Property Analysis November 2008
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November’s analysis is being posted a week early. Next week I’ll be off, eating delicious turkey and stuffing for Thanksgiving.
Today I venture into Southern California. A condo is listed at $133,000. In case the ad is missing by the time this goes to print, here are the stats.
- An REO property in Long Beach, California
- Three bedroom, 1 bath at 994 square feet
- Covered, Gated Parking
To use the business modeler, we need the asking price and rent. No rent is listed so I’m going to use rentometer.com. For this neighborhood, RentoMeter.com tells me that $2000/month is a decent price for rent. Yes, it’s true I could go higher. But I want to be conservative with my estimates.
Using the business modeler, Scenario 1 shows a cashflow of $248/month.
A few comments about Scenario 1:
- This doesn’t include HOA fees.
- Room for negotiation
A real estate agent I know also runs a Property Management (PM) company in Long Beach. He says that in Long Beach PM companies charge 5%. Not 10%.
I’ll rerun the modeler using the following changes:
- Asking Price reduced to $123,000
- Property Management at 7% (figure conservative)
- Other increased to 20% (for HOA fees).
Scenario 2 shows a cashflow of $182 per month.
Is this the best investment vehicle for our money?
Just because we’ve achieved positive cashflow doesn’t mean that real estate is the best investing vehicle. If you put $50,000 into a property and only get $100/month in cashflow, that is an ROI (Return on Investment) of 2.4%. You would be better off putting the $50,000 into a tax free municipal bond at 5% which would provide $208/month.
Verifying the cashflow from a bond or money market account is straight forward. Use the down-payment of $12,300 at 5% and divide by 12 months. Cashflow is $51.25 per month. Significantly less than our $182 per month.
Another quick method: figure out the return on this property and compare it to the bond’s ROI. Take the monthly cashflow and multiply by 12 months then divide by the initial investment. $182/month x 12 months divided by $12,300 produces a return of 17.7%.
Looks good.
Pitfalls
This property works if:
- Asking price is reduced
- Rent is $2000/month
- HOA fees are about $200.
- The condition of the condo doesn’t require major renovations.
It’s very realistic the agent would accept a $10,000 drop in the price. The property has already been written off the banks’ books. Negotiation may not be difficult.
Rent is contingent on neighborhood. If the neighborhood isn’t desirable, neither will the rent.
HOA fees were assumed at $200/month. Is this accurate?.
True the property is REO. But since properties must be livable in order to be financed, we can assume the basics of the condo are in decent shape: such as electricity and plumbing. Will the carpet have to be replaced? Are all the appliances present and accounted for?
Summary
With the cashflow at $182/month and an ROI of 17.7%, the property warrants further investigation.
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I find that rental amount hard to believe. That would make the GRM 5.5, which is really low and would be a great bargain. If you could buy that for $133k and get $2k per month, I would buy it. Well, I guess that’s your point based on the cashflow. But I wonder how realistic that rent really is. It seems like it’s still hard to find a property that cashflows yet.
@BuyNHold: You bring up a good point. Rentometer.com doesn’t differentiate between houses, condos and apartments. Nor does it ask for the number of bathrooms the unit has. In our analysis, it is lumping together 3 bedroom, 2 bath houses with 3 bedroom, 1 bath condos.
But that’s why I always lean towards the low end of Rentometer.com
From here, further analysis with PM companies or Craiglist would be in order to verify the rent amount.