Making these "assumptions" is a big mistake. Properties need repair for lots of reasons. Tenants damage them, burn holes in the carpet, scrape, chip, in general wear out paint, stuff things down the toilet and other plumbing. In fact, a huge percentage of ongoing repair has to do with plumbing, leaks, cracks, parts wear out. Wear and tear over time creates what we call "deferred maintenace". In other words, there are certain capital improvements that you create set-asides for, for that future time when you are required to replace it. For instance, the furnace and/or AC. These items might last 20 years....but, they wear out a little each year....so a set-aside for the ultimate time when they would be replaced is called deferred maintenace. When you reach the date when your furnace shoots craps you have the dough. Then, the tenant gets laid off. The first month he's late, and doesn't pay. You evict. This may require attorney fees depending on you and the state you are in. You don't receive the rent while you're evicting. If your tenant is "well-educated" there are ways to delay eviction. While you're evicting him he does damage. After you've evicted him he still doesn't leave. You have to wait for the sheriff to set him out. When you finally get posession you discover he got mad at you during the eviction and punched holes in the wall...or worse. After the repairs are done you advertise...more money. And all the while you're receiving no rent. Snow-removal, lawn mowing, bookkeeping. You aren't going to do it all. In fact, I don't do much of it at all. Therefore, for my properties, what ends up being fairly typical over time, including deferred maintenance, is 35-40% for taxes, insurance, vacancy, bad debts and checks, repairs, and all other expenses. For this net rental amount you then deduct your p&i payment. In your case, you're newer townhouses. This is a property type I've never cared for. Nonetheless, you have an association dues that I didn't see you mention. And again, taxes. Maybe insurance is included in your association dues...but you still may want liability insurance. And in my case, I didn't buy real estate to get a job called painting, lawnmowing, snow shoveling, etc. I hire these things. I also hire plumbers, electricians, etc. Now, I wield some weight in terms of what I pay....but still, it's more expensive than doing it yourself. I figure labor is maybe 70% of the total cost of a job. Some thing to think about. My guess is if you re-run your numbers using more realistic figures you may be at a negative cashflow. In my case, I don't buy negative cash flow....period. I buy properties cheap, at a big discount, in distressed sales. Most of the time I have to rehab them (which I hire out). But the result is that I have large equity in the property before I start. This also causes a higher cash flow. OldTrader PS. Oh by the way, hard to screen the tenants as effectively these days, since most of the good tenants have bought a house! You're faced with the leftovers.
Its interesting to see the two different perspectives on being a landlord. The great "returns" and the "downside" as outlined by old trader. So, I really don't know what to do. But lets take a different appproach. I want to buy a townhouse (free standing) for nearly all cash. I think that could make sense in late 2005 or 2006. But, my ultimate question is, does a smaller down payment and a larger loan make more sense? Also, I am missing something or are A.R.M. loans the ultimate ticket to bankruptcy? I saw one of these being advertised to affluent (over 1mil) buyers as the "intelligent" choice to finance property. (I am reverting to the frugal Eastern Europeans again in thinking of "paying back" a home loan)
question for the so cal guys if you had caught the bulk of the move on your property and planned to stay there..... assuming you had a ARM at 4.5% would you now take the recent pullback in long term rates and pony up to getting a fixed 30 year at 5.32%
doh! http://www.thestreet.com/_tscana/comment/detox/10199412.html "But in some ways the Fannie mess is much worse than any of the big recent corporate scandals. Fannie betrayed public trust on a massive scale. And its decline into accounting scandal endangers the health of the U.S. housing market. Fannie was set up by a congressional charter to provide liquidity to the housing market. It moved way beyond its main business of guaranteeing mortgages to buying them and holding them on its books. It now has over $900 billion of mortgages on its books." also: "The agency took particular issue with the way Fannie accounts for derivatives, which are financial instruments the company uses to insure itself against adverse movements in interest rates." The '87 crash had a political catalyst rooted in currency / trade issues -Baker's belligerent comments re letting the dollar fall. The crash was exacerbated by 'portfolio insurance,' as institutionals shorted more into the carnage. The mass hedge backfired. Kerosene on the fire. Fast forward to today. We've got the trade imbalance and the currency issues. And this: Fannie Mae, along with countless other CMO players, shorts treasury derivatives en masse as a hedge against the risk of rising interest rates. Kind of like... portfolio insurance.
