Your House Doesn't Add Up The Way You Think

[tobster1911]

Originally posted by kjb
Wayne's point is that people are renting it for a loss.

/ Johan

Why don't rental rates go up in CA with housing prices? What is the reasoning for keeping rental rates artificially low? I guess I just don't understand CA or the mentality of people out there....

Like Kurt said, here the rent is at or slightly higher than the mortgage payment of the house. If you want a lower rent, you have to live in an apartment or townhouse. Still the rent is based on what the owner is paying.

[turbo6bar]

I'm not so sure it's just an east-west coast thing. The other day I was pulling up some properties and the search engine pulled up a property in Gwinnett County Georgia (suburb of Atlanta). What caught my eye was the fact the property was listed twice; one listing was as a rental and one was a for sale listing. For sale price was $189k. Rent was $1195/month.

I use 25% of rent to cover expenses, taxes, insurance, vacancies. At $189k, the CAP rate is 5.6. Not so hot. Then, if you look at cash flow, the property is AT very best neutral, and more likely negative or very negative (especially in this soft rental market).

Yesterday, I saw a similiar deal on Craigslist: Asking $189900 or rent for $1300/month. My brother has a slightly smaller house for rent at $1195. The neighborhood is great and the home is in excellent condition, but 2 months of ads and showings produced not a single good applicant (in fact, only two applications total).

I truly believed the flyover states would escape the melee, but now I'm realizing this may be the beginnings of something spectacular. I am coming at this from an investment standpoint, though. Conservative homeowners, particularly those owning free-and-clear will, for the most part, be fine just fine.

[turbo6bar]

Originally posted by tobster1911
Why don't rental rates go up in CA with housing prices? What is the reasoning for keeping rental rates artificially low? I guess I just don't understand CA or the mentality of people out there....

Supply vs demand. Plus, rental prices are based on real incomes. Prospective tenants don't get to use silly stuff like stated income, negative amortization, and teaser rates like homebuyers might.

[Porsche-O-Phile]

Originally posted by tobster1911
Why don't rental rates go up in CA with housing prices? What is the reasoning for keeping rental rates artificially low? I guess I just don't understand CA or the mentality of people out there....

Like Kurt said, here the rent is at or slightly higher than the mortgage payment of the house. If you want a lower rent, you have to live in an apartment or townhouse. Still the rent is based on what the owner is paying.

It is impossible to find a situation where you can buy a duplex or other rental property and break even based on rental revenues right now. Impossible. I've looked. Even assuming 100% occupancy, you simply can't get the numbers to pencil out.

If rents rise, people will not rent, they'll simply take an I/O "sucker" loan and "buy" and the tenants will be lost and you'll end up with "revolving door" syndrome, high tenant turnover, high vacancy rates and a bunch of people in your property that don't give a damn about it and are just using it as a temporary place to sit until they find a place to go as a "buyer". From a landlord point of view, this is a disincentive to do so.

The ONLY thing that's going to solve the housing problem is for property values to go down. If this happens, rents and mortgage prices go more into sync., people CAN buy rental properties and make the numbers work again, etc. It doesn't resolve the problem of tenant turnover, but tightened lending standards will. People will rent at competitive prices in order to build their savings until they can legitimately buy (note: it's not in quotes here - deliberately) under more traditional lending guidelines.

Until then, I just don't see how the problem gets fixed. You either rent and pay a price that doesn't pay the landlord's mortgage or you "buy" and pay a price that pays your mortgage (much higher) but still gains you nothing because you build no equity. Until the nitwits that run this show figure that out, the problem is going to be slow to fix.

[the]

My brother lives in California, he sent me some info on duplexes and 4 plexes for sale in some "working class" areas (Anaheim, Santa Ana) that he's looked at.

I told him he's nuts. These are old (60 years or so) generally neglected buildings in questionable areas (not horrible, but not great, either).

They are very similar in rent and asking price. While the asking prices are down from last year, they are still high. Generally, they are asking around $800-$900,000 for a 4plex that generates maybe $50,000 in rent revenue.

Seems like a lot of headache being that type of landlord, esp. when you are losing thousands each month.

[Porsche-O-Phile]

Precisely. I've looked at no less than 20 multi-unit buildings and even with 100% tenancy and a <5% per year contingency for maintenance you STILL end up in the red by about 10-15% per year (varies, but it's always SOLIDLY in the red). If a "big ticket" item comes up like a roof replacement or HVAC issue or something like that and you could end up in a world of hurt VERY quickly.

[Moneyguy1]

THis reminds me of the "debates" about global warming....

Depends on where the poster is geographically located.....

[gr8fl4porsche]

I sold some rental property last year. If the new owner financed 100% of the sale price, the rents would not make the monthly payment much less pay for water, sewer, trash, etc.

[kjb]

Originally posted by tobster1911
Why don't rental rates go up in CA with housing prices? What is the reasoning for keeping rental rates artificially low? I guess I just don't understand CA or the mentality of people out there....

There's nothing artificial about the rental market out here. In a sense it's less artificial than the housing market since most leases are renegotiated yearly. Houses are only priced by the market when they are sold, which tends to happen less often.

So here's something that doesn't make sense to me (on-line source):

The median house price in Palo Alto is $1.2 million, with an average of 750 properties sold a year. The 60,000 resident population grosses a median household income of $90,000 annually

To get into the $900k starter homes, you have to make significantly more than the average guy. Are prices held up by the fact that so few properties change owners each year?

