If real estate auctions are your thing, and you are in the Orlando area on March 28th, this auction might be one you won't want to miss. This article was in the Orlando Sentinel.
By Jerry W. Jackson Orlando Sentinel
Home builders who competed fiercely with one another for sales across Central Florida during the housing boom now face a much tougher foe: their own houses, sitting empty or repossessed by lenders and selling for big discounts.
The flood of foreclosed properties on the market in the Orlando area has given a lift to existing-home sales in recent months, but it's also drowning builders' hopes of speedily selling their backlog of finished-but-vacant houses.
As a result, builders in three counties are pooling their resources for an unprecedented, new-homes-only auction, in an attempt to unload as many of their unsold houses as they can, as fast as they can.
A half-dozen finished-but-vacant homes in the Oakland Park subdivision of west Orange County, for example, are among at least 25 in the region scheduled to go to auction March28. Oakland Park, developed by California-based Castle & Cooke Inc., has been marketing its homes since mid-2007 but, nearly two years later, has sold only three.
One 3,735-square-foot home in the community went for $454,000 in October, according to county land records, yet nearby on the same street, four vacant homes are scheduled to be auctioned with starting bids as low as $175,000.
Housing analyst Anthony Crocco, who surveys subdivisions across Central Florida for Metrostudy, a Texas-based research company, said the foreclosure crisis has drained the last drops of profitability from home builders large and small.
"It's not uncommon for me to look at a market and see builders trying to sell below replacement cost," Crocco said. "They have to go below cost, to fight the foreclosure situation."
Foreclosures soaring
Despite government efforts to slow the rate of new foreclosures, the number of Metro Orlando homes in some stage of bank repossession continued to rise last month. The four-county metro area had 7,690 homes with a foreclosure filing, notice of foreclosure sale or repossession by a lender — more than twice as many as in February 2008, according to the listing service RealtyTrac Inc.
Meanwhile, there were 3,309 finished-but-unsold homes in Metro Orlando subdivisions at year's end, according to Metrostudy's most recent survey, and many of them are surrounded by houses in some stage of foreclosure. In the same Winter Garden-area ZIP code where the all-new Oakland Park development is located, for example, there are more than 1,560 foreclosure properties, according to RealtyTrac.
Crocco said that, although local home builders have reined in the number of housing starts in the past year to reduce their inventory, that has not translated into stable prices because of the downward pull from repossessed houses and other distress sales.
"There's just a lot of foreclosures at the bottom of the pile," Crocco said. "My sense is that there's more pressure [on new-home prices] from foreclosures than anything at this point, and job losses are going to have an [additional] impact.
"Earlier this month, the state reported that the unemployment rate in Metro Orlando, which consists of Orange, Seminole, Osceola and Lake counties, jumped to 9percent in January — the worst rate in 32years and almost double the rate of a year ago.
Engle Homes, the leading single-family-home subdivision builder in Orange, Seminole and Osceola counties last year, saw its average sale price drop by nearly 15percent, to $372,200, according to an industry survey by Charles Wayne Consulting Inc. of Maitland.
And Engle sold only about half as many homes in those three counties last year as it did in 2007, so its revenue for the year plummeted 57percent, to $113million. Other big builders recorded similarly large drops, the survey found.
Cheaper homes planned
"It's no secret this market has changed dramatically," said Bob Hennen, Castle & Cooke's marketing director in Central Florida. "At Oakland Park, we were positioned, and are positioned, as a move-up buyer's market, and that's the market that's been especially hard hit. People just can't sell their home — to move up."
Hennen said Oakland Park will "broaden" its product line in the coming years, "offering more variety and a lower entry point." To do that, the builder plans to add more town homes and expand the choice of lot sizes, from smaller ones starting at 40feet wide to larger ones at 70feet wide.
"Patience is the hardest part of the plan," he said. "For now, there's no need to pour a lot more inventory into the market."
