Could it be housing prices are heading up, finally? Well, maybe, maybe not, but good news from CoreLogic, which announced that prices nationwide increased from March to April of this year. Although still early, some good news (for those selling at least). However, the rise in prices was not uniform throughout the country. Some states were still seeing enormous price declines. Leading the list in price drops was Idaho which averaged a 15.2% price drop from March. I'd say it must be those Idaho'ans leaving the cold weather to head south but Arizona certainly didn't show much demand increase as its prices dropped by over 11%.
Although price drops seem like a bad thing, when price drops are combined with rising rents you've got an increasingly attractive investment. Combine that with record low interest rates and it really does not get any better for those who are looking to invest for the longer term. To help make my point, check out what Marcus & Millichap wrote for their 2011 National Apartment Report: (You can access the full report by registering here)
National Apartment Overview
◆ All 44 markets will post employment growth, vacancy declines and effective rent gains in 2011, confirming a sweeping recovery and expansion in the U.S. apartment sector above expectations. This year will mark the first across-the-board reduction in vacancy since at least 1990. This is driven by the release of pent-up demand in the aftermath of the Great Recession, lower turnover rates, falling homeownership and job growth.
◆ Apartment completions will total 53,000 units this year, 46 percent fewer than delivered in 2010. New supply will again fall critically short of demand, which is expected to reach 158,000 units. U.S. apartment vacancy will decrease 110 basis points in 2011 to 5.8 percent as a result, matching the decline recorded in 2010.
◆ As vacancy in 2011 aligns closely to pre-recession levels, owners will regain pricing power. Asking rents will rise 3.5 percent to $1,067 per month, while effective rates will increase 4.5 percent to $1,002 per month.
Amazing what happens when strong demand meets limited supply. The fact that you are still able to pick up single family properties in great areas for fire-sale prices is not rational! Eventually, the market will correct and those that got in now will have made a bundle, first off of the cash flow generated from holding the property and properly managing it, then later from the appreciation of the asset itself.
For a more in depth look at a property I'm currently working on, see my previous post on why you should invest in real estate.
Showing posts with label cash flow. Show all posts
Showing posts with label cash flow. Show all posts
Thursday, June 2, 2011
Tuesday, February 8, 2011
Phoenix Area Real Estate Market
I've been noticing a trend in Phoenix area real estate - prices keep going down!
I'll admit I'm not shocked but I am a little surprised that the market hasn't started to turn the corner yet. I was looking in the Palm Valley area today at houses and looked at a few properties which are listed on the MLS that would make fantastic rental properties. One property was a 4/2 and the others were 3/2's. The most expensive was listed at $105,000 - this in an area with a fantastic school district, great shopping and dining nearby, close to the freeway system and right near Luke Air Force Base.
The last property I rented out in that area of town had renters calling me the day I put up the sign in the yard - I ended up renting it out within 2 weeks to a great family that is taking great care of the house - and paying on time! (which is always a large plus in my book). The cash flow on the house is nicely positive even on a 15 year amort loan and that area of town also tends to draw quality family renters who are looking to get into the school district for their kids and settle down.
So going back to the properties I looked at today - and the couple I will investigate further later this week. If we were to pay market price for a property in this neighborhood (which, of course, we wouldn't) then we are looking at prices of a little over $100k for a 4/2 and $89k for a 3/2 & about 1,600 square. Using the 3/2 as an example I would legitimately expect to receive $1,200/month in rent on a property like that if it were fixed up nicely to where a family would want to move into it - less fixed up you could rent it out for $1,000 in your sleep. The 3/2's should be at least $1,100 - at minimum.
So, for this area of town (paying market prices), assuming you pay cash, then your annual yield would be ($1,200*12)/$89,000 = ~16.2% annually. Are your CD's or bank interest paying you that? The stock market has been up but do you realistically expect to make 16.2% on your money? If you finance this purchase and take advantage of the sub 5% interest rates that are out there now then after your down payment you end up with this cash flow:
Down payment = 25% * 89,000 = $22,250
Assumed fix up cost (Just a guess - I haven't actually seen inside yet) = $10,000
Total cost up front - $32,250
Monthly mortgage payment on the remaining $66,750 balance, assuming a 30 year amortized loan at 5% interest, compounded monthly = $358.33
Average taxes + insurance = $150
So, monthly cash flow = $1,200 - (358.33+150) = $691.67 monthly cash flow
Yield = ($691.67*12)/$32,250 = 25.7%
Oh, and by the way if financed that doesn't include the fact that the renter is paying off your mortgage. It also doesn't take into account any appreciation - which its anyone's guess as to when the market will start posting increases but given Phoenix's history of boom and bust I wouldn't at all be surprised to see another strong market back in the valley of the sun - if not within 5 years, at least within 10.
I'll admit I'm not shocked but I am a little surprised that the market hasn't started to turn the corner yet. I was looking in the Palm Valley area today at houses and looked at a few properties which are listed on the MLS that would make fantastic rental properties. One property was a 4/2 and the others were 3/2's. The most expensive was listed at $105,000 - this in an area with a fantastic school district, great shopping and dining nearby, close to the freeway system and right near Luke Air Force Base.
The last property I rented out in that area of town had renters calling me the day I put up the sign in the yard - I ended up renting it out within 2 weeks to a great family that is taking great care of the house - and paying on time! (which is always a large plus in my book). The cash flow on the house is nicely positive even on a 15 year amort loan and that area of town also tends to draw quality family renters who are looking to get into the school district for their kids and settle down.
So going back to the properties I looked at today - and the couple I will investigate further later this week. If we were to pay market price for a property in this neighborhood (which, of course, we wouldn't) then we are looking at prices of a little over $100k for a 4/2 and $89k for a 3/2 & about 1,600 square. Using the 3/2 as an example I would legitimately expect to receive $1,200/month in rent on a property like that if it were fixed up nicely to where a family would want to move into it - less fixed up you could rent it out for $1,000 in your sleep. The 3/2's should be at least $1,100 - at minimum.
So, for this area of town (paying market prices), assuming you pay cash, then your annual yield would be ($1,200*12)/$89,000 = ~16.2% annually. Are your CD's or bank interest paying you that? The stock market has been up but do you realistically expect to make 16.2% on your money? If you finance this purchase and take advantage of the sub 5% interest rates that are out there now then after your down payment you end up with this cash flow:
Down payment = 25% * 89,000 = $22,250
Assumed fix up cost (Just a guess - I haven't actually seen inside yet) = $10,000
Total cost up front - $32,250
Monthly mortgage payment on the remaining $66,750 balance, assuming a 30 year amortized loan at 5% interest, compounded monthly = $358.33
Average taxes + insurance = $150
So, monthly cash flow = $1,200 - (358.33+150) = $691.67 monthly cash flow
Yield = ($691.67*12)/$32,250 = 25.7%
Oh, and by the way if financed that doesn't include the fact that the renter is paying off your mortgage. It also doesn't take into account any appreciation - which its anyone's guess as to when the market will start posting increases but given Phoenix's history of boom and bust I wouldn't at all be surprised to see another strong market back in the valley of the sun - if not within 5 years, at least within 10.
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