The current edition of Forbes magazine has an intriguing story. It is a wakeup call that the path of homeownership is not always financially wise. The house was purchased for $922,500 in 2004 and now, it is pending at $849,000 price. It is likely that the offer maybe less than the listing price. After 5 years of homeownership, the seller is losing money, not only the equity, but also the $60K every year that she spent for mortgage payment, taxes and insurance. Had she chosen to rent similar house, she would only pay $36K each year. True, that mortgage interest and property taxes can be deducted from your taxable income, but remember, the higher the salary, those deduction will phase out.
As everyone tried to be homeowner, in the past few years, I heard this all the time: “Why do you want to make your landlord rich?” Now imagine if Ms. Seaman was renting the house at 1233 S Curson Ave, Los Angeles, CA 90019, instead of owning it. I would not ask her, the renter, “Why do you want to make your landlord rich?”, but I would ask her landlord instead, “Why do you want to fund your tenant’s lifestyle?” Yes in this story, it is smarter to be renter in West Hollywood neighborhood.
Of course, our lives are not based on financial alone. There are things in life that can’t be measured by money. So, it is OK to own a home in affluent neighborhood as long as you can afford it. What I mean by that, for the super wealthy people, it doesn't matter to spend a lot money every year for the house they like, or these people may buy the house in cash, since they have excessive cash anyway.
You may have wondered, why would I bring up that renting can be a smart financial decision, considering I am in the real estate investment business? There are two reasons. First, I am blatantly honest here and I like to speak out my mind. Second, if you live in expensive neighborhood like Ms. Seaman does, you’d be better off by renting there. Instead of using the money for down payment, mortgage, property tax, and maintenance of a house in West Hollywood area, you can invest that money to buy residential rental in different area, or maybe out of state, and pocket cash 6%-10% every year. Especially right now, you can find many houses that are 70% off from the peak and houses that cost less than their construction cost (you get the land for free). This way, you fund your retirement portfolio. This is not for people who have nothing, and have no choice other than renting, rather for people who have choices on what to do with their money and choose to rent because by renting, they will be better off financially.
Copyright © 2009 wealthaspiration.com - All Rights Reserved
Showing posts with label Cash Flow. Show all posts
Showing posts with label Cash Flow. Show all posts
Thursday, May 21, 2009
Monday, May 18, 2009
Houses for $26,900 with $450 cash flow per month
That is the promotion! Houses for $26,900 with $450 cash flow per month. That is equal to annual cash-on-cash return of 20%! Sounds too good to be true?
The houses were REO properties, which were purchased in bulk, rehabbed and sold to investor. What kind of houses will you get? I checked three of them:
House #1
Location: Indiana
Below Poverty Line: 41.26%
Vacancy rate: 15.14%
Ratio of renter-occupied to owner-occupied: 125.17%
House #2
Location: Georgia
Below Poverty Line: 43.42%
Vacancy rate: 22.73%
Ratio of renter-occupied to owner-occupied: 158.03%
House #3
Location: Florida
Below Poverty Line: 35.31%
Vacancy rate: 13.97%
Ratio of renter-occupied to owner-occupied: 74.20%
What do those numbers mean?
1) They are located in slum neighborhood. In my previous article, I mentioned, I personally will not invest in a slum, and will advise the same to my clients. You can rehab any properties, but you can’t change the location. Choosing the right location is one aspect of successful real estate investment.
2) High vacancy rate means, you have to wait longer to get tenants. As a result, your cash-on-cash return may be lower than the one advertised.
3) High poverty rate means, most people are low income resident or welfare-dependent. Low income neighborhood tends to have higher crime rate. It may take you or your property manager extra effort to screen qualified tenants and collect rent. Few months of uncollected rents lower your cash-on-cash return. And sometimes bullet proof vest is needed to collect rents!
4) High renter-occupied to owner-occupied rate. Tenants usually do not take care the properties as good as owners. There is no pride of ownership. Deteriorating neighborhood lowers property values.
Bottom line, you get what you pay for, and know what you are getting into.
Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved
The houses were REO properties, which were purchased in bulk, rehabbed and sold to investor. What kind of houses will you get? I checked three of them:
House #1
Location: Indiana
Below Poverty Line: 41.26%
Vacancy rate: 15.14%
Ratio of renter-occupied to owner-occupied: 125.17%
House #2
Location: Georgia
Below Poverty Line: 43.42%
Vacancy rate: 22.73%
Ratio of renter-occupied to owner-occupied: 158.03%
House #3
Location: Florida
Below Poverty Line: 35.31%
Vacancy rate: 13.97%
Ratio of renter-occupied to owner-occupied: 74.20%
What do those numbers mean?