The March28 auction of finished-but-unsold new homes is something of a test for the Home Builders Association of Metro Orlando. Never before has the local builders group helped members hook up with a real-estate company to try clearing out unsold inventory. In addition to Castle & Cooke, participating builders include Arthur Rutenberg Homes, Arlington Homes and Flagship Homes.
'A first' in Florida
"We think this is a first" in Florida, said Jim Cooper, the association's president. "We don't know of any other HBA [in the state] that's done this.
"If successful, the one-day auction, hosted by Stirling Sotheby's International Realty in partnership with the association, might be followed by others, Cooper said, as local and regional builders lacking the resources of national companies band together to move unsold inventory — so they can make way for their 2009 models and floor plans.
"These guys just need to sell," he said. "The market is terrible out there."
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Monday, March 23, 2009
Thursday, March 19, 2009
Sunday, March 15, 2009
More US States Eye Homebuyer Credit As Downpayment
NEW YORK, March 13 (Reuters - reported by Helen Chernikoff) - Several U.S. state homebuilder associations are trying to follow Missouri's lead in enabling homebuyers to immediately tap a federal government tax credit as a down payment, a Minnesota association official said.
The Missouri program allows homebuyers to receive the federal government's $8,000 tax credit for first-time homebuyers when they close on their house, instead of waiting for their federal tax refund.
Missouri's program works by loaning the homebuyer up to 6 percent of the home purchase price, which is then used for down payment and closing costs. The homebuyer then files for the federal tax credit and uses the credit refund to pay off the loan from the state.
Builders are struggling to help buyers come up with a down payment. They used to rely heavily on a federal program known as "seller-funded down payment assistance," banned since October, which allowed them to pay a percentage of a home's sale price.
"For buyers who would otherwise qualify for a mortgage but are having problems coming up with the down payment, it would certainly be beneficial," said Brent Anderson, a spokesman for Meritage Homes Corp (MTH.N), the 12th-largest U.S. homebuilder.
Minnesota is working to adopt Missouri's program by passing a bill instructing the state's housing finance agency to do so, said Pam Perri Weaver, executive vice president of the Builders Association of Minnesota.
Weaver's colleagues in Indiana, Kentucky, Michigan, New York, Oregon, Tennessee, Texas, Washington are also interested in replicating Missouri's model, she said.
A PATCHWORK STIMULUS?
Such efforts come as the homebuilding industry's political arm struggles to recover from its disappointment with the federal stimulus bill. Just before passage, the homebuyer tax credit was cut to $8,000 from $15,000.
California passed a $10,000 tax credit with its budget in February. Florida lawmakers are considering a bill that would give first-time homebuyers a 50 percent, five-year property-value exemption that would decrease by 20 percent each year, said Edie Ousley, a spokeswoman for the Florida Home Builders Association.
Florida's plan has passed a House committee but has no counterpart as yet in the Florida Senate. If both houses pass it and the governor signs it, it goes to a popular vote in 2010, where 60 percent of voters must approve it, said Ousley.
The timing of Florida's plan is a problem, said Stephen Kim, who analyzes real estate for a group of mutual funds at Alpine Woods Capital Investors. "The fact that it won't go into effect until 2010 is a big negative, since that would if anything give people a disincentive to buy before then."
But in general, Kim is eager to see more states implementing stimulus measures such as California's. If they have the desired impact on the housing markets in the various states, they could induce the federal government to take more aggressive action, Kim said.
The homebuilding industry is mired in a prolonged slump, triggered by risky lending and speculation during the boom years and exacerbated by the current recession.
Florida and California, two of the states that experienced the most dramatic surges in home production and value during the boom, have been among those hardest hit by the bust.
Arizona is another, but that state's legislature is too focused on its deficit to do more than talk about housing stimulus at this point, said Roger Yohem, vice-president of the Southern Arizona Home Builders Association.
The downturn has battered share prices of U.S. homebuilding companies. The Dow Jones U.S. Home Construction Index .DJUSHB is 83 percent off its July 2005 lifetime high.