http://piggington.com/ "12.15.04 - The SD Union-Tribune: Not Even Trying Any More "Ah, the Union-Tribune never fails to disappoint. Their latest article is, even by their own lofty standards, positively brimming with the kind of doubletalk and tortured logic that we've come to know and love. So sit back, grab a steaming mug of cocoa (or, in the case of the Professor, absinthe), and have a gander at this week's sampling of analytical ineptitude. Right out of the gate we are told: "Last month's median for resale homes stood at $515,000, compared with the all-time high of $525,000 three months earlier. It was the first time since 1998 that the median price for existing homes had dropped three months in a row." DataQuick analyst John Karevoll explained the three-month downturn as a normal late fall and winter event, with prices in November and February typically lower than those recorded in August. Now, I'm used to the UT writers contradicting themselves, but usually not within the same article, and almost never within two contiguous sentences! But there you have it: the three month price decline is a normal seasonal phenomenon... that hasn't occurred for 6 years! Thanks for clearing that up. Later, after Karevoll waxes rhapsodic about the housing market's state of "divine equilibrium," he displays his market-timing acumen by stating: "We keep looking for signs of a turn, and we're just not seeing it." Let's see... for months now, prices have been declining, inventories rising, sales slowing, and time on the market lengthening. If only there were some sort of sign that the market is turning! Later on they inexplicably quote some random Carlsbad real estate agent named David Asbury, who trots out our old favorite: despite acknowledging a drop in demand, he assures us that everything is fine because "Carlsbad remains a desirable place to live." Looking at the home prices, it must be about three times as desirable as it was in the mid-90s. All we need is for it to keep getting 25% more desirable every year and we can keep minting millionaires! Could the UT possibly do anything more inane than quote (for the billionth time) some pseudo-expert assuring us that the laws of economics have suddenly ceased to apply to San Diego because it's sunny here? Why, yes. Mr. Asbury has this to add: "I think we're going to see, after this winter, a lot of people moving out here again, especially if the Chargers go to the Super Bowl." Someone consult the archives... if I'm not mistaken, the Union-Tribune hit a new low! Like I said, they never disappoint."
December 13, 2004 Foreclosures.com: California Home Sales Volume Falling; Corrections to Follow? SACRAMENTO, Calif.--(BUSINESS WIRE)--Dec. 13, 2004--Foreclosures.com, a northern California investment advisory firm specializing in distressed property, reported today that falling sales volume in both northern and southern California could be a harbinger of a long awaited price correction in overheated Golden State housing markets. "The affordability issue is finally coming home to roost," said Alexis McGee, Foreclosures.com president. "A survey by the Public Policy Institute of California released on November 18 showed that 24% of residents are considering leaving because of high housing costs, and 31% say that housing costs put a financial strain on their households today." Ms. McGee added that declining prices, and nonexistent real income growth would collide with rising interest rates on adjustable mortgages in 2005 to strain many household budgets to the breaking point and create an increase in mortgage defaults. Rates for the benchmark 30-year fixed rate loan have dipped slightly, but Ms. McGee said that economic indicators point to rates going up in the near future and staying up. "Rates dropped recently because heavy foreign buying of the 10-year Treasury note has pushed yields down, but we expect that to slacken as the dollar stabilizes. Also, we saw strong corporate bond offerings in the first week of December. That means businesses are converting short-term obligations to long-term debt. Combined with the refinancing of the deficit, that means increased competition for dollars in the credit markets." She went on to say that a 13.3% year over year drop in sales volume in southern California and a 4.7% decline in the Bay Area is the first sign that housing markets are beginning to correct. "In Orange County, the median price has dropped from $600,000 last May to $532,000 in October." Ms. McGee added that there is evidence that the high end of the housing market leads the rest of the market in both upturns and downturns. "In the Sacramento area," she pointed out, "The inventory of homes above $750,000 has jumped 24% year over year to a 7.5 month supply. That's a sign of a shift from a seller's market to a buyer's market." Foreclosures.com has been tracking foreclosures and assisting investors since 1992, and serves markets in California; Phoenix, Ariz.; Las Vegas, Nev.; Chicago, Ill.; New York metro; and the state of New Jersey.