1) They are located in slum neighborhood. In my previous article, I mentioned, I personally will not invest in a slum, and will advise the same to my clients. You can rehab any properties, but you can’t change the location. Choosing the right location is one aspect of successful real estate investment.
2) High vacancy rate means, you have to wait longer to get tenants. As a result, your cash-on-cash return may be lower than the one advertised.
3) High poverty rate means, most people are low income resident or welfare-dependent. Low income neighborhood tends to have higher crime rate. It may take you or your property manager extra effort to screen qualified tenants and collect rent. Few months of uncollected rents lower your cash-on-cash return. And sometimes bullet proof vest is needed to collect rents!
4) High renter-occupied to owner-occupied rate. Tenants usually do not take care the properties as good as owners. There is no pride of ownership. Deteriorating neighborhood lowers property values.
Bottom line, you get what you pay for, and know what you are getting into.
Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved
Wednesday, April 15, 2009
Correlation between Neighborhood Characteristics and GRM
In one of the seminars I attended, I met a gentleman in his mid fifties. Despite the worldwide financial troubles, he saw a lot of opportunities in the real estate and wanted to start putting his money into real estate. He asked me if I can find him a property which produces annual rent 12%-15% of purchase price. That means GRM of 6.7-8.3.
GRM or Gross Rent Multiplier is a simple way of comparing investment properties by dividing the purchase price by gross annual rent before vacancy and expenses.
Purchase Price
Gross Rent Multiplier (GRM) = -----------------------------------------------------------------------
Gross Annual Rent before Vacancy & Expenses
Again, GRM is just a rough estimate to compare properties. For accurate financial analysis, all factors such as vacancy, repairs to bring property ready for rent, taxes, insurance and property management fees have to be included.
While it is not impossible to find GRM of 6.7-8.3, based on my experience, you will find those properties located in depressed neighborhood. I call them “junk real estate”.
Let’s examine neighborhood characteristics based on median household income, poverty level, vacancy, ratio of renter occupied to owner occupied and crime rate. Those data can be found from US Census Bureau and local police department. From scale 1 to 5, I give 1 to neighborhood with the lowest median household income, highest poverty level, vacancy, ratio of renter occupied to owner occupied and crime, while I give 5 to neighborhood with the highest median household income, lowest poverty level, vacancy, ratio of renter occupied to owner occupied and crime.
As a case study, we’ll take a look at 5 single family homes with 3 bedrooms located in Oakland.
Compare the house in east Oakland and Lake Merritt. Lake Merritt house is 66% more expensive than east Oakland house, but the rent is only more expensive by 23%. Compare any other 2 houses above, you will find, the percentage increment of rent tends to be less than the percentage increment of housing values. It shows you a tendency of higher GRM as the neighborhood characteristics improve, because the price goes up faster than the rent. While this tendency generally holds true regardless of the location (eg: Phoenix instead of Oakland), this analysis is only a general observation, and not an exact science. Instead of fixed value of GRM, you will find a range, and it could be possible that two neighborhood characteristics have GRM range overlap to each other.
I personally stay away from investing in depressed neighborhood and advise the same thing to my clients, but I know other investors who mainly invest in low end housing. It really depends on your objective, risk tolerance and experience. Why people invest in low end housing? Lower GRM usually means higher cash flow. They get more steady income from the cash flow regardless of the appreciation and the up and down of the housing market (please read “Nice Cash Flow or Great Appreciation?”).
Few years ago, one investor bought multi unit property in depressed downtown Los Angeles. He worked with police department, evicted drug dealers, and promoted education in the community. As a result, the quality of the neighborhood gradually improved. As the quality of the neighborhood improved, so did the building value.
If investing in low end housing is appealing to you, three properties are available, two of them currently offered at $49K, and the third one offered at $59K. You won’t be able to find these houses in the MLS.
Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved
GRM or Gross Rent Multiplier is a simple way of comparing investment properties by dividing the purchase price by gross annual rent before vacancy and expenses.
Purchase Price
Gross Rent Multiplier (GRM) = -----------------------------------------------------------------------
Gross Annual Rent before Vacancy & Expenses
Again, GRM is just a rough estimate to compare properties. For accurate financial analysis, all factors such as vacancy, repairs to bring property ready for rent, taxes, insurance and property management fees have to be included.
While it is not impossible to find GRM of 6.7-8.3, based on my experience, you will find those properties located in depressed neighborhood. I call them “junk real estate”.