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The Missouri program allows homebuyers to receive the federal government's $8,000 tax credit for first-time homebuyers when they close on their house, instead of waiting for their federal tax refund.
Missouri's program works by loaning the homebuyer up to 6 percent of the home purchase price, which is then used for down payment and closing costs. The homebuyer then files for the federal tax credit and uses the credit refund to pay off the loan from the state.
Builders are struggling to help buyers come up with a down payment. They used to rely heavily on a federal program known as "seller-funded down payment assistance," banned since October, which allowed them to pay a percentage of a home's sale price.
"For buyers who would otherwise qualify for a mortgage but are having problems coming up with the down payment, it would certainly be beneficial," said Brent Anderson, a spokesman for Meritage Homes Corp (MTH.N), the 12th-largest U.S. homebuilder.
Minnesota is working to adopt Missouri's program by passing a bill instructing the state's housing finance agency to do so, said Pam Perri Weaver, executive vice president of the Builders Association of Minnesota.
Weaver's colleagues in Indiana, Kentucky, Michigan, New York, Oregon, Tennessee, Texas, Washington are also interested in replicating Missouri's model, she said.
A PATCHWORK STIMULUS?
Such efforts come as the homebuilding industry's political arm struggles to recover from its disappointment with the federal stimulus bill. Just before passage, the homebuyer tax credit was cut to $8,000 from $15,000.
California passed a $10,000 tax credit with its budget in February. Florida lawmakers are considering a bill that would give first-time homebuyers a 50 percent, five-year property-value exemption that would decrease by 20 percent each year, said Edie Ousley, a spokeswoman for the Florida Home Builders Association.
Florida's plan has passed a House committee but has no counterpart as yet in the Florida Senate. If both houses pass it and the governor signs it, it goes to a popular vote in 2010, where 60 percent of voters must approve it, said Ousley.
The timing of Florida's plan is a problem, said Stephen Kim, who analyzes real estate for a group of mutual funds at Alpine Woods Capital Investors. "The fact that it won't go into effect until 2010 is a big negative, since that would if anything give people a disincentive to buy before then."
But in general, Kim is eager to see more states implementing stimulus measures such as California's. If they have the desired impact on the housing markets in the various states, they could induce the federal government to take more aggressive action, Kim said.
The homebuilding industry is mired in a prolonged slump, triggered by risky lending and speculation during the boom years and exacerbated by the current recession.
Florida and California, two of the states that experienced the most dramatic surges in home production and value during the boom, have been among those hardest hit by the bust.
Arizona is another, but that state's legislature is too focused on its deficit to do more than talk about housing stimulus at this point, said Roger Yohem, vice-president of the Southern Arizona Home Builders Association.
The downturn has battered share prices of U.S. homebuilding companies. The Dow Jones U.S. Home Construction Index .DJUSHB is 83 percent off its July 2005 lifetime high.
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Tuesday, March 10, 2009
How To Navigate A Foreclosure Auction
By Dawn Wotapka
The Wall Street Journal
March 9, 2009
When it comes to real estate auctions, the number one rule is focus: Bidders need to pay attention and move quickly when their house hits the block. And from what I witnessed Sunday at the Jacob K. Javits Convention Center in Manhattan, keeping your eyes on the prize might not be easy.
There were hundreds of homes on the block and only a few hours allotted to sell them. Each deal happened with lightning speed; some took just a minute. The circus-like atmosphere bordered on chaotic. Several tuxedo-clad ringmen raced the aisles, gesturing wildly and blowing whistles, ensuring that the auctioneer didn’t skip a bid. Hundreds of attendees–including children–sat shoulder-to-shoulder, many clutching dog-eared brochures, some marked with Post-Its. As their property number approached, they prepped for prime time, sitting up straight and clutching their bid card. Seconds later, the winning bidder would be escorted to the paperwork area.
Foreclosure auctions like this are happening all over the country, USHomeAuction.com says it plans about 300 this year, nationwide.
Looking to get in on the action?
Here are a few tips to help newbies navigate the auction process.
