Monday, March 30, 2009

Recent Investor Sales

It has been heavily reported lately that investors are returning to the Sacramento marketplace. Unlike the specuvestors of the bubble years, these investors are banking on rental income, not appreciation, as their primary source of profit.

I used some fairly best-case assumptions for valuing these deals. This includes no financing costs (100% cash deal), 1% property tax, 6% property management fee (minor maintenance included), $100,000/year gross income for the investor, 100% occupancy, and they get their asking rent.

So how are these deals working out? Judge for yourself:

7442 St. Tropez Way: Asking rent: $1250. Price paid: $163,760 on February 2, 2009. Price to rent ratio: 130:1. After tax ROI for first year: 5.9%

8474 Sunblaze Way: Asking rent: $1450. Price paid: $430,000 on June 20, 2008. Price to rent ratio: 297:1. After tax ROI for first year: 2.8%

1416 Lockhart Way: Asking rent: $1650. Price paid: $292,000 on May 20, 2008. Price to rent ratio: 177:1. After tax ROI for first year: 4.5%

1849 Acari Ave: Asking rent: $1250. Price paid: $161,500 on November 7, 2008. Price to rent ratio: 129:1. After tax ROI for first year: 5.8%

9108 Jonell Ct: Asking rent: $995. Price paid: $216,000 on January 16, 2008. Price to rent ratio: 217:1. After tax ROI for first year: 3.8%

Are these returns any good? I guess it depends on how you like to spend your time. It's tough to get 6% from any passive investment these days; the 10-year T bill is yielding 2.7% right now. Personally, any active investment that yields less than 5% per year is just not worth it, so I wouldn't be a landlord at these returns.

18 comments :

Anonymous said...

How many real estate investors actually pay taxes on their rental income? From my experience as a renter, I'd say that a large majority are taking steps to disguise their rental income. Take away the taxes and it significantly increases your ROI.

Max said...

Take away the taxes and it significantly increases your ROI.

Yeah, but that's impossible to predict. Banking on tax avoidance is a pretty short sighted investment strategy in any case.

Anonymous said...

good rule of thumb is 100 X monthly rents is price to pay for property in question.

smf said...

First of all, some of these rentals include utilities...

Second of all, none are in really good areas...which leads to a third point...

...maintenance is not taken into account. It takes a small repair to wipe out the proftis for an entire year.

I can guarantee that the majority of these saps are still speculators, not in it for the long run but just till the 'market comes back up'.

Max said...

I can guarantee that the majority of these saps are still speculators, not in it for the long run but just till the 'market comes back up'.

What's worse, I doubt their motives are even clear to them. There are literally thousands of houses for rent on Craigslist in Sac right now. The asking rents seem to have more to do with the level of pain the owner can take, rather than what the market will pay. Would you pay $1500/month to live in Meadowview?

Husmanen said...

Max, great post. I will have to revisit some of my homes I track to get the last sales price and see if they have ANY positive ROI (EDH & Folsom).

I remember one I did on averagebuyer's blog in EDH that was negative about $500/ month I believe.

Funny how concepts seem to spread, Dr. Housing Bubble takes up the same issue as well as future median increases.

http://www.doctorhousingbubble.com/

Anonymous said...

all the juice behind real estate investing has to do with incoming rents generated off of leveraged purchases. all cash deals are not any better than parking your money in a dividend paying fund or reit save for the diversification factor. until we see a return of NOO funding for prices within reason, or structured investor-to-investor deals, there really is not a lot of upside at this point.

patient renter said...

I can guarantee that the majority of these saps are still speculators, not in it for the long run but just till the 'market comes back up'.

I'd have to agree, 100%.

Max said...

all the juice behind real estate investing has to do with incoming rents generated off of leveraged purchases.

I agree. The purpose here was to look at best-case scenarios to see if they made sense. Tax benefits notwithstanding, these deals look like a waste of time to me.

When do the banks spin off all the REO into a REIT and rent it out? Isn't Fannie doing something like this right now?

patient renter said...

When do the banks spin off all the REO into a REIT and rent it out? Isn't Fannie doing something like this right now?

Yea I think they're working on it, but Fannie doing something like that would be for totally different reasons than any other lender doing something similar - I don't think it works out, as you've shown.

Darth Toll said...

There was a piece on KCRA "news" yesterday that talked about the bidding wars for foreclosure properties and that many are getting eight or ten offers a piece. Supposedly these are "investors" that are bidding against each other. So if this is remotely true, and is not another Realtwhore planted story, what is the motivation? Yes, prices are much lower than they were two years ago, but do the numbers make sense as an investment? The data in Max's post shows that the numbers do not make sense.

Don't get me wrong, I said a couple of posts ago that there is a window of opportunity here for someone that wanted to buy before rates skyrocketed, and I stand by those words. But I was thinking more for an owner occupied residence, not as an investment. Median prices in Sacramento could well bottom below $100K before all of this is over (2012) but you will need cash bucks to buy outright.

Here is a classic chart showing bubble psychology:

http://www.irvinehousingblog.com/wp-content/uploads/2007/06/bubble-psychology.jpg

Is this still just the Bull trap? If so, we've got a long ways to go. I don't believe we've seen anything remotely approaching despair - at least not what I would consider despair. When I see stockbrokers jumping out of windows, (or whatever the Real Estate equivalent is) then despair has come. Probably we're somewhere in capitulation.

Tom Stone said...

I love the assumptions of %100 occupancy,stable tax rates and low maintenance costs.

Wadin' In said...

Well, things are getting better for investors. I rented a house in November 2006 for $2,000/mon. The owner paid $720,000 for the place in April 2006 and I calculated his carrying costs at $5800/mon (PITI, Bonds, HOA, w no mngt or maint).

Of course he let it go back to Countrywide in 2007 and I was evicted!

Wadin' In said...

Oh, and BTW, the same house today sells for $300,000 and rents for $1800/mon!

Husmanen said...

Wadin' In. Your rental comparison pans out with rental parity (PITI).

An overshoot, decrease in rental rates etc can change this equation but things are moving in the right direction and the markets will correct.

Your landlord said...

Laughable.. you all concur with this guy?!

Only one sale he posted is a recent one.

I like how he says "After tax ROI for first year: 5.9%".

How did you figure your "after tax" ROI. You didn't even scratch the surface there.

"**Tax benefits notwithstanding**, these deals look like a waste of time to me."

Case in point.. you're obviously lifelong renters.

Max said...

Case in point.. you're obviously lifelong renters.

Please share with us your infinite wisdom, oh master. You've obviously much more educated than we are.

Chris said...

As someone in this business here's what I'm seeing.
a) There is intense competition for properties priced right
b) Lenders are not spending money on these properties so the buyers pretty much have to pay cash
c) Depreciation and the ability to expense the substantial turn costs/dome of the needed renovations due to initial property condition means these properties turn into tax shield for other income.