Prices vs. Rents

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Permalink Reply by Eric Crosby on April 2, 2008 at 9:31pm

Rents are stable, but with the rise in foreclosures, they are certain to go up. When the rental pool increases, the leasing market is sure to do the same. The numbers did not work when you were purchasing a home in Double Diamond over a year and half ago for $430,000 and rents being just $1600-$1700. Now the same home is selling in the market around the low $300,000's and rents have stayed the same or increased a tad.
We expect to see the investers hitting the market and swooping up the short sales & bank owned properties in the near future.

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Permalink Reply by Doug Rosner on April 3, 2008 at 8:17am

Eric, are you concerned that a rush of investor activity will produce an over-supply of rentals thereby pushing rents down as vacancy rates climb and competitive pressures are brought to bear? Some neighborhoods in Carson City, Minden and Gardnerville are 30%-40% rentals already as a result of the same phenomenon in the early 2000's. Easy money fed that investor feeding-frenzy.

I agree that as prices come down offering investors opportunities to get closer to breaking even, new investors will test the waters again. But I'm not so sure the new (old, really) stricter underwriting and down payment guidelines will deliver investors in the quantities we saw back then.

And, lastly, will a $325,000 Double Diamond house deliver a $1600-$1700 rent at this point? If it does, is that enough to break even--PITI plus landlord-paid utilities?

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Permalink Reply by Eric Crosby on April 3, 2008 at 11:36am

Yes, I believe that the home could rent for that number and possible more, depending on condition, etc.
You mentioned the stricter underwriting and down payment guidelines and that is exactly why some will have to resort to rentals only and not purchase. I see this all over my neighborhood.
Eric

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Permalink Reply by Bob Sewell on April 3, 2008 at 9:23pm

Eric/Doug, thank you both for your comments. Do you think that the same therories you expressed would apply to multi-unit properties such as 6+ unit complexes?

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Permalink Reply by Doug Rosner on April 3, 2008 at 10:05pm

Good question. 6 units is non-conforming and loans are not easy to obtain for them. Down payments are now 20% down minimum (if you can find one) and require the property to cash flow 1:1.25, i.e., show a 25% positive cash flow after debt service and all expenses and a reserve. These requirements will constrict sales of 5 or more units in my opinion because owners will not likely be willing to sell their property at such a low price to deliver a 25% cash flow.

The analysis I recently did for a client showed at his desired price a buyer would have to put down 65% in order to achieve a 25% positive cash flow. Therefore, the price would have to be reduced to well below market, and below his mortgage balance, to attract a buyer. Result: No listing.

The 1031 buyer with a boatload of cash will be our only buyer of 5+ units for some time to come.

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Permalink Reply by Bob Sewell on April 4, 2008 at 3:21pm

Doug/Eric, Thank you both very much. Thanks to your comments I am able to have a much more "meaningful conversation" (Dale Lawrence speak) with my friend. I appreciate it.

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