To Buy or Not To Buy?

来源: David_S_Meng 2020-09-26 08:29:36 [] [旧帖] [给我悄悄话] 本文已被阅读: 次 (6048 bytes)

To Buy or Not To Buy?

 

Some people have asked: “Should I buy rental houses now?  Is it too late? Should I wait?”

All real estate is local.  I looked at townhouses in my neighborhood and did the following estimate, as of 9/26/2020.

A relatively small townhouse in my neighborhood can be purchased at about $360,000. For 30 year-fixed mortgage, the interest rate is currently about 3% for primary residence. For rental property, assume it is 3.5%. Assume it is 20% down payment and 80% mortgage.

The money that you throw into this house: Down payment = 20% x $360,000 = $72,000. Closing cost is about $8,000 (it depends on what settlement company you use).  Total = $80,000.

Mortgage = 80% x $360,000 = $288,000. At 3.5% for 30 years, the monthly principal + interest payment (PI) = $1293.25.

The interest part is ($288,000 x 0.035)/12 = $840/month. So the principal reduction is $1293.25 - $840 = $453.25 (This is basically money that is paid into your own pocket because it reduces the loan amount that you owe the bank). This is just my simple estimate. For an exact calculation, please consult your loan officer.

Property tax is about $5,000 annually ($417/month). Insurance is about $480 annually ($40/month).  HOA is $110 monthly.  Repair is about $1000 annually ($83/month) (My neighborhood is relatively new).

To find a tenant, my agent charges $1,600, and the average tenant has stayed for about three years. So the agent fee for finding tenant and signing the lease is about $1,600/36 months = $45/month.

Rent is about $2,150/month for such a townhouse (You can probably get $2,200 but I usually keep it at $50 below market). Vacancy is less than one month per three years on average, which is $2150/36 month = $60/month on average (My neighborhood has the best schools in my county, with high demand).

Cash flow = 2150 – 1293.25 – 417 – 40 – 110 – 83 – 45 - 60 = $101.75/month.

You may think that this is so small and not worth it. But as you will see below, even if this is 0, the deal may still be worth considering.

The appreciation in my neighborhood has been 3-4% annually. Assume it is 3.5%. $360,000 x 0.035 = $12,600 in the first 12 months.

Now the important parameter:

Rate of return in the first 12 months = (Cash flow + principal reduction + house value appreciation)/money you throw into this house = ($101.75x12 + $453.25x12 + $12,600)/$80,000 = (1,221 + 5,439 + 12,600)/80,000 = 19,260/80,000 = 24.1%.

This is a simple estimate. Different investors may use different methods to estimate. This is not the only way, and I respect their ways too. These numbers also change over time, because your principal part will grow over time and your interest part will decrease over time as you owe the bank less and less money. You may also do a cash-out refinance after a few years and change the numbers too. So the aforementioned numbers are only for the initial estimate of the rate of return, in order to determine whether it is worth buying or not.

The 24% easily beats the SP 500 annual average return of about 10% in the past 60 years. And it beats Mr. Buffett's average annual return of 14% in the past quarter century.

Even if we assume break-even and the cash-flow is 0:

Rate of return in the first 12 months = (0 + 5,439 + 12,600)/80,000 = 22.5%.

Again, these are simple and approximate estimates. If you prefer exact calculations, you should talk with your loan officer or accountant. For me personally, the cutoff line is 15%. As long as it is above 15%, it is worth considering. Of course, the higher the return, the better, with other conditions being equal.

Certainly you should look at other factors too. For example, the appreciation rate should be the long-term historic average, not the last couple of years. If your area has experienced fast appreciation in the last couple of years, you should not use that fast appreciation rate in your calculation, and expect that the fast growth rate will continue into future years. I would be extremely cautious if the last few years have gone up too fast, because eventually it will drop or slow down and revert to the long-term average. It also pays to do some research to see if people are leaving your area or moving into your area; is the population growing or declining? Are companies moving in or leaving, is the area thriving or decaying, etc.  These and other safeguards, including understanding the local market, what and when and how to buy, effective negotiation skills to get the lowest possible price, are discussed in detail with real-life examples in my book.  Hope this article will give you inspiration and provoke your thinking process; fo course, your money, your decision.

 

By David S. J. Meng, author of “$5 Million in 8 Years: Real Estate Investing on the Side”

 

所有跟帖: 

仅供朋友們參考。每个区都不大一样 -David_S_Meng- 给 David_S_Meng 发送悄悄话 (0 bytes) () 09/26/2020 postreply 08:30:26

请前辈和资深投资者老师们指正 -David_S_Meng- 给 David_S_Meng 发送悄悄话 (0 bytes) () 09/26/2020 postreply 08:31:23

好文章!如果是在一个租售比合理的房地产市场,加上不要太贪和纪律性以及本人比较handy,房地产投资 -落花起作回风舞- 给 落花起作回风舞 发送悄悄话 (170 bytes) () 09/26/2020 postreply 09:20:37

谢谢,您说得很对 -David_S_Meng- 给 David_S_Meng 发送悄悄话 (0 bytes) () 09/26/2020 postreply 10:55:35

谢接近地方实例的分享,计算无误。试着验证利率假设,前5年3.48,30年2.74,用3.5保守安全。 -IEbird- 给 IEbird 发送悄悄话 (0 bytes) () 09/26/2020 postreply 09:27:50

谢谢您的验征 -David_S_Meng- 给 David_S_Meng 发送悄悄话 (0 bytes) () 09/26/2020 postreply 10:55:07

so summing it all up when in doubt just buy no LOL.. -chent12- 给 chent12 发送悄悄话 (0 bytes) () 09/26/2020 postreply 09:47:00

Yes when it’s above 15% or 20%. Also consider other factors as d -David_S_Meng- 给 David_S_Meng 发送悄悄话 (0 bytes) () 09/26/2020 postreply 10:54:39

as discussed in my article, and personal and local factors too -David_S_Meng- 给 David_S_Meng 发送悄悄话 (0 bytes) () 09/26/2020 postreply 10:57:11

加跟帖:

当前帖子已经过期归档,不能加跟帖!