www.hahnscorner.com "Market comments on Wednesday morning, December 15 We are approaching a very important inflection point in the equity markets. Euphoria and greed surrounding the year end Santa Claus rally are taking the major market indices up, as the momentum indices diverge dramatically. This is a major warning sign for equity share holders! Things are not as good as they seem. The foundation of the US economy is rotten, based on the twin record deficits. Only the money manager imperative is driving stock prices into the end of year qualifying period for their million dollar bonuses. After December 31, there will be dumping of accumulated positions. This is assuming the absence of an intervening external shock. Greenspan thinks he has a plan to remove accommodation at a measured pace. The problem is the measured pace is slower than the growing inflationary pressures. The US dollar and gold prices on this Wednesday morning are reacting to Greenspan's slow moves to stem inflation. If he moves slowly enough, monetary accommodation could actually increase at a time when accommodation should be withdrawn. Wall Street dreams of another stock market bubble, but all of the Greenspan generated asset bubbles have or will burst. I continue to believe it will be a much worse energy price shock than expected that will burst the real estate bubble and the re-emerging stock bubble. This most likely explains why the long term bond market is so very strong in the face of rising inflation. The prospects for stagflation are real. The flight to safety in bonds is a rational move. Use this Santa Claus rally to unload any and all high beta stocks in your portfolio. Take the frothy behavior as a sign of a nearby market top in stocks. Helen has a major time projection for the last days of December. That should bring in a major cyclical top. Easily the most important news this morning was the report of an audio tape from Osama bin-Laden, in which he called for an uprising to overthrow the Saudi kingdom. He suggested attacks be made on oil facilities. One should take this warning seriously. The financial media are burying this news. OBL and al-Qaeda do not need to attack on American soil. The economic impact of a major disruption of the flow of crude oil to the western world would do more damage than a nuke explosion in New York City, and that is saying a lot. The Bush administration support of the House of Saud is one of the reasons we have an occupation army in next door Iraq. Don't be short the oil market."
We got a Housing Shortage for future Americans Although I consider this newspaper a rag, it does provide some form of leasure financial entertainment.
This chart is true...and it shows VERY long term demand. This goes along with exactly what Billbuild and others have been saying, that in the very long term they believe in real estate and are bullish. I myself own two homes and am keeping both. It would clobber me to sell the rental and I only paid 86k for it. I have weathered two other "haircuts" since I have owned it. But in the shorter term (ie:a single decade, etc) real estate can have local bubbles and get ahead of itself, and ahead of the longer term trendline. If the longer term trendline shows wages, population, and housing starts all going up about 1-3% a year....and then suddenly for a couple of years it goes nuts (like now) and goes up 25% a year for a few years....THAT IS A BUBBLE! That is the reason your press releases on the other thread show record earnings...we are in a bubble! Back to your chart. I wish I had copies of 1989 and 1990 Los Angeles Times. At least twice a week they would gush about how perfect California was, how the climate was a huge draw, how the Pacific Rim area would attract a huge Asian population (remember the displaced Hong Kong folks?), how this time it was different, how it would never go down blah, blah, blah. REAL ESTATE WENT DOWN 30-40% IN MY NEIGHBORHOOD BETWEEN 1990-95 DESPITE CHARTS, ECONOMISTS, REALTORS, GREENSPAN, AND THE WONDERFUL WEATHER. Manias swing both directions, what people embrace today they can eschew tomorrow. This goes for Pokemon Cards, Cabbage Patch dolls, Krispy Kreme and Taser stock, and houses. Manias will be with us forever and ever. Only the foolish never learn. This parabolic chart says it all Convert. Period. If you think this chart is going to climb forever or simply level off you have some great stuff in your crack pipe.
That's the ironic thing about bubbles... the positive fundamentals used to justify them are the same positive fundamentals that enabled bubble conditions in the first place. It starts with a good thing (or a hidden cause that is misattributed to a good thing). You have to have a compelling story to create the necessary irrational exuberance (and sustain it as valuations go sky high). Bubbles are based on extrapolation of trends that were once reasonable but became grossly distorted over time as willful blindness and irrational greed kick in. For those who see no brake, what would an unabated boom look like five or ten years on? Santa Barbara zip codes averaging $6 million per residence? Cleveland Townhouses at $500,000 a pop? Average mortgage four times the average rent, new housing starts from sea to shining sea? Everybody and their brother six figures deep in HELOCs with no end in sight? Does that math add up? But hey, we don't need to worry because "there are no shocks," interest rates never rise quickly, currency crises never happen, credit induced expansions never end badly, and no one ever gets greedy or stupid. Right.