/ J

[Rot 911]

Originally posted by Moneyguy1
THis reminds me of the "debates" about global warming....
Depends on where the poster is geographically located.....

Same with buying rental property. In 2005 I bought an older house converted to 3 apartments. Total investment with improvements is $64,000. Total rental income is $970 per month. Last year I bought another old house converted into two apartments. Total investment was $55,000. Monthly income is $600.00. In both instances the rental income covers all mortgage/insurance/tax expenses with money to put aside for repairs.

[jyl]

Interestingly, rents are rising, at least at the macro data level. In core inflation (excluding food and energy), the component that is causing the most inflationary pressure is "shelter" i.e. rents.

AFAIK and IIRC, shelter as measured in the inflation data does not include RE values, so during the RE bubble you can argue the inflation data under-stated real inflation. Now that the RE bubble is deflating I wonder if the inflation data is over-stating real inflation.

I assume (don't know) that rents are rising because fewer people are buying, so more demand for rentals. Eventually I'd think more of the unsold RE gets converted to rentals (isn't this happening w/ condos?) and the supply of rentals increases.

Wayne, I had a similar rental situtation in Berkeley. I was renting a 4-bdrm 2500 sq ft house in the best part of the North Berkeley Hills, that sold in 2003 for $850K, my rent was $2,300/mo. The owners lived in FL and planned to renovate, remodel, expand, etc the house after we left, as their dream retirement home. They figured on doing everything for $250K. As I lived there, it became obvious they were going to get screwed. They got started o the work after we left, and last I heard the foundation work alone was going to be $150K+ and the total project was looking like well over $500K. In that area of CA, a high-end kitchen remodel easily costs $100K, it is simply ludicrous. At the peak, Zillow.com used to say that property was worth $1.4MM (totally wrong, since Zillow doesn't know about the condition of the property), now it says $1.1MM, the owners' paper gain is rapidly disappearing.

[nostatic]

I finally got part of my divorce settlement and the ex suggested I think about buying a house in Santa Monica. I'm looking to move there anyway and rent an apartment so my son can go to a decent public middle school. Right now I'm paying $1600/mo for a 2br apt in a reasonable area. In SM I'l probably be around $2500/mo. I did a quick search in Santa Monica for stuff to buy and a crappy condo in the worse part of town was $600K. A decent one was $800K. With 10% down (all I can afford), I'm looking at a $4500/mo mortgage payment. No f*cking way I can swing that. The ex argues that I get money "back" from the taxes, but add property taxes, upkeep, etc. I don't see how it makes ANY sense for me to buy a house in LA right now. MAYBE if the area corrects 30% or so. But barring that, I'm going to pay off some lingering bills so the only debt I have is the car and invest the rest of it, waiting for a better time.

[Porsche-O-Phile]

Originally posted by nostatic
I finally got part of my divorce settlement and the ex suggested I think about buying a house in Santa Monica. I'm looking to move there anyway and rent an apartment so my son can go to a decent public middle school. Right now I'm paying $1600/mo for a 2br apt in a reasonable area. In SM I'l probably be around $2500/mo. I did a quick search in Santa Monica for stuff to buy and a crappy condo in the worse part of town was $600K. A decent one was $800K. With 10% down (all I can afford), I'm looking at a $4500/mo mortgage payment. No f*cking way I can swing that. The ex argues that I get money "back" from the taxes, but add property taxes, upkeep, etc. I don't see how it makes ANY sense for me to buy a house in LA right now. MAYBE if the area corrects 30% or so. But barring that, I'm going to pay off some lingering bills so the only debt I have is the car and invest the rest of it, waiting for a better time.

You and me both brotha'.

RE is friggin' toxic right now. I'm glad I looked at it, but EXTREMELY glad I reached the right conclusion before doing something foolish out of panic.

[turbo6bar]

When subprime and Alt-A problems force aspiring buyers to rent, there will be price pressure. Also, I've seen reports of upward rent pressure in select markets (NYC, tight urban zones in California). Interestingly, landlords in some flyover states have reported being able to raise rents at modest rates (2-4%/yr) regularly over the past decade.

On the other hand, landlords in most markets are still complaining about the soft conditions. Many who've been around for a long time say it's the worst in several decades. The rental vacancy rate drop in late 06 indicating the market might be turning better. However, the last quarter turned worse, putting the rate at a cyclical and historical high.

Like others, I believe unsold speculative inventory will revert to rental inventory, placing some downward pressure on prices. This activity will delay inevitable [i]housing[/b] price declines until amateur landlords come to the realization renting property at a loss and putting forth great effort is a loser's game.

In the end, I know rental real estate is a great way to grow wealth and build and income stream, but like all things nice, good and bad times are to expected.

[campbellcj]

LOL, even with the 'corrections' thus far, we've roughly doubled in 4 years. I don't really care much about minor market fluctuations, as moving ain't gonna happen for another year or two, and hopefully will be discretionary, not a forced/distressed situation.

Plus, I figure it's kinda tough to live in a stock certificate

I suppose I can also add that, as far as I'm concerned, being a landlord (on the management side) ranks up there on the fun spectrum with rectal exams or tax audits.