Let’s examine neighborhood characteristics based on median household income, poverty level, vacancy, ratio of renter occupied to owner occupied and crime rate. Those data can be found from US Census Bureau and local police department. From scale 1 to 5, I give 1 to neighborhood with the lowest median household income, highest poverty level, vacancy, ratio of renter occupied to owner occupied and crime, while I give 5 to neighborhood with the highest median household income, lowest poverty level, vacancy, ratio of renter occupied to owner occupied and crime.
As a case study, we’ll take a look at 5 single family homes with 3 bedrooms located in Oakland.
| Neighborhood characteristics | 1 | 2 | 3 | 4 | 5 |
| Neighborhood | East Oakland | Lake Merritt | Oakland Hills | Oakland Hills | Piedmont Pines |
| Beds/Baths/Sq ft | 3 /1 /1248 | 3 /1.5 /1494 | 3 /1.5 /1508 | 3 /1.5 /1542 | 3 /2 /1716 |
| Zillow.com ZESTIMATE | $221,500 | $367,000 | $466,000 | $587,500 | $709,500 |
| Monthly rent | $1,600 | $1,975 | $2,295 | $2,500 | $2,795 |
| GRM | 11.5 | 15.5 | 16.9 | 19.6 | 21.2 |
Compare the house in east Oakland and Lake Merritt. Lake Merritt house is 66% more expensive than east Oakland house, but the rent is only more expensive by 23%. Compare any other 2 houses above, you will find, the percentage increment of rent tends to be less than the percentage increment of housing values. It shows you a tendency of higher GRM as the neighborhood characteristics improve, because the price goes up faster than the rent. While this tendency generally holds true regardless of the location (eg: Phoenix instead of Oakland), this analysis is only a general observation, and not an exact science. Instead of fixed value of GRM, you will find a range, and it could be possible that two neighborhood characteristics have GRM range overlap to each other.
I personally stay away from investing in depressed neighborhood and advise the same thing to my clients, but I know other investors who mainly invest in low end housing. It really depends on your objective, risk tolerance and experience. Why people invest in low end housing? Lower GRM usually means higher cash flow. They get more steady income from the cash flow regardless of the appreciation and the up and down of the housing market (please read “Nice Cash Flow or Great Appreciation?”).
Few years ago, one investor bought multi unit property in depressed downtown Los Angeles. He worked with police department, evicted drug dealers, and promoted education in the community. As a result, the quality of the neighborhood gradually improved. As the quality of the neighborhood improved, so did the building value.
If investing in low end housing is appealing to you, three properties are available, two of them currently offered at $49K, and the third one offered at $59K. You won’t be able to find these houses in the MLS.
Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved
Saturday, March 14, 2009
Nice Cash Flow or Great Appreciation?
Which one do you think is better: Nice Cash Flow or Great Appreciation? Here is my personal opinion:
Nice Cash Flow is equal to money NOW, while Great Appreciation is equal to money LATER. Do you want to receive money now or do you want to receive money later? You tell me.
Nice Cash Flow can buy you grocery and pay your bill. Great Appreciation neither pays your bill nor buys you grocery.
Usually you either have Nice Cash Flow with not so great appreciation, or Great Appreciation with not so nice cash flow (worse, negative cash flow), or something in between.
If you have both Nice Cash Flow and Great Appreciation, either you are extremely lucky or in a bubble.
Nice Cash Flow will likely be loyal and stay by your side during good and bad time. Great Appreciation doesn’t guarantee to always be there for you and may disappear as soon as the trouble comes.
Nice Cash Flow is not too sensitive to timing, while Great Appreciation is very sensitive to timing.
Nice Cash Flow tends to attract investor more, Great Appreciation tends to attract speculator more.
Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved
Nice Cash Flow is equal to money NOW, while Great Appreciation is equal to money LATER. Do you want to receive money now or do you want to receive money later? You tell me.
Nice Cash Flow can buy you grocery and pay your bill. Great Appreciation neither pays your bill nor buys you grocery.
Usually you either have Nice Cash Flow with not so great appreciation, or Great Appreciation with not so nice cash flow (worse, negative cash flow), or something in between.
If you have both Nice Cash Flow and Great Appreciation, either you are extremely lucky or in a bubble.
Nice Cash Flow will likely be loyal and stay by your side during good and bad time. Great Appreciation doesn’t guarantee to always be there for you and may disappear as soon as the trouble comes.
Nice Cash Flow is not too sensitive to timing, while Great Appreciation is very sensitive to timing.
Nice Cash Flow tends to attract investor more, Great Appreciation tends to attract speculator more.
Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved
Wednesday, March 11, 2009
Crisis or Opportunities?