The Wall Street Journal
March 9, 2009
When it comes to real estate auctions, the number one rule is focus: Bidders need to pay attention and move quickly when their house hits the block. And from what I witnessed Sunday at the Jacob K. Javits Convention Center in Manhattan, keeping your eyes on the prize might not be easy.
There were hundreds of homes on the block and only a few hours allotted to sell them. Each deal happened with lightning speed; some took just a minute. The circus-like atmosphere bordered on chaotic. Several tuxedo-clad ringmen raced the aisles, gesturing wildly and blowing whistles, ensuring that the auctioneer didn’t skip a bid. Hundreds of attendees–including children–sat shoulder-to-shoulder, many clutching dog-eared brochures, some marked with Post-Its. As their property number approached, they prepped for prime time, sitting up straight and clutching their bid card. Seconds later, the winning bidder would be escorted to the paperwork area.
Foreclosure auctions like this are happening all over the country, USHomeAuction.com says it plans about 300 this year, nationwide.
Looking to get in on the action?
Here are a few tips to help newbies navigate the auction process.
Raise your hand. The auctioneer talks fast – almost too quickly to understand. To avoid confusion – and bidding on something you don’t want - don’t hold up your paddle to ask questions. Use your hand, just like in grade school.
Set limits Winning bidders I interviewed knew what they wanted before arriving, and they set limits to avoid getting trapped in a frenzied bidding war. Miriam Ruiz came specifically for a Scranton, Pa., house, one she got for $100,000. She knows the N. Main Avenue address needs plumbing and heating work and windows, but it’s near a university and she considers it a safe investment.
Do your homework Ms. Ruiz suggests carefully studying contracts, which are often on the auction Web site. “Read all the fine print,” she says. Hansa and Dinesh Patel paid $175,000 for a home on Jefferson Avenue in Rockville Centre, N.Y. (Real estate Web site Zillow.com’s “Zestimate” values the house at $581,500.) “For this price, Long Island, you can get nothing,” Ms. Patel said, as she went to check out the new property. Duane Harden of Harlem has purchased 26 residential properties at auction since 2001. He suggests studying property taxes and, if you plan to rent out the unit, comparable rents. “Make sure the rent will cover the expenses,” he advises.
Come prepared On auction day, bring lots of paperwork: W-2s, pay stubs and tax returns. Coming with extra funding can’t hurt–some deals are cash only.
Check your credit score That’s what tripped up Tasnia Hossain. She offered $120,000 on a unit at 153rd St. in Jamaica, N.Y., only to be derailed by a credit score slightly below the necessary 620. Though dejected, she said she understood. Lenders “don’t want to continue what they’ve been doing,” Ms. Hossain said. That’s why you shouldn’t give in, even when outbid. Stick around. Deals that unravel are quickly put back up for auction, giving losing bidders another chance to come out on top.
Be prepared for disappointment The Bronx condo Mr. Harden had his eye on wasn’t available Sunday. “That’s just the way the game goes,” he said.
Tuesday, March 3, 2009
Foreclosure Auctions Hit New York
The Wall Street Journal
March 3, 2009
$49,000 Long Island Home: Foreclosure Auctions Hit New York
Dawn Wotapka reports:
Here’s a sign that the foreclosure epidemic has infected the Northeast: More than 375 foreclosed homes from New York, New Jersey and Pennsylvania will be auctioned — with bargain starting prices — at the Jacob K. Javits Convention Center in Manhattan starting this Sunday.
This is Calif.-based USHomeAuction.com’s second Big Apple production. The first was last March, before Wall Street layoffs intensified, when 69 homes were sold. This time around, 232 alone are in the New York metro area. Including this 3-bed, 2-bath home in Rockville Centre, Long Island, with a starting bid of $49,000 and this 2,000 square-foot 3-bedroom home in Baldwin, also in Long Island, previously valued to $350,000 with a starting bid of $89,000. (See the foreclosure inventory at USHomeAuction’s site.)
