very good points, and thanks for the info on the loans.
The investors I know have long since given up trying to make a property cash flow here. As you said, the downpayment required is too high, so you are tying up too much capital without enough of a pay off.
Long-term owners who purchased properties before all the craziness are in a great position, though.
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