Determining A Support Level in Southern California Real Estate
by: Brian.Brady on October 10, 2007 11:47:44 3 comments »
I spoke with Burbank real estate specialist, Ana Connell, today. Ana's "other life" paralleled mine; she was a manager for a securities brokerage firm before she started her career in real estate brokerage. We chuckled as we talked about the principles of technical analysis and how it might apply to residential real estate . I want to share the product of our discussion with you, the Southern California property buyer.
I think that the real test of proper pricing for Southern California real estate is revealed when we analyze properties like a long-term investor may. We are getting close to parity here. If a property can create net positive cash flow, with a 20% down payment, and a a current market rate, interest-only loan, the game's over. Long-term investors will flock to that purchase no matter what the near-term pricing does.
Here's why. Investors believe in the long-term viability of the Southern California residential market, they just don't like the short-term negative cash-flow.
eg: The unit can produce $2150/month in rent, what is a "safe" purchase price?
Let's reverse engineer this question:
A 7%, interest-only loan, will cost $5.83 per thousand. Taxes. .83 per thousand. Estimate .83 per thousand for the condo association fee (which may be high). This brings us to total carrying cost expenses of $7.49 per thousand. Depreciation, however, can save $1.06 per thousand for someone in a combined, 35% marginal tax rate (check with a tax advisor). The net carrying costs would be $6.43 per thousand.
Now, divide the $2150 by the net carrying costs per thousand. Youll come up with a loan amount of $334,370. Divide that loan amount by .8 (to reflect the 20% down payment) and you get a purchase price of $417,630.
Let me offer some disclaimers here: I'm not saying that the price of $417,630 is the absolute bottom of the market for this property. What I'm suggesting is that the property becomes attractive to long-term investors at that point. Buy and flip types will be sorely disappointed if they try this at home. I'm also saying that you may not be able to get this particular property for this price. Real estate has utility (as a place to live). A premium may be built into the pricing to reflect that utility.
Cash flow analysis, as a long-term investor might perform, is a good way to analyze properties in this market. It demonstrates a pricing support level. Nothing replaces the value of a local real estate professional.
· http://http:www.CaliforniaLoanConnection.comAssumptions:
1- 7%, interest only mortgage= $5.83/thousand
2 1% taxes= .83/thousand
3- Condo Fee- WAG of 1%= .83/thousand
4- Depreciation based on 27.5 years, straight line, 35% combined bracket (check with a tax advisor)
Permalink October 10, 2007 15:34:43 · http://www.blogcalabasas.comHi Brian, This is a great straight forward analysis of what fuels the real estate market in SoCal.
By the way, this new site of yours is absolutely perfect. I love the money background and colors. Very nice!
Permalink October 10, 2007 15:38:26 At first I thought it might be a bit hokey but when the RSS crew was finished, I was impressed.
Will prices continue to drop, Tracey? Maybe. I do know that the investors' model will show support. There are a whole lot of wealthy people who stick to the 20% down, positive cashflow approach to purchasing investment property. I think that provides support pricing
Permalink October 10, 2007 15:55:50This post has 10 feedbacks awaiting moderation...