“In the past, there weren’t enough foreclosed New York homes to hold an auction,” Rick Weinberg, a USHomeAuction.com spokesman, told Crain’s Web site. “This year I suspect that there will be a second and third auction in the city.”
It wasn’t until recently, Mr. Weinberg added, that banks accumulated enough excess inventory to feed a giant event.
Plus, the area did not see a construction boom matching Phoenix or Las Vegas. But as job losses mount, prices erode and the financial market continues its freefall, foreclosures are a growing issue, particularly in working-class neighborhoods where creative financing was prevalent during the boom, and areas reliant on commuters. In January, scheduled foreclosures citywide spiked 64% from December, and climbed 5% from a year earlier, according to PropertyShark.com. February’s numbers are expected Wednesday morning. Queens, labeled the region’s foreclosure epicenter, will report an 8% monthly and annual jump, while other boroughs have stabilized.
Such headlines – and the lure of homes selling for 50 or 60 cents on the dollar – have captivated consumers: More than 3,000 have already registered to attend Sunday, with hundreds more expected at the door.
Don’t get too excited: Ending prices will undoubtedly be more. Even so, the events are popular. Sunday’s is one of about 300 that USHomeAuction.com plans this year around the country. In 2008, it says it set an industry record by auctioning nearly 33,000 homes nationwide. This year’s total has already crossed 5,000, and may break another record.
Jeffrey Frieden, CEO of the site and parent company REDC, labeled this business the foreclosure epidemic’s “silver lining,” saying “when a house is vacant, everyone loses.”
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March 3, 2009
$49,000 Long Island Home: Foreclosure Auctions Hit New York
Dawn Wotapka reports:
Here’s a sign that the foreclosure epidemic has infected the Northeast: More than 375 foreclosed homes from New York, New Jersey and Pennsylvania will be auctioned — with bargain starting prices — at the Jacob K. Javits Convention Center in Manhattan starting this Sunday.
This is Calif.-based USHomeAuction.com’s second Big Apple production. The first was last March, before Wall Street layoffs intensified, when 69 homes were sold. This time around, 232 alone are in the New York metro area. Including this 3-bed, 2-bath home in Rockville Centre, Long Island, with a starting bid of $49,000 and this 2,000 square-foot 3-bedroom home in Baldwin, also in Long Island, previously valued to $350,000 with a starting bid of $89,000. (See the foreclosure inventory at USHomeAuction’s site.)
“In the past, there weren’t enough foreclosed New York homes to hold an auction,” Rick Weinberg, a USHomeAuction.com spokesman, told Crain’s Web site. “This year I suspect that there will be a second and third auction in the city.”
It wasn’t until recently, Mr. Weinberg added, that banks accumulated enough excess inventory to feed a giant event.
Plus, the area did not see a construction boom matching Phoenix or Las Vegas. But as job losses mount, prices erode and the financial market continues its freefall, foreclosures are a growing issue, particularly in working-class neighborhoods where creative financing was prevalent during the boom, and areas reliant on commuters. In January, scheduled foreclosures citywide spiked 64% from December, and climbed 5% from a year earlier, according to PropertyShark.com. February’s numbers are expected Wednesday morning. Queens, labeled the region’s foreclosure epicenter, will report an 8% monthly and annual jump, while other boroughs have stabilized.
Such headlines – and the lure of homes selling for 50 or 60 cents on the dollar – have captivated consumers: More than 3,000 have already registered to attend Sunday, with hundreds more expected at the door.
Don’t get too excited: Ending prices will undoubtedly be more. Even so, the events are popular. Sunday’s is one of about 300 that USHomeAuction.com plans this year around the country. In 2008, it says it set an industry record by auctioning nearly 33,000 homes nationwide. This year’s total has already crossed 5,000, and may break another record.
Jeffrey Frieden, CEO of the site and parent company REDC, labeled this business the foreclosure epidemic’s “silver lining,” saying “when a house is vacant, everyone loses.”