CRISIS or OPPORTUNITIES? There are always two sides to a coin. One side is credit crunch, soaring foreclosure rate and 25-year high unemployment rate (8.1% as of 3/6/2009). The other side is OUTRAGEOUS OPPORTUNITIES to find bargain houses anywhere in the US. All of sudden, tremendous potential buying opportunities are screaming for your attention:
• Residential rental with cash-on-cash return better than ever
• Houses that cost less than the construction cost
• 70% off from the peak
However, given the likelihood of continued market volatility and uncertainty regarding the depth of the recession, you should move forward with caution and selectivity in assessing every investment opportunities. Consider as well longer term time horizon and sufficient capital resources.
Many people have asked me, is it a good time to invest in real estate yet? Are we reaching the bottom already? Nobody knows the future and neither do I. Even Warren Buffett has been criticized of buying too early and that he needs a new crystal ball. But here is my personal opinion, if you can find residential rental with annual cash-on-cash return of 6%-9%, and you plan to hold it for five to ten years, it will not hurt you even if the house values dip a bit further. You still receive 6%-9% of your investment every year. Am I right?
I know exactly what you are thinking. You argue with me, “but if I wait a little more, and I buy at the bottom, my cash-on-cash return will be even better”. My friend, think about this, if you know where the bottom is, that means the bottom is over and we are in the recovery mode. When the sellers are aware that house prices are recovering, do you think they will give you bargain? NO! Time is in their favor. They would prefer to hold and wait because they know they will get higher sales price the more they wait. And when do you think that buyers have more negotiation power (please look at the graph below): when the price is going down (point A), or, when the price is going up (point B)? You definitely have greater negotiation power at point A. It is possibly you even pay close enough to the bottom.
I have to admit, this investment is not for everyone, especially if you can’t afford to wait. Financing is scarce now even for somebody with perfect credit. If you have extra cash, you can purchase residential rental below $200K in good neighborhood, and expect to get 6%-9% cash-on-cash return. We also learn from history that recession may take a long time to recover. In Southern California for example, the house value started to go down around 1990, dropped up to 26% of value, and it took nine years to go back to 1990 value.
The other side of the coin, people are seeing outrageous opportunities. According to National Association of Realtors, buyers stepped in to snap up properties at steep discounts in December. San Francisco Chronicle reported ultra-rich Chinese from China are going to seize the opportunity to take advantage of some great deals in New York, California, Boston and Las Vegas.
So, crisis or opportunities? The ball is in your court.
Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved
• Residential rental with cash-on-cash return better than ever
• Houses that cost less than the construction cost
• 70% off from the peak
However, given the likelihood of continued market volatility and uncertainty regarding the depth of the recession, you should move forward with caution and selectivity in assessing every investment opportunities. Consider as well longer term time horizon and sufficient capital resources.
Many people have asked me, is it a good time to invest in real estate yet? Are we reaching the bottom already? Nobody knows the future and neither do I. Even Warren Buffett has been criticized of buying too early and that he needs a new crystal ball. But here is my personal opinion, if you can find residential rental with annual cash-on-cash return of 6%-9%, and you plan to hold it for five to ten years, it will not hurt you even if the house values dip a bit further. You still receive 6%-9% of your investment every year. Am I right?
I know exactly what you are thinking. You argue with me, “but if I wait a little more, and I buy at the bottom, my cash-on-cash return will be even better”. My friend, think about this, if you know where the bottom is, that means the bottom is over and we are in the recovery mode. When the sellers are aware that house prices are recovering, do you think they will give you bargain? NO! Time is in their favor. They would prefer to hold and wait because they know they will get higher sales price the more they wait. And when do you think that buyers have more negotiation power (please look at the graph below): when the price is going down (point A), or, when the price is going up (point B)? You definitely have greater negotiation power at point A. It is possibly you even pay close enough to the bottom.
I have to admit, this investment is not for everyone, especially if you can’t afford to wait. Financing is scarce now even for somebody with perfect credit. If you have extra cash, you can purchase residential rental below $200K in good neighborhood, and expect to get 6%-9% cash-on-cash return. We also learn from history that recession may take a long time to recover. In Southern California for example, the house value started to go down around 1990, dropped up to 26% of value, and it took nine years to go back to 1990 value.
The other side of the coin, people are seeing outrageous opportunities. According to National Association of Realtors, buyers stepped in to snap up properties at steep discounts in December. San Francisco Chronicle reported ultra-rich Chinese from China are going to seize the opportunity to take advantage of some great deals in New York, California, Boston and Las Vegas.
So, crisis or opportunities? The ball is in your court.
Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved
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