The Right Price to Pay For an Investment Home
Many so called investors of homes in the past few years or so have purchased homes without planning on making money on rent anytime soon. Now that these homes have stopped appreciating, the financing is drying up and these people are seeing just how important making a profit on rent is.
Let’s take a look at what it actually takes to break even on a 3BR home in Las Vegas and San Diego. Interest rates have skyrocketed recently to over 6.4% for a 30yr fixed mortage. This means most of you will be paying around 7%.
Looking on Craigslist we will find the price of homes in Las Vegas and San Diego as well as what people are paying to rent them.
In Las Vegas, 3BR home prices range from about $260,000-300,000. These homes rent out for approximately $1300-1600 a month and per roommate approx $450-600.
In San Diego, a 3BR home ranges from approx $400,000-620,000. These homes rent out for approximately
$1600-2300 a month and per roommate approx $550-800.
So, plugging this info into Bankrate.com’s mortgage calculator, if you own a home in Las Vegas, the break even if you rented it out for $1350 a month would be approx 203,000. This is before property taxes and insurance. However, as I have shown, houses are not selling for $203,000 but are $260,000+ so these owners are still losing money each month. The payment on a $260,000 home is $1729 a month so the loss is approx $379 a month not including the $175 or so a month for property taxes, homeowners assoc dues and insurance. So the loss is approx $550 a month or $6600 a year.
In San Diego, if renting out home at $1600 a month, the cost of the house should be approximately $240,000. However, this house would cost approximately $400,000 so the payment would be $2661 a month for a loss of approxmiately $1061 a month not including property taxes and other expenses. Including property taxes of $4400 + 400insurance= $4800 a year or $400 a month extra losses. This brings the total monthly loss to $1461 and a total yearly lossloss for a total monthly loss of The yearly loss is $17,532.
As I have shown here, home prices are still considerably overpriced. On stocks, we don’t expect to loose money before breaking even. Increasing rent 5% a year means the vegas home will break even in approximately 6-7years. During this time real estate taxes are increasing at up to 6% a year (for investor owned homes). The gains in rent should offset the increases in property taxes. However, at the end of six or seven years, this investor is approximately $39,615 poorer even while staying fully rented. A lapse occupancy could mean even greater losses.
For the San Diego home, the losses are even greater It will take approxmiately 10-11yrs of 5% increases in rent before the home reaches its mortgage rate of $2661 a month. During this period the investor will have lost approximately $140,107.
Growth in the price of these homes should continue to decline so that they reach close to the break even points with rent. San Diego homes should probably at least fall 25% over the next several years. So this basically means that houses that were selling for $600,000 will lose $150,000 in value. So the $400,000 home could lose $100K in value. This will bring the prices of San Diego homes back to 2001-2002 price levels.
www.realtor.org/Research.nsf/files/06CASanDiego.pdf/$FILE/06CASanDiego.pdf
The Las Vegas market may also see a correction so that the house that was $260,000 will be about $200,000. This should bring price levels back to 2003-2004 levels.
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