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Sunday, March 1, 2009
The Competitive Advantage in Real Estate Investing
Credit.com News
By Randy Johnson
In another article I wrote recently I discussed the long-term benefits of owning investment property. You have the cumulative effects of appreciation that is greater than the rate of inflation, as well as leverage and tax sheltering of cash flow. But, as I mentioned, real estate needs to be managed. Managing real estate is a business. Like any other business, it requires work. If you work hard and work smart, your business will run better and the results will be more satisfying.
The other aspect of business is that you have competitors. Most people don’t think much about this. You just think that you are buying a property. But your customers, the renters, have choices. They can rent from you or they can rent from someone else down the street. Why would they rent from you?
Well, your property may be in a more desirable location. Your home may have features that meet a tenant’s particular needs, like the number of bedrooms. For example, it may be the case that in your area three bedroom homes are more attractive and popular than two bedroom homes. This kind of information is important to know before you buy. I saw an appraisal on a home that has only 765 square feet. Most people need a larger space, and for this reason the home has a more limited market appeal.
Of course, the biggest factor is the rent that the landlord wants for the home. If the market rent in your area for comparable homes is $2,000 per month, you can certainly attract tenants if you are willing to rent for $1,800 per month. But why shouldn’t you get $2,000? Let’s say that the cash flow breaks even at $1,800 per month. That means that $200 was your profit margin. You don’t run a successful business if you give away your profit. Right?
Your competitors – all those other landlords – set the market rental price. Your goal is to be able to collect rent that is at or a little above everyone else so as to maximize your rental income.
Now let’s assume that you have an opportunity to buy a home for $200,000. The data show that the identical house next door sold three years ago for $300,000, but property values have fallen 33% so your price is in line with current market.
Now let us examine the cash flow over 30 years, the period of time it takes to pay off the loans. We’ll also assume that the first buyer put 30% down and got a loan at 6.5%. The difference in annual cash flow between the two looks like this.
Purchase Price: 300,000---------------Purchase Price: 200,000
Loan amt @ 70%: 210,000------------Loan amt @ 70%: 140,000
Monthly rent: 1,800--------------------Monthly rent: 1,800
Mortgage payment: 1,327-------------Mortgage payment: 885
Insurance: 50----------------------------Insurance: 50
Property taxes: 313----------------------Property taxes: 208
Total expenses: 1,690------------------Total expenses: 1,143
Cash flow per month: 110-------------Cash flow per month: 657
Annual: 1,322---------------------------Annual: 7,881
Difference: $6,559
This is huge! Not only did the lower-price property cost less, but the profit is substantially more – like 600% more. You make a lot more money. Not only that, but in a period when rents drop – it will likely do so for a few years here and there – you are the low-cost producer. If market rent drops to $1,600, your competitor is going to lose over $1,000 per year and you will still make over $5,000 per year.
When you examine the numbers over 30 years, the cumulative advantage is cash flow, even assuming that you pay off your loan in 27 years. Your competitor’s cumulative cash flow is $451,000. Not bad. He owns a home free and clear, and he made $450,000 over 30 years.
How did you do? Remember that you got the same rent he did, but your lower expenses really add up. Your cumulative cash flow is $616,000. That’s a difference of $165,000. You read it right.
You make $165,000 more profit than your competitor did.
Not only that, but your properties will likely be worth the same amount of money, so you will make an additional capital gain of $100,000 because you bought for $100,000 cheaper than your competitor.
Thus the cumulative advantage of buying is now $265,000.
If you choose to dedicate a portion of your increased cash flow to paying your mortgage loan off more quickly, like by getting a 15-year loan, the result is a profit advantage of $266,000, an ADDITIONAL $100,000. Along with the capital gains of $100,000, this brings the total profit ADVANTAGE to $366,000.
Bottom line: Purchasing an investment property at the prices you can buy at today is an incredible opportunity.
Footnote – this is a simple example that ignored several factors, like income taxes. But this factor doesn’t make a big enough difference to change the advantage. You’re not going to tell me you don’t want to do this because you’d have to pay taxes, are you?
