Sunday, February 26, 2006

Losing Ten Grand a Year in Kentfield

Ok, so this is a duplex in Kentfield, not a SFR. But it's still a PoS. The owner is asking $945,000 and desires "a quick sale" (no kidding, I can see why). Rental income for the two units is $1,450/month and $1,475/month or a total of $2,925/month. According to my conservative math, if you made a 20% down payment (which no one does anymore of course) then your monthly mortgage (principle + interest assuming a 6% rate) works out to about $3,750/month or a monthly shortfall of -$825/month or -$9,900/year. Never mind maintenance costs, insurance, taxes, etc., which only exasperates the situation (hey, all you landlords out there, in your experience what would all the incidental costs add up to each year?). So, not only do you own a butt-ugly, gray PoS surrounded by cracked and oil stained concrete, but you can also expect to lose money each month. But hey! That only makes sense here in Marin. You see, no one buys here because of the house per se. Oh no, no...it's not about the house at all my naive reader. It's about the intangibles and intangibles, as everyone knows, are worth whatever you want them to be worth.

10 Comments:

Blogger Former Apt. Broker said...

Marinite wrote:

> According to my conservative
> math, if you made a 20% down
> payment (which no one does
> anymore of course)

Unless you move in to one of the units (or get super expensive private financing) you will have to put a lot more than 20% down since commercial lenders will not finance an "investment" property unless their is positive cash flow (some return on the investment). Doing a quick commercial lender max. loan $ stress test (.85 DSCR on the NOI at a 9.25% constant) the property would support a commercial loan of about $200K.

> assuming a 6% rate) works out to
> about $3,750/month or a monthly > shortfall of -$825/month or -
> $9,900/year. Never mind
> maintenance costs, insurance,
> taxes, etc., which only
> exasperates the situation (hey, > all you landlords out there, in
> your experience what would all
> the incidental costs add up to
> each year?).

As a rule of thumb in California rental unit expenses are about $3K per unit per year + taxes so for this place the expenses should average about $500 month + $900 month taxes + at least $100 month average vacancy/collection loss. If the owner was local and did all their own management and maintenance (roofing, gardening, painting, etc.) they may be able to cut the expenses a little, but your return will still be way below 2% even with an 80% cash down payment (but why should anyone care since the plan will be to sell the place for $1.5mm in a couple years)...

February 26, 2006 10:14 PM  
Blogger Philip John said...

to put it into perspective, there are shares that pay 5% a year and have a history of going up another 5% a year...

1M invested in a diversified selection of shares would result in 50k a year in dividends. Even better - there are no maintenance costs or an annual share ownership tax, you don't have to monitor tenants or repaint you share certificates.

Anyone who spends $1M on this PoS deserves to get burned.

February 27, 2006 12:15 AM  
Blogger Marinite said...

Hey thanks for those very informative comments.

February 27, 2006 9:31 AM  
Blogger marin_explorer said...

Interesting comments on the commercial value of this property. I've always thought there are far easier returns on my dollar, corroborated by the above posts.

How long before the "investment" myth of residential RE is dispelled? Certainly for Marin, there isn't much time left for anyone who bought in the last 5 years.

February 28, 2006 3:13 PM  
Blogger Marinite said...

A reader sent me this comment which I found informative (reproduced without permission):

Hi - I read your site, and like it. I'm a real estate broker (very easy to obtain a license ... ), but I'm not buying to the myth and hype.

Regarding your "Losing 10K per month" blog entry. I think you need to give more consideration to the prop taxes ... they are quite significant, and what most people fail to realize is that they *go up every year*. In my opinion, prop taxes will lead to the ultimate crash, as it's simply too big a nut. April 10 the next delinquent date for prop taxes.

Keep up the good work

February 28, 2006 4:26 PM  
Anonymous rejunkie said...

I thought I would throw my hat in the ring here and add after-tax cash flow analysis. I am not sure how you got a $3750/month payment on a $200k loan @ 6%. Or maybe I misunderstood. I come up with about $1200. But, I am in agreement with the premise that they don't do 90% LTV investor loans, and rarely do 80% BUT you can do a piggyback 80/10 with 20 % down.

Anyway, for the sake of argument, let's assume 30% down and to ease the pain, make it I/O for 5 years @ 6.25% (going rate for strong credit and income capable of compensating for negative cash flow): I get a $661,500 loan which equates to $3445/month. Taxes are probably closer to $950, maintenance is $500, $100 for vacancy as stated previously AND insurance, which I will ballpark at $1800/year. That adds up to $5145/month, less the $2925/month rent puts you at a $2150/month loss.

The entire loss is deductible as is building depreciation subject to passive activity loss limitations (25k/year can be written off on your regular income up to $100k declining to zero when AGI hits $150k). However since at $2150, you already hit the $25k PALL mark, we can leave out building depreciation since it is not deductible anyway. We will also assume the household AGI of the owner is < $100k (which would probably mean they would have to state income to qualify for the loan).

$25k write-off puts roughly $8050 back in your pocket, making the after-tax negative cash flow of $1412.50 per month. You could justify the purchase if you could a: handle the monthly nut and b: assume the building appreciate exceeds that amount, which in the long term, is quite likely.

However, probably a better investment of the money is the stock market.

February 28, 2006 8:22 PM  
Anonymous rejunkie said...

Marinite-

I guess you could rename the post "Losing 25 Grand a Year in Kentfield"

February 28, 2006 8:23 PM  
Blogger Marinite said...

I am not sure how you got a $3750/month payment on a $200k loan @ 6%.

I assumed 20% down or a total loan amount of $756,000. I then went to some lending site that has an online calculator that where you enter some other factors and then it tells you your principle and interest payments each month for 30 years.

Thanks junkie for your input, that's good.

February 28, 2006 9:21 PM  
Anonymous rejunkie said...

Marinite-

I assumed 20% down or a total loan amount of $756,000

Ah, that makes much more sense.

Errata on my part -- I need to post before I crack open my first beer:

you can do a piggyback 80/10 with 20 % down.

That would be a 70/10 piggy back loan (70% first, 10% second) with 20% down.

That adds up to $5145/month, less the $2925/month rent puts you at a $2150/month loss.

Wow, second grade math skills are nowhere to be found. What it should be is $5145-$2925 = $2220/month loss.

March 01, 2006 8:11 AM  
Blogger Marinite said...

Wow, second grade math skills are nowhere to be found.

We're just human.

March 01, 2006 9:39 AM  

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