Friday
May022008

When is is time to buy investment property?

 The bottom of the market will be here, in my opinion, when rents "pencil", that is you can pay the mortgage with your rent, approximately.  After deducting expenses, you want about a 6% cap rate (income - expenses)/sales price.

Lower prices have brought out more buyers, and the bottom is set when investors can be cash-flow-positive.  So let's all hope for price declines, so the market can pick up.

I've said for years now, that the best thing the NAR (National Association of Realtors) can do, is tell sellers to lower prices.  High prices are really crimping this market.  Let's just be honest with people, and explain that high prices are stll a problem. 

Sean O'Toole, founder of ForeclosureRadar.com, explains

 

You can quickly and easily estimate where the bottom might be in your market by looking at local rental rates, multiplied by twelve, subtracting taxes and insurance, and dividing by a reasonable cap rate. That, of course, begs the question of what a reasonable cap rate is. In my opinion it will vary according to the property. Perhaps as low as 2% for a trophy property in a fabulous location, to 12% or more in high crime rate areas where you fear for your life.

 

...You'd think my Realtor friends in Stockton, Manteca and Modesto – communities at the epicenter of the housing shock -- would be near suicidal. Not so. Prices are now down 40%, and at that price you can actually buy rentals that cash flow. Renters can afford to buy with traditional 30-year fixed financing. Smart parents that thought neg-am ARMs were lunacy are now willing to help their kids with a down payment and traditional financing. And enterprising Realtors capitalizing on this new opportunity by letting buyers know they can help find bargains are doing just fine.
Not that things are great - but they are whole lot better for buyers and Realtors now that there has been a significant price correction.

If you are in an area where sales are slow, and prices have not yet corrected, you may want to secretly hope they do soon. And stop working against yourself by trying to convince everyone that your market is special and can't possibly go down. Buyers won't come knocking until you do. It is going to be a really hard transition for banks, builders, recent buyers, and owners that used their homes as ATM's, but despite the best efforts or legislators and regulators, only lower prices will get this market going again.

And don't buy into the message from doomers that prices have no bottom. They absolutely do. Largely determined by rents and cap rates.

 

Contact me if you are looking for investment properties in San Diego.