By Randy Johnson
In another article I wrote recently I discussed the long-term benefits of owning investment property. You have the cumulative effects of appreciation that is greater than the rate of inflation, as well as leverage and tax sheltering of cash flow. But, as I mentioned, real estate needs to be managed. Managing real estate is a business. Like any other business, it requires work. If you work hard and work smart, your business will run better and the results will be more satisfying.
The other aspect of business is that you have competitors. Most people don’t think much about this. You just think that you are buying a property. But your customers, the renters, have choices. They can rent from you or they can rent from someone else down the street. Why would they rent from you?
Well, your property may be in a more desirable location. Your home may have features that meet a tenant’s particular needs, like the number of bedrooms. For example, it may be the case that in your area three bedroom homes are more attractive and popular than two bedroom homes. This kind of information is important to know before you buy. I saw an appraisal on a home that has only 765 square feet. Most people need a larger space, and for this reason the home has a more limited market appeal.
Of course, the biggest factor is the rent that the landlord wants for the home. If the market rent in your area for comparable homes is $2,000 per month, you can certainly attract tenants if you are willing to rent for $1,800 per month. But why shouldn’t you get $2,000? Let’s say that the cash flow breaks even at $1,800 per month. That means that $200 was your profit margin. You don’t run a successful business if you give away your profit. Right?
Your competitors – all those other landlords – set the market rental price. Your goal is to be able to collect rent that is at or a little above everyone else so as to maximize your rental income.
Now let’s assume that you have an opportunity to buy a home for $200,000. The data show that the identical house next door sold three years ago for $300,000, but property values have fallen 33% so your price is in line with current market.
Now let us examine the cash flow over 30 years, the period of time it takes to pay off the loans. We’ll also assume that the first buyer put 30% down and got a loan at 6.5%. The difference in annual cash flow between the two looks like this.
Purchase Price: 300,000---------------Purchase Price: 200,000
Loan amt @ 70%: 210,000------------Loan amt @ 70%: 140,000
Monthly rent: 1,800--------------------Monthly rent: 1,800
Mortgage payment: 1,327-------------Mortgage payment: 885
Insurance: 50----------------------------Insurance: 50
Property taxes: 313----------------------Property taxes: 208
Total expenses: 1,690------------------Total expenses: 1,143
Cash flow per month: 110-------------Cash flow per month: 657
Annual: 1,322---------------------------Annual: 7,881
Difference: $6,559
This is huge! Not only did the lower-price property cost less, but the profit is substantially more – like 600% more. You make a lot more money. Not only that, but in a period when rents drop – it will likely do so for a few years here and there – you are the low-cost producer. If market rent drops to $1,600, your competitor is going to lose over $1,000 per year and you will still make over $5,000 per year.
When you examine the numbers over 30 years, the cumulative advantage is cash flow, even assuming that you pay off your loan in 27 years. Your competitor’s cumulative cash flow is $451,000. Not bad. He owns a home free and clear, and he made $450,000 over 30 years.
How did you do? Remember that you got the same rent he did, but your lower expenses really add up. Your cumulative cash flow is $616,000. That’s a difference of $165,000. You read it right.
You make $165,000 more profit than your competitor did.
Not only that, but your properties will likely be worth the same amount of money, so you will make an additional capital gain of $100,000 because you bought for $100,000 cheaper than your competitor.
Thus the cumulative advantage of buying is now $265,000.
If you choose to dedicate a portion of your increased cash flow to paying your mortgage loan off more quickly, like by getting a 15-year loan, the result is a profit advantage of $266,000, an ADDITIONAL $100,000. Along with the capital gains of $100,000, this brings the total profit ADVANTAGE to $366,000.
Bottom line: Purchasing an investment property at the prices you can buy at today is an incredible opportunity.
Footnote – this is a simple example that ignored several factors, like income taxes. But this factor doesn’t make a big enough difference to change the advantage. You’re not going to tell me you don’t want to do this because you’d have to pay taxes, are you?
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